Canadian real estate is telling two different stories. Office buildings are filling up. Condo markets are falling apart. And the reasons behind each trend explain a lot about how Canada's economy has shifted.

The national office vacancy rate dropped to 18% at the end of 2025, down from 18.7% a year earlier, according to CBRE. That's the first decline in years and marks a significant reversal from pandemic trends.

Meanwhile, Greater Vancouver saw condo prices drop 5.3% year-over-year. Toronto condos faced similar pressure. Vancouver had over 2,500 unsold condo units by mid-2025, the highest level in decades.

"Canadian real estate is finally showing signs of life as workers return to the office, but condos continue to face problems," Brian Rosen, president and CEO of Colliers Canada, told BNN Bloomberg.

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The Office Comeback

Return-to-office mandates drove the recovery. TD Bank, RBC, Scotiabank, BMO, and Rogers Communications all required employees back four to five days per week starting in fall 2025. The Ontario government went further, mandating five-day office weeks for public servants starting January 2026.

The impact showed up immediately in absorption numbers. Q4 2025 was the best quarter for office absorption in almost eight or nine quarters, according to Rosen.

Downtown Toronto saw vacancy rates drop almost 3%. Class A buildings now sit at 15.4% vacancy, the lowest level in three years. Trophy buildings, the top tier of office space, hit just 3% vacancy in Toronto and 10.4% nationally.

"There was going to be a reversion to the mean at some point, and I think that is what's happening," Rosen said. "And it's going to continue to happen over time, particularly as there's no new office being built."

That last point matters. Only 2.8 million square feet of office space is currently under construction across Canada, and nearly 70% of that is pre-leased. The only significant building under construction is the second phase of CIBC Square in Toronto, set for completion in 2026.

New building starts and completions hit a record low in 2025. Active construction levels for new buildings stand at the lowest in 20 years. That supply constraint supports the recovery as demand returns.

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The Quality Divide

Not all office space is recovering equally. The market is splitting between high-quality buildings and everything else.

Vacancy in Class B and C offices downtown remains elevated at 25.4% in Q4 2025, up slightly from 25.3% a year earlier. That's in sharp contrast to Class A space, which is declining steadily.

Companies signing new leases want spaces that justify bringing employees back. That means modern amenities, good locations, efficient layouts, and attractive common areas. They're competing for limited Class A and trophy space rather than settling for older buildings.

"Companies are very focused on getting their workers into the office," Scott Figler, director of Canada research for JLL, told The Globe and Mail. "If they're going to sign a new lease, they want to make sure the investment in that space has a payoff."

Raymond Wong, vice president of data solutions at Altus Group, explained the dynamic. "With the increase in mandates for employees to come back into office, we're seeing companies finally realizing, 'Look, we don't have enough space to bring everyone back, because we downsized over the last three to five years.'"

That realization is driving new leasing activity concentrated in premium buildings. Class AAA vacancy rates in Toronto dropped to just 3% as of Q2 2025. There's basically no trophy space available in downtown Toronto anymore.

Wong expects demand to eventually trickle down to Class B and C buildings as higher-rated spaces become unavailable. But for now, the recovery is firmly concentrated in quality properties.

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The Sublet Space Signal

Another sign of office market stabilization is the sharp decline in sublet space. Companies pulled 3.2 million square feet of sublet space off the market in 2025, more than in any year since 2005, according to CBRE.

Sublet space often signals tenant distress. When companies need to shed space quickly, they sublet it rather than breaking leases. The amount of office space available for sublease now stands at 11.4 million square feet, roughly in line with 2017 levels when office demand was considered strong.

That 13.9% sublet rate as of Q3 2025 represents a year-over-year drop of 320 basis points. It indicates companies are re-occupying previously subleased space rather than trying to offload it.

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Regional Differences

Office recovery isn't uniform across Canada. Vancouver and Halifax have the lowest vacancy rates at 11.6% and 10.7% respectively. Toronto sits at 18%, matching the national average. Montreal is at 18.3%.

Calgary and London, Ontario remain challenging markets with vacancy rates of 25.9% and 26.2%. But Calgary's rate is falling as landlords take supply off the market through conversions to residential use.

Since 2021, Canada has seen about 7.8 million square feet in office space converted, plus 2.6 million square feet demolished, leading to about a 2.2% reduction in inventory. Calgary has led conversion projects, transforming office buildings into residential, hotel, life sciences, and education uses.

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The Condo Collapse

While offices recover, condos are struggling. Vancouver condo prices dropped 5.3% year-over-year. Toronto condos fell 4.4%. Sales volumes collapsed even more dramatically than prices.

In Vancouver, condo sales were down 23.1% year-over-year in October 2025. Resale condo transactions plunged as buyers stayed on the sidelines.

"The condo market tanked and it's a complicated situation right now," Rosen told BNN Bloomberg. "There are signs that we're nearing a bottom, however, there still expects to be distress in 2026."

The primary driver is immigration cuts. Canada implemented tighter rules in late 2024 to reduce unemployment, address housing affordability, and ease pressures on healthcare and public services. The impact on condo demand was immediate.

"You had all the non-permanent resident decline that we saw on immigration, and that created a lack of demand," Rosen explained.

Non-permanent residents, international students and temporary foreign workers, overwhelmingly rent rather than buy. But they rent condos. When their numbers dropped sharply, condo rental demand collapsed. That affected investor appetite for buying condos as rental properties.

