The office isn’t dead. But it’s different.
Three years after pandemic work-from-home experiments became permanent hybrid arrangements, let’s look at what’s actually happening with office real estate and financing.
The Hybrid Work Reality
Start with what actually happened. Companies didn’t abandon offices entirely, and most didn’t go fully remote.
The modal outcome is hybrid: employees in office two to three days per week, home the rest. Some companies require specific days (Tuesday-Wednesday-Thursday is common). Others allow flexible scheduling.
Fully remote remains rare except for certain industries like tech. Most companies want some in-person presence for collaboration, training, and culture.
What this means for office space: companies need less of it. If employees are in office 60% of the time on average, you can get by with less square footage through hoteling, shared desks, and scheduling.
The result is office space demand declining by roughly 15% to 25% in most markets compared to pre-pandemic. That’s created the vacancy and valuation challenges we’re seeing.
The Vacancy Picture
Office vacancy in Canadian cities reflects these trends.
Downtown Toronto office vacancy is around 16% to 17%. That’s nearly double the pre-pandemic norm of 8% to 10%. Vancouver is similar.
Calgary is higher, around 25% to 30%, but that includes legacy issues from energy sector contraction years ago, not just hybrid work.
Montreal, Ottawa, and other cities are seeing elevated vacancy but not as extreme.
Suburban office markets are performing better, with vacancy rates closer to 10% to 12%. Companies that don’t need downtown prestige are choosing suburban locations that are easier for hybrid workers to reach.
What’s concerning from a lending perspective is that this isn’t temporary. Vacancy has been elevated for over two years now. It’s a structural shift, not a pandemic disruption.
The Flight to Quality
Not all office space is suffering equally.
Class A buildings with modern amenities, good air quality, flexible layouts, nice common areas, these are maintaining relatively high occupancy. Tenants want their three days in office to be in quality space.
Class B and C buildings, particularly older towers without recent capital investment, are seeing the highest vacancy. Tenants are consolidating into better space and leaving older buildings.
This bifurcation creates both challenges and opportunities. Owners of quality buildings are doing okay. Owners of marginal buildings are struggling.
For lenders, Class A properties in good locations with strong occupancy are still financeable, though at lower loan-to-value ratios than pre-pandemic. Class B and C properties with high vacancy are very difficult to finance conventionally.
Lease Renewal Dynamics
Office lease renewals are happening but on different terms.
Tenants are renewing with 20% to 30% less space on average. They’ve adjusted their space needs for hybrid work and aren’t returning to pre-pandemic footprints.
Lease terms are shorter. Ten-year leases used to be standard for office space. Now five years is more common. Tenants want flexibility given uncertainty about future work arrangements.
Landlord concessions are significant. Free rent periods, tenant improvement allowances, flexible termination clauses. Effective rents are well below face rents in many cases.
These dynamics affect building cash flows and valuations, which flows through to financing.
Conversion Opportunities
Converting office buildings to other uses, particularly residential, is getting significant attention.
The economics are complex. Office buildings are designed differently from residential: floor plates, ceiling heights, bathrooms, windows, mechanical systems. Conversion costs can be $200 to $400 per square foot or more.
But in some cases, the numbers work. If you buy a distressed office building cheap enough, and if there’s demand for residential units in that location, conversion can be viable.
Government incentives and streamlined approvals in some cities are supporting conversions. Toronto, Calgary, and other cities are encouraging office-to-residential conversions to address housing shortages.
Financing conversions is challenging because lenders need to underwrite both the acquisition and the construction. This typically requires experienced developers and significant equity.
But it’s happening. Conversion projects are underway in multiple Canadian cities.
The Suburban Advantage
Suburban office is outperforming downtown in most markets.
Several factors drive this. Easier parking makes hybrid schedules more convenient. Lower rents save money for companies. Modern suburban buildings often have better amenities than older downtown towers.
For some industries, suburban locations also help with employee recruitment. Workers don’t want long commutes if they’re only coming in occasionally.
Suburban office vacancy is elevated but not crisis-level. And suburban properties are financing more easily than downtown.
For investors, selective suburban office investment might make sense where downtown is clearly challenged.
Office Property Valuation
Office property values have declined from peak levels, though the degree varies.
Prime downtown towers in good condition with strong tenancy have seen values decline maybe 10% to 20% from peaks. Painful for owners who bought high, but manageable.
Class B office with higher vacancy has seen value declines of 30% to 50% in some cases. Some properties are worth less than the debt against them.
Valuation is complex because cash flows have declined (vacancy, rent concessions) and cap rates have widened (higher risk perception). Both factors compound to reduce values significantly.
For owners needing to refinance, this creates major challenges. Loans that were 65% LTV at origination might be 85% or 95% LTV now based on current values.
Refinancing Challenges
Office property owners facing refinancing in 2026 are encountering difficult situations.
Lenders are offering lower loan-to-value ratios than original mortgages. A property that financed at 70% LTV five years ago might only get 55% to 60% LTV today, requiring the owner to pay down significant principal.
