A new stream of incentives to extract energy saving potential in Class B and C buildings dovetails with projections about their future competitiveness in a recovering office market. For now, elevated vacancy rates continue to plague this subset of the inventory, but some investors are eyeing it as a good bet for future returns given anticipated scarcity of Class A and AAA supply.

“Our development cycles are, generally speaking, at a standstill. Save for a few potential projects, we’re in a position of limited new inventory over the next three to five or potentially seven years. Tenants will be forced to seek alternative opportunities to a very tight AAA and A class market,” says Brendan Sullivan, senior vice president, office leasing, with CBRE Canada. “We’re at a moment in time where it’s very important for landlords of B class office buildings to understand the opportunity that exists today, and, more importantly, will exist in the future.”

Still, there’s no prediction for a quick, universal or effortless improvement in those landlords’ fortunes. CBRE Canada’s newly released data for the first quarter of 2026 reports a 24.3 per cent national vacancy rate for downtown Class B and C office stock — a drop of 100 basis points (bps) from 12 months earlier, but just 10 bps lower than at the end of Q1 2024 and 160 bps higher than the B/C vacancy rate for the first quarter of 2023. Consistent with Sullivan’s hypothesis, a steeper year-over-year drop in downtown Class A (210 bps) and trophy status (160 pbs) office vacancy illustrates where leasing momentum is currently occurring.

Toronto, which is leading the trend, posted a third consecutive quarter with more than 1 million square feet of positive absorption downtown. A record high tally of 2.1 million square feet of absorption in Q1 2026 includes the completion of the fully pre-leased, 1.4-million-square-foot CIBC Square II tower, leaving just 420,000 square feet of in-progress construction yet to arrive onto the downtown market. The Class A vacancy rate fell 160 bps during the course of the winter to end the quarter at 12.1 per cent, while the total downtown office vacancy rate declined by 110 bps, to 15.9 per cent.

Analysts with Savills interpret the year-over-year 0.4 per cent drop in average net asking rents in Toronto’s central business district as evidence that “lower-tier” inventory now accounts for a larger share of available space. The firm’s newly released stats for Q1 2026 peg those average asking rents at $62.67 per square foot (psf) versus $45.73 psf across the broader Greater Toronto Area. Within the central business district, average asking rents range from $70.10 psf in the financial core to $49.68 psf in midtown and $47 psf in the King/Dufferin node, where more Class B and C office buildings are typically found.

Niche for outsized returns

That’s happening as investment property specialists turn back to asset-specific strategies after an extended run of reaping easy gains from tilting their portfolios toward industrial holdings. Last year, the gaps in performance narrowed significantly among the four main asset categories monitored in the MSCI REALPAC Canada Property Index, which tracks institutionally held assets, and office registered the second best average total return after bottoming out the field for the previous four consecutive years.

“It’s becoming more of a stock picker’s market,” Jim Costello, MSCI’s Chief Economist, Real Assets, told a Toronto audience assembled earlier this winter for the release of the 2025 investment results. “It’s a matter of finding the right properties, understanding those properties and making sure you have the right pieces, at the asset level, to generate income.”

Searchers for potential outsized returns on investment — dubbed “alpha” — zero in on properties valued at a discount relative to the market, which could credibly command higher rents and operate more cost-effectively in the future. Class B buildings, whether newly acquired or long held in a portfolio, almost inherently fit that bill, but typically need intervention to deliver on their promise.

“You create the alpha by running the property efficiently, doing something to the property, really increasing your rents,” Ugo Bizzarri, Chief Executive Officer of Hazelview Investments, observed during a panel discussion occurring alongside the release of the Canada Property Index 2025 results.

That’s not necessarily accomplished solely through the addition of deluxe amenities like the conference centres, fitness facilities and lounges that have been sprouting up in Class A and AAA space in recent years. Joining Bizzarri in the panel discussion, Scott Gordon, Head of Asset Management with Manulife Investment Management, suggested non-trophy office assets and markets beyond Toronto, Vancouver and Montreal offer some of the best possibilities.

“If you’re in a primary market, yes, you’re in a stable economy, but it’s hard to outperform. The almost-primary and secondary markets are where, from an investment perspective, you have to spend a lot of time looking to try to outperform the index,” Gordon said. “If you put alt (alternative asset classes) aside, I think office is actually where you’re going to find alpha right now, and amenitzing your building is different if you’re a C or a B versus an A. I think people who are looking for Class B office are less concerned about amenities and more concerned about economics.”

