The Quiet Collapse of Office Real Estate

Hybrid work has permanently restructured office demand in ways that were dismissed as temporary in 2020 and 2021. Canadian office vacancy rates in Toronto, Calgary, Ottawa, and Vancouver have climbed steadily since 2022 and now sit in the 18–22% range in many downtown submarkets — levels that would have been unimaginable to developers who financed new towers at 2019 rents.

The financial consequences flow in multiple directions. Property owners are marking down asset values, triggering covenant breaches on commercial mortgages. Banks holding those mortgages are increasing provisions. Municipal governments — whose property tax bases are substantially weighted toward commercial real estate — are beginning to feel revenue pressure that will require either higher residential tax rates or reduced services.

Calgary’s Conversion Strategy

Calgary, which faced severe office vacancy following the 2014 oil price crash, has the most mature playbook for office-to-residential conversion. The city established an Office Conversion Incentive Program that has converted over 1,500 units from vacant office space to residential use. The economics are challenging — conversions cost more per square foot than purpose-built residential — but the alternative of permanently vacant towers is worse. Other Canadian cities are studying Calgary’s experience carefully.