Toronto’s downtown office market recently showed signs of recovery, with availability rates dropping for the first time in five years. However, this nascent revival in the Toronto office market now faces significant headwinds due to escalating trade tensions between Canada and the United States. With tariffs implemented and rising economic nationalism on both sides of the border, the path to sustained recovery for the Toronto office market has become increasingly uncertain. The confluence of a weakening Canadian currency, deteriorating investor confidence, and shifting corporate priorities creates a complex environment where recovery momentum could easily stall. This comprehensive analysis examines how U.S. policy shifts and the ensuing economic uncertainty may reshape demand dynamics in Toronto’s office market, potentially derailing what appeared to be the beginning of a long-awaited turnaround.
Toronto’s Office Market: Signs of Recovery Amid Persistent Challenges
After years of elevated vacancy rates, downtown Toronto’s office market showed its first decline in office availability in five years, according to JLL’s Q4 2024 Toronto Office Insight report. The availability rate registered at 20 percent, representing a 30-basis-point reduction from the third quarter of 2024. This improvement was primarily driven by strong leasing activity that resulted in over 152,000 square feet of positive absorption in the trophy segment of the market1. While the total vacancy rate remained flat at 18.2 percent, this modest improvement in availability signaled what some hoped might be a turning point for a market that has struggled significantly since the pandemic.
The downtown market, with its approximately 83.6 million square feet of inventory, has experienced a bifurcated recovery pattern that JLL describes as “feast or famine.” While the trophy and class-A segment market saw 1.2 percent of net absorption as a percentage of total inventory, class-B and class-C offices experienced a negative net absorption of 5.6 percent1. This divergence highlights the ongoing flight to quality that has characterized the post-pandemic office market, with premium properties outperforming their lower-tier counterparts. Landlords have been offering “aggressive concession packages” to facilitate activity, particularly focusing on large tenants considering renewals and extensions1. These concessions have been necessary to stimulate demand in a market that has undergone fundamental changes since the pandemic.
The current state of Toronto’s office market must be understood within a historical context. A balanced office market has traditionally been considered to fall within the 8 to 10 percent vacancy range. As Michael Case of CBRE noted, “The happy equilibrium has always been 8% to 10%. That used to be the magic number that allowed companies to grow and move, while landlords had some certainty on price and new development requirements”2. By this standard, Toronto’s current vacancy levels still reflect significant imbalance, despite the recent improvement. The market had actually been showing positive momentum in late 2021 before the Omicron variant disrupted this progress. Jon Ramscar of CBRE observed that “Leasing activity accelerated before Christmas[2021]. There was a significant pick up in demand for office space with the last quarter representing more leasing activity than the heights of 2019”2. This historical pattern of recovery followed by setback raises questions about whether the current improvement will prove sustainable in the face of new economic challenges.
Trade Tensions and Tariffs: A New Economic Reality
The implementation of U.S. trade tariffs in March 2025 has created a significant new obstacle for Canada’s economic recovery. These tariffs have led to immediate market responses, including a weakening Canadian dollar. As of March 10, 2025, the loonie fell by 0.3 percent, trading at 1.4425 against the U.S. dollar, equivalent to 69.3 U.S. cents, reaching its lowest intraday point since the previous Wednesday3. This currency devaluation has direct implications for real estate investment dynamics, potentially affecting both Canadian and U.S. firms’ decision-making regarding office space commitments in Toronto.
The tariff situation remains fluid, with U.S. President Donald Trump pausing tariffs on Canadian goods until April 2, 2025, specifically for exports that comply with the Canada-U.S.-Mexico Agreement (CUSMA)6. However, this temporary relief has done little to dispel the underlying uncertainty. As Aaron Hurd, a senior portfolio manager at State Street Global Advisors, observed, economic confidence would take a hit even if tariffs are postponed, which would keep the Canadian dollar “on the weaker side.” He further noted that “If you’re an investor or a U.S. production company, you’re not going to engage in any capital expenditures until there is significantly more certainty”3. This hesitancy to commit to investments has direct implications for office space decisions, as companies may delay expansion plans or new leases until the trade landscape becomes clearer.
