The real test of the rapidly improving office market might be who builds the next so-called “trophy tower” in Toronto, where vacancy rates in the best AAA buildings have been dropping fast.
With building costs still prohibitively high and rents needing to rise enough to clear that hurdle, the focus remains on the next-best buildings near sparkling new towers like CIBC Square, which are basically full and have pushed the financial core further south, closer to the key transit hub of Union Station.
The spillover effect has dropped Toronto’s downtown vacancy rate to 12.6 per cent, according to CBRE. Just two years ago, that was closer to 18 per cent. Trophy vacancy is closer to 2.6 per cent.
Return-to-work mandates, including the provincial government’s five-day-a-week requirement, are helping as occupiers seek more space, but so is the lack of new supply. If it wasn’t being built before and isn’t in the pipeline, that office tower isn’t going up today. It’s a national trend.
CBRE Canada Research managing director Marc Meehan said that in a typical year, office construction might be in the range of four million to six million square feet.
“That’s by and large kind of what we’ve seen since 2000,” said Meehan. “But for 2026 onward, for the foreseeable future, that’s effectively going to zero per cent.
CIBC Square, a three-million-square-foot, two-tower development in downtown Toronto jointly developed and managed by Ivanhoé Cambridge and Houston-Texas-based Hines, could be the last tower built for a very long time.
How long is the question. It harkens back to what some people remember as the Bay-Adelaide “stump” in the financial district, which was ready to go around 1989 amid a booming office market and then halted for 15 years, leaving only a six-storey parking garage that gave it that nickname.
Jon Love, executive chair and founder of KingSett Capital, notes that several sites in downtown Toronto are ready to go and that the supply vacuum won’t be nearly as long this time.
“To launch the next site for most people will take a lead tenant commitment,” said Love. “I think for sure within the next year we will see something. The lead tenant validates your project, your pricing and your strategy.”
Mum’s the word from the developer, but Oxford Properties, the real estate arm of the Ontario Municipal Retirement System , is the leading candidate to build a new tower.
The 57-storey tower known as The Hub is already pre-leasing, but with 1.5 million square feet of office and retail, it’s a tall order to get off the ground.
One thing is for sure: The project at 30 Bay Street validates the financial district’s continued shift south from Bay and King streets, a location real estate circles have long called centre ice.
Amenities and services get talked about a lot. Still, commute times are the number one perk you can offer occupiers and their employees, and the closer you can get to that transit point with minimal friction, the more valuable it is. Oxford’s site is a five-minute walk from Union Station and connected to Toronto’s 30-kilometre underground system, The Path.
Meanwhile, supply and demand continue to drive improvements in fundamentals. “When you have supply at exactly zero, any positive demand means the vacancies start to drop,” said Meehan, adding that any net gains directly drive down construction.
CBRE believes an announcement could come in 2027, and the economics will drive it. At a cost-to-build of $1,100 to $1,200 per square foot for office space and a seven per cent yield, Meehan said you need rents of about $80 per square foot to consider a new project.
Those trophy office buildings were renting at $63.58 as of the most recent quarter, but in parts of CIBC Square’s second tower, rents were already at $80, and those rents could reach $90 by 2031, he said.
“New construction will begin to make sense very soon,” he said.
Hines’ senior managing director, Jonathan Pearce, who oversees leasing in the Americas, said during a conference this month the recovery is ripple-induced: “You drop a pebble into the water, and it produces a series of ripples. The first ripple is the brand new; the trophy class is filling up. Rents are extremely high,” Pearce said.
Other landlords are trying to take advantage of the ripple effect by transforming buildings that may not be quite at the centre of the action.
Crown Realty, which owns 67 buildings and manages 12.5 million square feet, is repositioning its buildings.
“The story a lot of people are talking about is the bifurcation in the office market. It doesn’t actually mean that trophy buildings are the only winners, though,” said Emily Hanna, managing director of Crown, in an emailed comment, adding her group is targeting buildings with the right fundamentals.
Jamie Grossman, managing principal of tenant representation firm Cresa Toronto, said availability might be half of what it was a year ago in the financial core.
“It has become more and more difficult to find larger blocks of space,” he said, adding that two or more contiguous floors are harder to find today.
Hines’ Pearce said that if he had another million square feet at CIBC Square, he could probably lease it today, and noted that some of the last deals in that building were between $80 and $90 per square foot.
The problem with building that new supply is the cost. CIBC’s first tower cost about $600 per square foot to build, and the second tower was close to $900. Pearce said it would cost $1,200 to $1,400 to build the same tower today.
“Oxford is trying to get the Hub launched,” he said, adding that the pension fund is demanding rents in the mid-$80s to mid-$90s to proceed. Alan MacKenzie, JLL Canada’s chief executive, said he’s heard the same dollar figures.
“We have a million square feet in office mandates right now we can’t find a home for,” said MacKenzie.
Pearce said there is a recovery, but it’s nuanced. Secondary locations with high-quality buildings, or low-quality buildings in great locations, can fill up. But there are going to be limits.
“God help you if you have a low-quality building in a crap location. Your best business plan in that case might actually be arson,” he said, clearly joking.
Jokes aside, the office recovery is well underway. But it will take a new tower to make it official.
Toronto may have to wait for its next 'trophy' office tower
2026-10-26 18:01:22
