If you own a downtown Toronto office building, you may have noticed something confusing.

The headlines often suggest that the office market is recovering, but many smaller building owners are still dealing with vacant space, longer leasing periods, and tenants asking for more flexibility.

The reason is that downtown Toronto office is not one single market anymore.

Some newer Class A buildings with strong locations, transit access, modern amenities, and efficient layouts have seen stronger demand as companies continue adjusting their workplace strategies. At the same time, many older Class B and Class C buildings are facing more pressure because tenants have more options and are looking more closely at building quality, operating costs, and flexibility.

For small and mid-size office owners, the question is not simply whether the market will recover.

The bigger question is:

What should you do with your building today?

Should you lease more aggressively? Invest in upgrades? Look at a conversion? Or consider selling?

The right answer depends on your building, tenants, financial position, and long-term goals.

This article explains the current downtown Toronto office market and practical strategies owners can consider when dealing with elevated vacancy.

What is Happening in the Downtown Toronto Office Market in 2026?

The downtown Toronto office market has become increasingly divided by building type.

Market reports from organizations such as CBRE Canada Research and Colliers Canada Research show that office performance varies significantly depending on location, building quality, and tenant demand.

Class A buildings have generally benefited from stronger demand, and many companies looking for office space are prioritizing properties that offer:

• Convenient transit access
• Modern building systems
• Updated amenities
• Efficient layouts
• Better tenant experiences

Older office buildings face a different challenge. Even if they are located downtown, they may compete against newer properties that provide features tenants now expect.

For owners of smaller office buildings, this difference is important.

A renovated 20,000 sq ft building with flexible layouts and competitive operating costs is not competing in the same market as an older building with outdated systems and limited amenities.

Understanding where your building fits is the first step before deciding what to do next.

Why Vacancy Matters Beyond Empty Space

Vacancy affects more than rental income.

When office space remains empty, owners may face:

• Lower net operating income (NOI)
• Higher leasing costs
• Increased tenant improvement expenses
• Longer marketing periods
• Pressure on property value

Commercial properties are often valued based on their income-producing potential. A reduction in sustainable income can directly affect what buyers and lenders are willing to pay.

Understanding how income, expenses, and market conditions affect value can help owners make better decisions. You can learn more about this through our guide on how commercial property is valued in Canada.

What This Means for Small and Mid-Size Office Owners

Large office landlords often have advantages that smaller owners do not.

They may have:

• Larger marketing budgets
• More amenities
• More capital available for renovations
• Established relationships with major tenants

Smaller owners usually need to compete differently.

Instead of trying to copy a large corporate office tower, many smaller buildings can focus on their advantages:

• More flexible lease terms
• Direct communication with ownership
• Faster decision-making
• Competitive pricing
• Spaces designed for specific tenant needs

Before making any major decision, owners should understand their building’s current position.

Ask:

• Who is the ideal tenant for this property today?
• How does the building compare with nearby alternatives?
• Are current rents realistic for the market?
• Are operating costs competitive?
• Would targeted upgrades improve leasing potential?

Having accurate financial information is also important.

Vacancy, expenses, and tenant changes should be reflected in your monthly reporting so you understand the actual impact on your property.

A consistent commercial property operating budget and owner reporting process can help identify problems early and support better decisions.

Why Office Tenants are Making Different Decisions

Several changes are influencing office demand in Toronto. These shifts affect smaller buildings because owners often have fewer resources to compete with newer properties.

Tenants Are Looking for More Value From Office Space

Many companies still want office space, but they are more selective about where they lease.

Businesses are looking for buildings that support employee attendance and provide a better workplace experience.

Factors that may influence decisions include:

• Location
• Transit access
• Building condition
• Amenities
• Energy efficiency
• Quality of the workspace

A lower rent alone may not be enough if the building does not meet tenant expectations.

Companies Are Adjusting Their Space Requirements

Many businesses have changed how much office space they need compared with pre-pandemic years.

Some tenants are renewing leases but reducing their footprint because hybrid work models have changed how employees use offices.

For example, a company that previously occupied 10,000 sq ft may determine that a smaller space better fits its current operations.

For landlords, this creates a challenge because even a successful renewal can still result in vacant space.

Older Buildings Face More Competition

Older office buildings are facing more competition as tenants become more selective about the spaces they choose. Beyond rent, many companies now consider factors such as building condition, energy performance, operating costs, and the overall workplace experience. 