Toronto’s municipal government has responded to these trade tensions with its own protectionist measures. Mayor Olivia Chow announced that the city will award contracts valued at less than $353,000 solely to Canadian businesses and is considering excluding American companies from all future contracts6. Chow stated, “Yeah it may hurt our pockets, it may cost more if we don’t buy Canadian. As proud Canadians, I think we are united in saying we will never back down”6. This municipal response reflects a broader surge in economic nationalism across Canada, which, while politically popular, may have its own economic consequences that could affect the commercial real estate market.
Economic Uncertainty and Market Confidence
The uncertainty created by trade tensions has already had measurable impacts on Toronto’s broader real estate market, providing insights into how the office sector might be affected. According to data from the Toronto Regional Real Estate Board (TRREB), home sales in the Greater Toronto Area saw a significant drop in February 2025, with property prices decreasing for the third consecutive month7. Seasonally adjusted sales fell by 28.5 percent month-over-month to 4,326 units, following a 12.4 percent increase in January. Compared to February 2024, sales plummeted by 27.4 percent7. While this data pertains to residential rather than commercial real estate, it reflects the broader impact of economic uncertainty on real estate decision-making in the region.
Jason Mercer, TRREB’s chief market analyst, directly attributed this decline to trade concerns: “Alongside ongoing concerns about affordability, it seems that homebuyers have grown increasingly uncertain about the economy. Concerns regarding our trade ties with the United States have likely led some buyers to adopt a cautious, wait-and-see approach when it comes to purchasing a home”7. This wait-and-see approach is equally applicable to commercial real estate decisions, particularly for office space commitments that typically involve longer-term leases and greater financial obligations. Corporate tenants, like residential buyers, may be hesitant to make major commitments amid such uncertainty.
The potential economic impact of the tariffs extends beyond immediate market reactions to longer-term structural concerns. The U.S. tariffs pose a risk to Canada’s nascent economic recovery, potentially leading to higher consumer prices and increased unemployment, which could, in turn, spark a recession7. Such macroeconomic deterioration would inevitably affect office space demand, as companies might downsize operations, implement hiring freezes, or postpone expansion plans in response to worsening economic conditions. This potential economic contraction would come at a particularly vulnerable time for Toronto’s office market, which had only just begun to show signs of recovery after years of elevated vacancy rates.
Corporate Response: Scaling Back or Strategic Opportunity?
The key question for Toronto’s office market is how businesses—both Canadian and American—will respond to this changing economic landscape. For Canadian firms, particularly those with significant exposure to U.S. markets, the tariffs may necessitate operational adjustments that affect office space requirements. Companies facing reduced profit margins due to tariffs might look to cut costs in other areas, including real estate expenses. This could manifest as delayed expansions, office footprint reductions, or increased adoption of remote and hybrid work models to reduce space needs. Such responses would undoubtedly put downward pressure on demand for office space in downtown Toronto.
A concerning long-term trend that may be exacerbated by the current trade tensions is the decline in corporate headquarters located in Canada. Between 2012 and 2022, one-in-20 head offices closed or merged with other companies, according to Statistics Canada data. Head office employment has also dwindled, dropping by around 6 percent since 20124. This trend has been broadly based across provinces, though in some cases it can be attributed to energy companies exiting or scaling back operations following the plunge in oil prices from 2014 to 2016 and an investment-chilling federal regulatory environment4. If trade tensions accelerate this trend of corporate headquarters relocating away from Canada, it could have significant implications for premium office space in Toronto, which has traditionally been anchored by large corporate tenants.
For U.S. firms, the situation presents a more nuanced calculation. On one hand, the weakened Canadian dollar could make Canadian office space more affordable in U.S. dollar terms, potentially encouraging U.S. companies to expand their Canadian presence to take advantage of this cost differential. On the other hand, rising economic nationalism and municipal policies that explicitly disadvantage U.S. companies in contract bidding could create a less hospitable business environment that discourages such investments. Additionally, U.S. firms may be concerned about the potential for further retaliatory measures that could affect their Canadian operations. The net effect of these opposing forces remains uncertain but adds another layer of complexity to the already challenging recovery dynamics in Toronto’s office market.
