Gated funds lock $30 billion while Toronto trophy offices tighten, forcing investors to rethink risk
Toronto’s best office towers are running out of space at the same time billions in Canadian real estate capital is locked behind fund “gates” – a combination that directly affects how institutional investors think about property risk, liquidity and future returns.
Toronto’s office market has clearly turned a corner, but only at the top end.
According to the Financial Post, office leasing in the city hit just under 2m square feet in the fourth quarter of 2025, the strongest level in five years, driven largely by major tenants such as Royal Bank of Canada, Canadian Imperial Bank of Commerce, Toronto‑Dominion Bank, Wealthsimple Inc., Bank of Nova Scotia, Stripe, Inc., and Mastercard Foundation.
CBRE research managing director Marc Meehan described the market as “on fire,” while Colliers national head of research Adam Jacobs said “Demand is roaring again,” tying the shift to aggressive return‑to‑office mandates from banks, government, insurance and tech employers.
The headline vacancy rate in downtown Toronto still sits around 16 percent, near historic highs, but that masks a sharp bifurcation.
The Financial Post reports that trophy‑grade downtown space has a vacancy rate of just 3 percent, compared with about 25 percent for Class B and C buildings.
Top‑tier Class AAA rents have climbed from $50 to $55 per square foot since 2020, a 21 percent rise.
Newer, amenity‑rich buildings with strong transit links capture most of the demand, while older stock that needs capital upgrades remains under pressure and, in some markets such as Calgary, is increasingly a conversion candidate.
Supply dynamics add to the imbalance.
Meehan said there has been no meaningful new office construction in 2024 or 2025 and that CBRE does not expect new trophy‑level supply before 2030 or 2031 at the earliest, as reported by the Financial Post.
CBRE forecasts office demand to peak in 2026 and then moderate through 2027 and 2028, but Meehan expects the “scarcity of trophy space” to push rents higher.
For occupiers and long‑term owners, that points to tightening conditions at the top of the quality spectrum even if overall vacancy stays elevated.
At the same time, the cost of capital and policy backdrop remain uncertain.
The Financial Post notes that infrastructure issues, ongoing trade tensions with the US that affect Ontario’s manufacturing sector and Toronto’s relatively high unemployment rate all threaten to dampen office demand.
Jacobs said that “uncertainty is an enemy in real estate for getting deals done and building for the future.”
On the capital side, the bigger story for institutional readers is liquidity risk in private real estate funds.
Bloomberg reports that investors have about $80bn in Canadian private real estate funds, and around $30bn of that is now locked up as managers “gate” redemptions and restrict distributions in response to a housing downturn and slower development activity.
Several platforms have imposed or extended gating.
Romspen Investment Corp. halted redemptions in 2022 and has kept them gated.
Nicola Wealth has lengthened withdrawal timelines and cut distributions by more than one‑third on about $2.7bn of real estate assets.
Hazelview Investments, Trez Capital, Centurion Apartment REIT and KingSett Capital’s Canadian Real Estate Income Fund have all, at various points, suspended or limited redemptions or payouts.
The core problem is structural.
Bloomberg points out that these funds hold illiquid assets such as towers, warehouses and construction loans but were marketed with frequent‑redemption features.
After 10 interest rate hikes in 2022 and 2023, condominium values fell by hundreds of dollars per square foot, and returns could no longer support outflows.
In his former role as governor of the Bank of England, Mark Carney warned in 2019 that offering quick redemptions on illiquid assets was “built on a lie.”
That warning now looks prescient for Canadian investors facing gates, extended timelines and lower cash yields.
Some managers have turned to leverage to preserve distributions, borrowing against portfolios to fund payouts.
York University real estate professor Jim Clayton called that “a bit of a house of cards,” arguing to Bloomberg that borrowing to maintain distributions sustains the illusion of stability while deepening the eventual adjustment.
All of this unfolds against a weak housing backdrop.
National home prices have fallen 18 percent from their peak. Development pipelines in Toronto and Vancouver have dropped to levels last seen in the 2000s. Commercial real estate investment fell 22 percent year‑over‑year in the first half of 2025.
Population growth has also stalled after immigration curbs, with a rare 0.2 percent quarterly decline in the third quarter of 2025.
