Commercial real estate market at turning point as office, industrial vacancy rates fall

Canada’s national office vacancy rate fell to 13.6% in Q1 2026, down 1 percentage point year over year, while industrial vacancy also declined for the first time since 2022 to 3.5%. Colliers said the market is moving toward balance as office leasing demand strengthens, inventory growth slows, and industrial absorption exceeds new supply by more than 600,000 square feet in the quarter. Risks remain, including continued office oversupply, a slow pace of conversion activity, and uncertainty ahead of Canada-U.S.-Mexico Agreement renegotiations.

Analysis

The key read-through is not “CRE is healing,” but that the market is bifurcating into scarce, financeable quality and a long tail of stranded, legacy assets. That matters because the improvement in vacancy is likely to compress cap rate dispersion before it lifts the whole sector: lenders, insurers, and equity buyers will reprice trophy and near-trophy assets first, while obsolete office remains functionally uninvestable without conversion economics. The second-order winner is not just landlords; it is the brokerage and data layer that monetizes transaction restart, lease-up, and restructuring activity as capital finally has something to underwrite.

For CIGI and CSGP, the setup is a delayed but durable revenue tailwind from improved leasing volumes, dispositions, and advisory work rather than a near-term valuation reset. The better mix is important: tightening vacancy in industrial and top-tier office should increase decision velocity, which tends to favor firms with global client relationships and analytics credibility over pure local leasing shops. The risk is that “better” remains geographically narrow; if capital markets stay restrictive, transactions can improve while monetization lags, keeping fee growth choppy for several quarters.

The main macro catalyst to watch is trade policy. Industrial demand is still exposed to cross-border friction, and a serious tariff escalation or prolonged USMCA uncertainty would likely hit leasing sentiment first, then new starts with a 1-2 quarter lag. On office, the overhang is more secular than cyclical: a renewed RTO push helps, but the real bullish catalyst is faster-than-expected conversion of obsolete stock, which would mechanically tighten supply and improve replacement-cost support over 12-36 months.

Consensus is probably underestimating how much slack still needs to be absorbed before this becomes a broad-based CRE upcycle. The market can look “better” on vacancy while owners of weaker assets still face equity wipes, covenant pressure, and refinancing haircuts. That suggests the trade is less about owning CRE beta indiscriminately and more about owning the service providers and the highest-quality real assets while shorting exposed, legacy-office-sensitive balance sheets.

Key Decisions for Investors

• Long CIGI vs short a basket of legacy-office REITs/owners: prefer CIGI into the next 2-4 quarters as leasing recovery and restructuring activity should expand faster than broad property NOI; risk is a delayed transaction rebound if rates stay higher for longer.
• Accumulate CSGP on pullbacks for a 6-12 month horizon: improving vacancy and rising leasing decision velocity should support higher subscription and marketplace activity; risk/reward is best if capital markets thaw and transaction volumes normalize.
• Avoid initiating broad long CRE beta until refinancing windows clear: the bifurcation means headline vacancy improvement can coexist with forced sales in weaker assets over the next 2-3 quarters.
• Pair long CIGI / CSGP with short industrial-logistics or construction beneficiaries most exposed to a tariff-driven leasing slowdown for the next 1-3 months; the trade works if USMCA uncertainty delays tenant commitments.
• Set a watchlist for conversion-capable office owners only after local policy catalysts appear; if conversion incentives accelerate, the upside is 12-36 months out, not immediate, and legacy-office names without redevelopment optionality remain value traps.