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The city is leading the way in converting old offices into much-needed housing
Published 04 June 2024 • Last updated: June 04, 2024 • 4 minutes reading time
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Calgary is a leader in converting office space into residential space. Photo by Gavin Young/Postmedia Files
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By Murtaza Haider and Stephen Moranis
Canada needs to build millions of new homes quickly to make housing affordable again. But with each passing month, the goal of six million new homes by 2031 seems less and less likely.
Canada can increase its housing supply in unconventional ways, such as converting excess office space into housing, but for this conversion to be successful, collaboration between landlords, developers, communities and higher levels of government is essential.
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Calgary is a leader in office-to-residential conversion, where city officials have developed a simplified formula of incentives to balance the interests of various stakeholders and create housing where empty or abandoned office towers once stood.
Remodeling was the focus of a recent research webinar organized by REALPAC, an association promoting the Canadian real estate sector. Speakers from the City of Calgary and the real estate sector revealed strategies and considerations that have made office building remodeling a success.
Calgary's commercial real estate market was already beginning to weaken before the pandemic, due to the decline in oil and gas prices. By 2021, more than 14 million square feet (SFT) of office space was vacant downtown, representing 33 percent of the city's total commercial space. By its own estimates, the city has lost $16.6 billion in office values since 2015.
In other words, Calgary was ripe for conversion.
In 2021, the City Council developed a $443.5 million Greater Downtown Plan that included $153 million in incentives for office-to-residential conversions, and funds were also directed toward initiatives to promote the arts and restore the vibrancy of the downtown area.
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The city reformed its regulatory framework to speed up approval of conversions while achieving millions of dollars in additional cost savings. The success of Calgary's plan was based on the transparency and simplicity of the incentives, which were developed after consultation with the industry. Conversion of office space to residential space was paid $75 per square foot, conversion to a hotel was paid $60, and conversion to education or arts was paid $50. Colleges were offered $50 per square foot to use converted space downtown.
The strategy worked. More than 1,500 housing units were created in converted spaces using $165 million in incentives. The conversions eliminated nearly 2 million square feet of redundant office space. The city estimates that the conversions increased assessments by as much as eight times over pre-2021 levels, with stakeholders involved matching every dollar the city invested by $3.
While converting office space to residential space is a smart way to convert redundant space into usable (and much-needed) space, not every office building is suitable for conversion. The suitability of a building must be determined before any expensive renovation.
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Gensler is a company that has perfected the art and science of redevelopment readiness. The global architecture, design and planning firm analyzed more than 1,300 buildings in 130 cities and reduced a variety of factors to simple metrics to estimate redevelopment readiness.
Their research found that a building's shape and layout – such as the location of windows and elevators – were the most influential factors, accounting for up to 60 percent of the conversion score. In contrast, site context, location and accessibility to amenities and transportation accounted for just 10 percent of the score. Loading docks, parking and other mechanical components accounted for 20 percent, while the building's exterior envelope accounted for the remaining 10 percent of the conversion score.
The pandemic caused many office tenants to move from older buildings to newer ones. This exodus created significant vacancies in the older inventory and forced landlords to look for alternative uses for the space. While repurposing is an option, Gensler estimates that only 30 percent of the buildings they assessed were suitable for repurposing. This assessment is critical for landlords with large portfolios grappling with what to do with their older buildings.
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The math behind the conversions couldn't work without government support. Calgary's experience underscores the importance of public sector support, as it provides incentives for developers to build environmentally sustainable housing. Converting office buildings to residential is far better for the environment than building the same number of new homes from scratch.
A study by consulting firm Arup found that “expanding opportunities to convert office space into residential space in New York City could reduce overall carbon emissions by as much as 54 percent by 2050, compared with a business-as-usual scenario.”
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Converting redundant or surplus office buildings into much-needed housing requires collaboration between landlords, developers and city government. This approach would revitalize abandoned buildings and transform run-down neighborhoods into vibrant residential areas. Improved affordability and environmental sustainability are a bonus.
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Murtaza Haider is a principal of Regionomics Inc., a consulting firm specializing in predictive analytics and machine learning. Stephen Moranis is a real estate industry veteran. You can reach them through the Haider-Moranis Bulletin website, www.hmbulletin.com.
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