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Key takeaways for office conversions to apartments

Earlier this year, we ran a two-day online event on the conversion of offices to rental apartment...

Earlier this year, we ran a two-day online event on the conversion of offices to rental apartments. We had a range of speakers, from Canada and the U.S., including developers, architects and municipal government representatives.

The presentations were fascinating and I took a number of key points away from it, which I felt were valuable to share.

Converting office buildings is not a new idea; in fact I was part of a conversion project in Montreal in 2010 and there are other examples across the country as well.

But in this post-pandemic society, we have seen remote work increase across the board. As a result, we are seeing office vacancies and the opportunity to acquire certain office buildings for lower prices that make the conversion process more feasible . . . or at least worth considering.

Considerations for a conversion

Office landlords have been seeing tenants move toward class-A or trophy facilities, while class-B and -C buildings have been emptying out, deteriorating and becoming less valuable.

Using these buildings for a different purpose, rather than tearing them down and putting them in a landfill, is both productive and sustainable.

The benefits of conversion are obvious, but it is important to dive into the details of the project before assuming viability.

Several characteristics should be assessed and considered, including proximity to other residential developments, zoning in place, pedestrian friendliness and proximity to transit, adequacy of public resources and community amenities (schools, parks, etc.).

Characteristics of the building itself are also important, such as floorplate, core areas and sufficient egress.

Sometimes there may even be options for hybrid conversion where the bottom floors remain office, the middle is amenity space that can either be shared or designated and the top floors are residential.

Some of the best options tend to be 1970s-era class-B (or in some cases -C) buildings that are tired and outdated but are found in class-A locations. Other opportunities can also be found with pre-war era buildings (1900-1930s). These two options often present an upside for conversions and fewer complications.

Calgary is doing lots of things right

The experience of office conversion in the City of Calgary has been very instructive and can be an example for many cities looking to delve into this opportunity.

The Downtown Calgary Development Incentive Program has spurred several conversions of vacant office buildings to residential apartments. The city committed $100 million to the program which offers developers $75 per square foot of space that will be converted.

Thom Mahler, director of downtown strategy, shared some of the success stories and gave tips for other municipalities looking at offering similar programs.

He explained it’s important to have at least a three-year horizon for the funding, recognizing that there are two types of developers which will take advantage:

– the first being the building owners who have been thinking about converting for years and are ready to act immediately;

– the second category is parties looking to acquire office buildings for conversion.

In this latter case, they will need time to conduct proper due diligence and assess the opportunities, so the actual conversions may not occur for a number of years.

Mahler also spoke about the disconnects between varying levels of government.

“Don’t wait for it to happen, make it happen to you”

In a perfect world, developers would be able to enter their property address into a search engine and see all of the different grant monies and programs available to convert their office to residential.

Unfortunately, that type of search engine is currently only wishful thinking.

Often, municipalities tend to be reactive and wait for developers to come to them. A smarter approach is to get out there as municipalities and try to attract development to your city, especially in changing economic times.

If a municipality is looking to attract office conversion projects, it should identify what is available to developers in the city from provincial and federal levels of government, then create attractive programs that work together with those higher levels of government.

This approach has led to some very successful projects in downtown Calgary.

One more aspect that can really attract developers and municipalities can control is zoning timelines.

For a typical office building, a developer looking to convert the property could be subject to up 18 months of wait time on approvals and zoning revisions.

If, on the other hand, it can start construction straight away because offices are already zoned for residential, that could take a three-year timeline down to just 18 months.

Offering this benefit of a shorter timeline hugely incentivizes developers and that time can offset the costs of conversion and development because you don’t have as long a wait for cashflow to come in.

We are excited to see more office conversions and city programs come forward as the office sector continues to mature. There are many lessons learned and opportunities for other cities to model after these successes.

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