Monday Market Minute | Oct 13, 2025

Commercial office remains the outlier — conversion strategies gain traction

What Moved

While most CRE asset classes had stabilized or improved, Canadian office real estate continued to struggle. National office vacancy rates remained above 18%, with downtown Toronto at 15% and Calgary above 30%. However, a new narrative was emerging: office-to-residential conversion projects were moving from concept to execution. Several municipalities accelerated zoning approvals and offered incentive programs. At least four major conversion projects were announced in Toronto and Montreal, backed by PE capital and supported by federal housing infrastructure funding.

Why It Matters

The office-to-residential conversion theme represented exactly the kind of structural opportunity that private markets are designed to capture. The economics were challenging but improving — conversion costs were declining as contractors gained experience, and the residential demand floor was well established in urban markets with housing shortages. For PE and real estate funds, conversion plays offered the potential for outsized returns: acquiring distressed office assets at steep discounts, investing in conversion, and exiting into a residential market with structural undersupply. The strategy required patient capital and development expertise — barriers that limited competition and protected returns.

Signal to Watch

Whether municipal permitting timelines could match the ambition of conversion proposals. Zoning and building code complexity remained the primary bottleneck, and municipalities that streamlined approvals would attract disproportionate private capital.

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