Rates are higher than expiring mortgages in many cases. A loan maturing at 3.5% might refinance at 6.0% to 7.0% or higher, significantly increasing debt service.
Some properties simply can’t get conventional refinancing at any reasonable terms. Values have declined too much, or cash flow is too weak, or vacancy is too high.
Private lending is available for some situations at 8% to 12% rates, but those terms are only viable for properties with reasonable cash flow. Truly distressed properties may have no financing available.
Lender Strategies
Lenders are managing office exposure carefully.
Most lenders have reduced new originations for office properties. They’re not seeking this business aggressively given sector challenges.
For existing loans, lenders are working with borrowers where possible. Modifications, extensions, and forbearance are being negotiated to avoid foreclosures.
But lenders’ patience isn’t infinite. If a property is fundamentally unviable, they’ll eventually act. We’re starting to see office property foreclosures and receiverships in situations where workouts aren’t possible.
From a borrower perspective, communication with lenders is critical. Don’t hide problems. Engage early if you’re facing refinancing challenges.
The Future of Office Work
Where is office work headed long-term?
The consensus view is that hybrid is permanent for knowledge workers. Pure office work (five days in-office) is increasingly rare. Fully remote remains niche.
Some companies are mandating more office days, pulling back from pandemic-era flexibility. But few are going back to pre-pandemic five-day office weeks.
Younger workers entering the workforce never experienced pre-pandemic office culture, which may make hybrid work even more entrenched over time.
Technology continues improving remote work capabilities, reducing friction in working from home.
All of this suggests office space demand will remain structurally lower than pre-pandemic for the foreseeable future.
Asset Class Implications
Office is likely to remain a challenging asset class for several more years.
Supply is relatively fixed in the short term. Buildings don’t disappear quickly. Conversions are slow and expensive.
Demand is structurally lower due to hybrid work, and it’s not coming back quickly.
This suggests continued pressure on occupancy, rents, and values until supply and demand rebalance.
Eventually, we’ll reach a new equilibrium. Some buildings will be converted or demolished. Office space per worker will stabilize at new lower levels. Rents and cap rates will adjust.
But that equilibrium is years away, not months.
Investment Opportunities
Despite challenges, opportunities exist in office real estate for patient, capitalized investors.
Distressed acquisitions: Buying troubled properties from lenders or overleveraged owners at significant discounts. Requires turnaround capability and long time horizons.
Value-add repositioning: Buying Class B buildings, investing in improvements, and re-leasing to quality tenants. Works in markets with limited quality supply.
Suburban office in growth markets: Selective investment in suburban properties in markets with strong economic fundamentals.
Conversion plays: Buying buildings for conversion to residential or other uses. Requires development expertise and creative financing.
All of these require more equity, lower leverage, and higher risk tolerance than traditional office investment. But they can generate returns for those who execute well.
The Amenity Evolution
Office buildings are competing on amenities more than ever.
Quality coffee service, fitness facilities, outdoor space, collaboration areas, modern technology, good air quality. These matter when tenants are choosing space.
Buildings without these amenities struggle to compete. Investing in amenities can support occupancy and rent growth.
For lenders evaluating properties, amenity quality and recent capital investment are factors in credit decisions.
Regional Variations
Office market dynamics vary by city and region.
Toronto: Largest office market in Canada, significant challenges downtown, suburban markets better. Flight to quality is pronounced.
Vancouver: Expensive market with limited supply. Downtown vacancy is elevated but some neighborhoods like Yaletown remain strong. Suburban markets solid.
Montreal: More resilient than Toronto or Vancouver partly due to smaller company sizes and different industry mix. Government and institutional presence helps.
Calgary: Still dealing with energy sector legacy vacancy. But recent improvement as energy recovers and companies expand.
Ottawa: Government town, directly affected by federal government work-from-home policies. Market dependent on government decisions about office requirements.
Understanding local conditions is essential to office investment and lending decisions.
The 20-Year View
Looking very long term, office space will remain important but different.
Offices will be about collaboration, culture, and specific tasks that benefit from in-person work, not just “a place to work.”
Space per employee will be lower than historical norms. Flexibility and shared space will be standard.
Location matters more. Offices need to be convenient for hybrid workers, which may favor different geographies than traditional CBDs.
Building quality matters more. No one wants to commute to a mediocre building.
The office building stock will shrink through conversions and demolitions until supply matches new lower demand.
Long-term office investment will work, but it requires adaptation to new realities.
Get Expert Guidance
Office building financing is complex in the current environment. Each property situation is unique.
At Creek Road Financial Inc., we work with office building owners facing refinancing challenges and investors pursuing office opportunities. We understand which lenders are still active in office lending and how to position properties for optimal terms.
Whether you’re dealing with a mature loan refinancing, pursuing distressed acquisitions, or exploring conversion opportunities, we can help you navigate the financing landscape.
Let’s discuss your office property financing needs and explore what’s possible in this challenging but evolving market.