The Rise of Economic Nationalism and Its Implications
The surge in economic nationalism in response to U.S. tariffs represents a significant shift in Canada’s traditionally open, trade-oriented economic posture. This nationalism ranges from individual consumers adopting “Made in Canada” shopping habits to government investment strategies aimed at reshaping the entire Canadian economy5. While such measures may be politically popular during times of international tension, they carry economic risks that could affect the commercial real estate sector, including the office market.
Terence Corcoran, writing in the Financial Post, warned that “This surge in nationalist thinking, and the implied abandonment of the liberal economic principles of free trade and open internationalism, pose a threat to Canada’s economy that could exceed the threat posed by Trump”5. Economic nationalism typically leads to higher prices throughout the economy as competition is reduced, which can dampen overall economic growth. For the office market, a slower-growing economy means less demand for commercial space, potentially offsetting any benefits that might come from policies favoring domestic businesses.
The specific measures implemented by the City of Toronto to exclude U.S. companies from certain contracts could have particular relevance for the downtown office market. Mayor Chow’s announcement that the city will solely award contracts valued at less than $353,000 to Canadian businesses—and potentially exclude American companies from all future contracts—represents a significant shift in municipal procurement policy6. If this approach is adopted more broadly or leads to retaliatory measures, it could affect U.S. companies’ decisions about maintaining or expanding their presence in Toronto. Currently, according to Mayor Chow, 10 percent of the city’s capital budget goes to American companies6. Changes to this relationship could influence these companies’ office space requirements in the downtown core.
Future Outlook: Navigating Uncertainty in Toronto Office Market
As Toronto’s office market navigates these complex challenges, the path forward remains uncertain. Michael McNabb, portfolio manager at Purpose Investments Inc., described office REITs as being in a “darkest before dawn” scenario heading into 2024, noting that “there is no denying they are cheap … but there are numerous headwinds that office landlords face”8. This assessment, made before the current trade tensions escalated, highlights the already challenging environment for office properties. The addition of trade uncertainty and potential economic contraction further complicates the recovery outlook.
The immediate future of Toronto’s office market will likely be characterized by continued caution from both tenants and investors. Companies may prefer shorter lease terms or include more flexibility clauses in their agreements to hedge against uncertainty. Landlords may need to continue offering generous concession packages to attract and retain tenants, particularly in the class-B and class-C segments that were already experiencing negative absorption. These dynamics could put downward pressure on effective rents even if headline rates remain relatively stable.
The divergence between premium and non-premium properties is likely to persist or even widen in this environment. Trophy and class-A buildings, which have already shown greater resilience with positive absorption, may continue to outperform as companies engage in flight-to-quality strategies. Major tenants that do commit to new leases or renewals are likely to gravitate toward these higher-quality buildings, as evidenced by recent large leases signed at premium properties like CIBC Square II and First Canadian Place1. This trend could leave class-B and class-C buildings increasingly vulnerable, potentially requiring repositioning or conversion to alternative uses if vacancy rates remain elevated.
Conclusion
The nascent recovery in Toronto’s downtown office market faces significant headwinds from U.S. policy shifts and the resulting trade tensions. While the market showed its first improvement in availability rates in five years during Q4 2024, this progress is fragile and could easily be reversed by the economic uncertainty created by tariffs and rising economic nationalism. The weakened Canadian dollar, potential economic contraction, and shifting corporate priorities all contribute to an environment where businesses may delay or scale back office space commitments.
For Canadian firms, particularly those with significant U.S. market exposure, the tariffs may necessitate cost-cutting measures that include reducing office footprints or delaying expansions. For U.S. firms, the calculation is more complex, with the cheaper Canadian dollar potentially offset by an increasingly nationalist business environment. The continued decline in corporate headquarters located in Canada represents a concerning trend that could be exacerbated by current conditions.
The path forward for Toronto’s office market will be shaped by how these various forces balance out. The divergence between premium and non-premium properties is likely to continue, with trophy and class-A buildings showing greater resilience than their class-B and class-C counterparts. Landlords will need to maintain flexibility and continue offering concessions to attract and retain tenants in this uncertain environment. While some investors see potential opportunities in the market’s current challenges, a sustained recovery will likely depend on greater clarity regarding the trade relationship between Canada and the United States and a return to more stable economic conditions. Until then, Toronto’s downtown office market remains in a precarious position, with its recent improvements at risk of stalling amid continuing economic and policy uncertainty.
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