“There are many things on the margin, from an investment perspective, that can enhance the experience that an occupant will have in an office building,” Sullivan concurs. “Back-of-house things like energy and water efficiency complement front-of-house when we talk about amenitization. It’s not just about what looks good; it’s also about what’s operationally good, and they have to meet together and be symbiotic.”

Game plan for gains

The Building Owners and Managers Association (BOMA) of Canada has targeted that sphere via its Enspire program. Newly launched Retrofit Ready incentives, drawing on funds from Natural Resources Canada’s deep retrofit accelerator initiative, include rebates of:

• up to 80 per cent of the eligible costs of recommissioning to assess and, where necessary, adjust mechanical, electrical and/or automation systems to ensure they are operating as intended; and
• up to 60 per cent of eligible costs for the professional services required to: set up and configure tracking and monitoring systems; develop the business case for a retrofit involving at least $100,000 worth of upgrades; and/or project manage a retrofit of similar value.

The program reflects the Canadian government’s capacity-building agenda for the deep retrofit accelerator initiative, which is aimed at developing preparedness, delivery models and expertise to conduct deep retrofits on the scale and at the pace necessary to achieve Canada’s targeted reductions in greenhouse gas (GHG) emissions. (Those are: a 40 to 45 per cent drop below the 2005 level by 2030; and net-zero emissions by 2050.)

BOMA Canada’s piece of the larger national puzzle focuses on Class B and C buildings. Adjacent programs, such as the Purpose Retrofit Accelerator offered in collaboration with the Canada Green Building Council (CAGBC), cover off other building types and economic sectors, but also channel federal funds to pre-project planning and preparedness to help owners/managers reap optimal gains from their retrofit spending.

Last year, two fully subscribed BOMA Enspire initiatives — Quick Start Assessment (QSA) and Building Performance Excellence (BPE) — provided support for 838 projects in 735 properties collectively encompassing about 43 million square feet of space. The new Retrofit Ready initiative has a $4 million budget, of which slightly more than two-thirds is earmarked for recommissioning incentives. Program administrators began processing applications on April 1.

Eligibility is restricted to Class B and C commercial and institutional buildings in the range of 10,000 to 250,000 square feet, built prior to 2016. Office, retail, light industrial, restaurants, hotels/lodgings and public sector facilities, excluding those that the federal government owns and operates, can qualify for varying maximum amounts of funding, depending on their size.

The rebate ceiling is set at $125,000 for buildings in the range of 100,001 to 250,000 square feet; $100,000 for buildings in the range of 51,000 to 100,000 square feet; and $75,000 for buildings from 10,000 to 50,000 square feet. Owners/managers would have to undertake whole-building recommissioning and all three of the other designated activities to obtain those maximum amounts. As well, they can claim only to a threshold of $500,000 across their entire portfolio of buildings, including funds previously allocated for Enspire’s QSA and BPE initiatives.

Approved candidates are expected to work with one of BOMA Canada’s registered service providers, comply with all program rules, complete projects by Jan. 29, 2027 and submit required documentation by Feb. 12, 2027. Beyond that, project proponents will have to secure and invest the capital to move forward with their retrofit plans.

Meanwhile, some prospective financiers welcome awareness-building exercises that could steer more loan applicants their way. Speaking at a recent CAGBC seminar, Carla Heim, director of sustainability with the Business Development Bank of Canada (BDC) acknowledged that the lending institution’s certified green building loan is “not flying off the shelves”.

The preferred-rate loan is available for Canadian entrepreneurs to acquire, build or renovate a building that has or will achieve a sustainability certification, and it comes with what Heim describes as “very simple” conditions. However, many applicants in the small and medium-size enterprise (SME) sector, in particular, are not highly attuned to sustainability as they grapple with other economic and growth-related pressures.

“A lot of times, the building is the last thing on their list (of concerns). Entrepreneurs are coming to us with fully baked projects and they haven’t made any considerations about sustainability in their buildings,” Heim observed. “We really want to get into that conversation a lot earlier. I think they would pursue it because it has a rate reduction for achieving a building certification, and we’ve shied away from complicated reporting requirements that might intimidate them. Once the underlying condition is met, the rate reduction can be done.”