Owners of older properties may need to evaluate whether targeted upgrades, improved building operations, or repositioning can help the property compete more effectively. However, improvements should be based on tenant demand, market conditions, and the building’s financial goals, as upgrades alone do not guarantee stronger leasing results. 

Four Strategies Small and Mid-Size Office Owners Can Consider

Strategy 1: Lease Aggressively and Hold

For owners who believe their building still has long-term potential, improving leasing performance may be the best option.

The goal is not simply filling space. It is attracting tenants that provide sustainable income.

Some strategies to consider include:

Adjust Pricing With a Long-Term View

In a tenant-focused market, owners may need to be more flexible with asking rents.

Instead of focusing only on headline rent, consider the complete lease structure, including:

• Rent escalations
• Lease term
• Tenant improvements
• Leasing commissions
• Renewal options

A lower starting rent may help attract a stronger tenant if the overall lease creates a stable relationship.

Consider Speculative Suites

Many tenants do not want to wait months for construction.

Move-in-ready office suites can make smaller buildings more competitive because tenants can visualize the space and start operations faster.

The right investment depends on the building, available capital, and expected leasing demand, but outdated vacant space can be harder to market than a finished suite.

Offer More Flexible Lease Options

Some tenants are hesitant to commit to long lease terms, especially smaller companies and growing businesses.

Offering options such as:

• Shorter initial terms
• Renewal options
• Flexible expansion rights

may help attract tenants who would otherwise choose another property.

Work With Tenant Representatives

Tenant brokers play an important role in office leasing decisions.

Making your property easy for brokers to present, with clear information, competitive terms, and cooperation with tenant representatives, can improve visibility in the market.

Protect Tenant Quality

Vacancy pressure can make owners feel rushed.

However, accepting a tenant without properly reviewing their financial position can create larger problems later.

Before signing a lease, it is important to review a commercial tenant’s financial information and understand their ability to meet lease obligations.

Strategy 2: Consider Office to Residential or Mixed-Use Conversion

For some office building owners, conversion is becoming a strategy worth evaluating.

However, office conversion is not a simple solution for every property. The building structure, zoning, costs, and future demand all need to be considered before moving forward.

A building that appears suitable from the outside may still face significant challenges during planning and construction.

Some important factors include:

Building Structure

The physical structure of the building plays a major role.

Buildings with layouts that allow better access to natural light, plumbing, elevators, and mechanical systems may be easier to adapt than properties that require major structural changes.

Older buildings are not automatically poor candidates. In some cases, their layouts may be more suitable for conversion than newer office buildings designed specifically for large open-floor workplaces.

Floor Plate and Natural Light

Residential units require access to windows and natural light.

Buildings with very deep floor plates may require more complicated designs because interior areas can be difficult to convert into functional residential units.

A feasibility study can help determine whether the existing structure can support a practical residential layout.

Zoning and Municipal Requirements

Owners should confirm whether residential use is permitted and whether additional approvals are required.

The City of Toronto has been reviewing office space needs and conversion policies as part of broader planning efforts. Requirements can vary depending on the location and project details, so owners should confirm current rules before making investment decisions.

You can review current information about Toronto’s office planning initiatives through the City of Toronto’s Office Space Needs Study.

Financing and Project Feasibility

Conversion projects require significant planning and capital.

Owners should evaluate:

• Construction costs
• Financing options
• Expected rental income
• Approval timelines
• Market demand

Some qualifying rental housing projects may be eligible for CMHC financing programs, depending on the project details and program requirements.

Before committing to a conversion, owners should complete a detailed financial and planning review.

Environmental considerations may also be important during redevelopment. Learn more about environmental due diligence for commercial properties.

Strategy 3: Reposition Your Building for a Specific Tenant Group

Many smaller office owners make the mistake of trying to compete with large downtown towers for the same tenants.

That can be difficult.

A smaller building may not have the amenities, branding, or capital budget of a major office property. However, it can offer other advantages that certain tenants value.

Instead of marketing to everyone, owners may have better results by focusing on specific tenant groups.

Potential tenant profiles include:

Creative and Design Businesses

Some creative companies prefer spaces with character, unique layouts, and more flexibility rather than traditional corporate offices.

Older buildings with interesting architecture, exposed features, or flexible layouts may appeal to these tenants.

Health and Wellness Businesses

Medical, wellness, and professional service businesses often have specific space requirements.