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The Supply Timing Problem

The other issue is supply. Many condo projects started in 2021 when interest rates were low and prices were shooting up. Those projects are completing now, right as demand weakens.

"It's a case of bad timing," Ben McLaughlin of WOWA.ca told Business in Vancouver. "Many new condo projects [are] completing just as demand weakens due to tariff uncertainty and federal immigration curbs."

There were 3,031 apartment completions in Vancouver in June 2025, compared with 1,698 in June 2024, according to CMHC data. That surge in supply hit a market with declining demand.

Vancouver had over 2,500 unsold condo units in mid-2025, the highest inventory level in decades. Developers couldn't move units. Some projects got cancelled. Others converted to purpose-built rental.

Todd Shyiak, an executive vice president at Century 21 Canada, said developers in downtown Vancouver and Toronto focused for years on building small units for investors. "All of a sudden you can't buy a 500-square-foot condo and rent it out to a waiter anymore, because the cost for rent would be extraordinarily high."

The economics broke. Rising construction costs, higher interest rates, and stagnant rents made small investor condos unprofitable. The units completing now were financed based on 2021 assumptions that no longer hold.

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Four Factors Behind the Condo Slump

CBC identified four major forces converging on Metro Vancouver's condo market. They apply to other Canadian markets as well.

First, high interest rates. Even though the Bank of Canada cut rates from 5% to 2.25%, mortgage rates remain elevated compared to pandemic levels. That affects both buyers and investors.

Second, softening rental income. Average asking rents for two-bedrooms in Vancouver fell from $3,440 in 2024 to $3,170 in 2025, according to Statistics Canada. Rental price growth stagnated across most markets. Investors can no longer count on steady rent increases to absorb rising costs.

Third, reduced foreign capital. The foreign buyer ban, extended through January 2027, limits access to capital that could help developers meet presale thresholds and finance new construction. While the intention is understandable, the measure has made it harder to get projects off the ground.

Fourth, lower immigration. The federal government reduced temporary resident targets by 43% for 2026. That removes a significant source of rental demand, which directly affects condo investor appetite.

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What This Means for Markets Like Kelowna

Kelowna sits somewhere between these extremes. The city doesn't have a significant office market compared to Toronto or Vancouver. But it absolutely has a condo market that's been affected by the same forces.

Kelowna condo prices averaged $489,500 in November 2025, down 12% from the April 2022 peak of $557,700. That's a bigger percentage decline than single-family homes, which dropped 8% from their peak.

The Central Okanagan's 6.4% rental vacancy rate, the highest in Canada, reflects the same immigration-driven demand collapse. International students at Okanagan College and UBC Okanagan were a significant source of rental demand. When their numbers dropped, vacancy rates spiked.

Purpose-built rental projects in Kelowna, like 285 Dougall Road, are offering two months of free rent to attract tenants. That softness feeds back into condo investor interest. Why buy a condo as a rental property when purpose-built rentals are struggling to lease units?

Kelowna doesn't have the supply glut Vancouver faces. There aren't thousands of unsold condos. But the demand dynamics are similar. Fewer temporary residents. Weaker rental market. Less investor appetite.

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The Forecast Going Forward

Royal LePage's 2026 forecast projects condominiums will decrease 2.5% to $563,918 year-over-year in Q4 2026. Toronto and Vancouver will see the most persistent softness, driven by oversupply and weaker investor demand.

The rest of the country is expected to see modest gains, suggesting the worst of the condo correction is concentrated in major markets with large investor populations.

For offices, the recovery should continue as return-to-office mandates take full effect and limited new supply supports absorption. But the quality divide will likely persist. Trophy and Class A buildings will perform well. Class B and C buildings will struggle unless companies exhaust higher-quality options.

CBRE's report notes that overall net absorption totaled 2.2 million square feet in 2025, with Toronto accounting for the vast majority. That positive absorption offset negative numbers in markets like Ottawa and Calgary.

The office recovery is real but uneven. The condo correction is real and will likely extend into 2026.

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What This Means for Buyers and Sellers

If you're looking at condos in Kelowna or elsewhere in BC, the current market offers opportunities. Prices have adjusted. Sellers are more negotiable. Inventory is available. The question is whether you believe demand will return or if this is the new baseline.

For investors specifically, rental yield calculations have changed. Rents aren't growing as fast. Vacancy risk has increased. The small condo unit strategy that worked for years doesn't work anymore. You need different assumptions and a longer time horizon.

If you're selling a condo, understand you're competing not just with other resale units but with new developments offering incentives and purpose-built rentals offering flexibility. Pricing needs to reflect that reality.

For those considering commercial real estate or mixed-use properties, the office recovery creates opportunities, but only in quality assets. Older buildings in weaker markets face an uphill battle. The flight to quality isn't reversing anytime soon.

The split in Canadian real estate between recovering offices and struggling condos reflects deeper shifts in how Canadians work and live, which population groups are driving demand, and what types of properties make sense in the current economic environment, and navigating those dynamics successfully whether you're buying, selling, or holding property means understanding which factors matter for your specific situation and market, which is where working with the team at Coldwell Banker Horizon Realty helps you focus on what's actually happening in Kelowna rather than making assumptions based on national trends that may or may not apply locally.