They may need:

• Private rooms
• Reception areas
• Waiting spaces
• Sound considerations

Buildings that can support these layouts may have opportunities beyond traditional office tenants.

Nonprofits and Professional Associations

Many organizations are focused on affordability, accessibility, and location rather than premium office amenities.

A well-maintained smaller building with reasonable rental rates may fit their needs.

Startups and Smaller Companies

Growing businesses often value flexibility.

They may prefer:

• Smaller spaces
• Flexible lease terms
• Lower occupancy costs

Understanding your ideal tenant can help you spend marketing dollars more effectively.

Strategy 4: Sell With a Clear Understanding of Current Market Conditions

For some owners, selling may be the right decision.

This is especially true for owners who have reached their investment timeline, need to redeploy capital or do not want to commit additional funds to reposition the property.

However, selling an office building in today’s market requires realistic expectations.

Buyers are paying close attention to:

• Current occupancy
• Lease expiry dates
• Tenant quality
• Required capital improvements
• Future leasing potential
• Building operating costs

A vacant or partially occupied office building will typically be evaluated differently than a fully leased property with stable income.

Changes in financing conditions and investor expectations have affected commercial property values across many markets. The impact depends on the individual property and cannot be determined by one market number alone.

Before listing a property, owners should understand what the building may realistically be worth.

A professional property evaluation can help owners understand how income, vacancy, and market conditions may affect value.

What Small Office Owners Should Do in the Next 90 Days

Regardless of your long-term strategy, there are practical steps every owner can take.

1. Review Current Market Rents

Understand what similar buildings are actually leasing for today.

Do not rely only on older lease agreements or historical expectations.

Current market conditions may require adjustments to:

• Asking rents
• Lease incentives
• Tenant improvement allowances
• Lease structures

2. Review Upcoming Lease Expiries

Look at every lease expiring within the next 24 months.

Start conversations early.

Waiting until a tenant has already hired a broker can make renewal discussions more difficult.

3. Understand Your Vacancy Impact

Calculate how vacancy affects your property.

Review:

• Lost rental income
• Additional marketing costs
• Operating expenses
• Impact on NOI

A clear financial picture helps owners decide whether leasing, renovating, converting, or selling makes the most sense.

4. Review Building Improvements

Identify improvements that could improve competitiveness.

This may include:

• Updating common areas
• Improving lighting
• Upgrading building systems
• Creating move-in-ready suites
• Improving energy efficiency

Not every improvement will provide a return, so owners should evaluate each project carefully.

5. Explore Your Options Before You Need Them

Even if you are not planning to sell or convert, understanding those options gives you more flexibility.

A preliminary review can help answer:

• Could this building support another use?
• Would improvements improve leasing?
• Is holding the property still the best option?

Managing Your Office Property Through Changing Market Conditions

The downtown Toronto office market has changed, but owners still have options.

The best strategy depends on understanding your building, your tenants, and your financial position.

Whether the goal is improving leasing performance, evaluating a conversion, preparing for a sale or improving operations, having accurate information is the foundation for making better decisions.

Our team helps office and commercial property owners with the operational and financial side of property management, including:

• Commercial property management
• Property management for real estate investors
• Accounting and bookkeeping

We also provide commercial property management services across the GTA.

Frequently Asked Questions (FAQs)

1. Is downtown Toronto office space still a good investment in 2026?

It depends on the specific property.

Office buildings with strong locations, quality tenants, and competitive features may continue to perform differently from older buildings with higher vacancy.

For owners, the important question is whether the property’s income, condition, and future potential support their investment goals.

2. Will downtown Toronto office vacancy return to pre-pandemic levels?

Recovery is expected to vary by building type and location.

Higher-quality buildings may recover faster, while older office properties may need repositioning, upgrades, or alternative uses to remain competitive.

3. Should I convert my office building to residential?

Conversion may make sense for some properties, but it depends on factors such as zoning, building structure, construction costs, financing, and expected rental demand.

A feasibility study is usually the first step before making a major investment decision.

4. How does vacancy affect commercial property value?

Vacancy can reduce property value by lowering sustainable income and increasing uncertainty for buyers.

Commercial properties are generally valued based on factors such as income, expenses, lease quality, market conditions, and risk.

5. How can I reduce office vacancy in my Toronto commercial building?

Reducing vacancy usually requires a mix of competitive pricing, flexible leasing options, and targeted improvements. Owners should understand current market demand, improve tenant appeal, and focus on attracting the right type of tenant for their building.