Yahoo Finance In search of novel solutions to the housing crisis? Look to Calgary
By Murtaza Haider and Stephen Moranis
Canada needs to build millions of homes quickly to restore housing affordability. But with each passing month, its goal of six million new homes by 2031 looks increasingly implausible.
There are unconventional ways for Canada to boost its housing supply, including converting surplus office space to residential units. However, for conversions to succeed, a multiway collaboration between landlords, developers, municipalities, and higher tiers of government is a must.
Calgary has been a leader in office-to-residential conversions. There, city officials devised a simplified formula of incentives to help align the interests of diverse stakeholders and deliver housing in places where once empty or abandoned office towers stood.
Conversions were the focus of a recent research webinar organized by REALPAC, an association advocating for Canada’s real property sector. Speakers from the City of Calgary and the real estate sector revealed strategies and considerations that have made office conversions a success.
Calgary’s commercial real estate market began its slump prior to the pandemic, tied as it was to the decline in oil and gas prices. By 2021, more than 14 million square feet (SFT) of downtown office space lay vacant, representing 33 per cent of the city’s total commercial space. By its own estimates, the city has lost $16.6 billion in office valuations since 2015.
In other words, Calgary was ripe for conversions.
In 2021, its city council devised a $443.5-million Greater Downtown Plan, which included $153 million in incentives to convert offices to residential uses. Funding also went to initiatives aimed at promoting the arts and restoring vibrancy to its downtown core.
The city reformed its regulatory frameworks to expedite conversion approvals, delivering millions of dollars in additional cost savings at the same time. What made Calgary’s plan a success was the transparency and simplicity of its incentives, which were devised after consultations with the industry. A conversion from office to residential received $75 per square foot; to hotel $60; and to educational or arts-related uses, $50. Higher-ed institutions were offered $50 per SFT to occupy converted space downtown.
The strategy worked. More than 1,500 residential units were created in converted spaces from $165 million in incentives. The conversions eliminated nearly two million square feet of redundant office space. The city estimates the conversions raised valuations by up to eight times from pre-2021 levels, where partnering stakeholders matched every dollar invested by the city with three dollars.
While office-to-residential conversions are a smart way to turn redundant spaces into usable (and much needed) ones, not every office building is a good candidate for transformation. A building’s suitability must be determined in advance of any expensive makeover.
Gensler is one firm that has mastered the art and science of conversion suitability. The global architecture, design, and planning firm analyzed more than 1,300 buildings in 130 cities, reducing a myriad of factors into simple metrics to proxy conversion readiness.
Their research revealed that a building’s shape and floor plate considerations — such as the location of windows and elevators — were the most influential factors, accounting for up to 60 per cent of the conversion scoring criterion. In contrast, site context, location, and accessibility to amenities and transit comprised just 10 per cent of the score. Loading docks, parking facilities, and other mechanical components represented 20 per cent, while the building’s outer envelope made up the remaining 10 per cent of the conversion score.
The pandemic prompted many office tenants to move from older buildings to newer ones. This exodus resulted in significant vacancies in the older stock, compelling landlords to seek alternative uses for the space. While conversion is one option, Gensler estimates that only 30 per cent of the buildings they evaluated were suitable for conversions. This assessment is crucial for landlords with extensive portfolios, who are grappling with what to do with their older buildings.
The math behind conversions might not work without government assistance. Calgary’s experience underscores the importance of public sector support, since it incentivizes developers to build environmentally sustainable housing. Converting office buildings to residential use is far better for the environment than constructing the same number of new dwellings from scratch.
A study by Arup, a consulting firm, revealed that “expanding eligibility for office-to-residential conversions in New York City could result in up to a 54 per cent reduction in whole life carbon emissions by 2050, compared to a business-as-usual scenario.”
Transforming redundant or surplus office buildings into much-needed housing requires a collaborative effort between landlords, developers and city hall. This approach would revitalize abandoned buildings and turn blighted neighbourhoods into vibrant residential communities. Improved affordability and environmental sustainability are a bonus.
Murtaza Haider is director of Regionomics Inc., a consultancy specializing in predictive analytics and machine learning. Stephen Moranis is a real estate industry veteran. They can be reached at the Haider-Moranis Bulletin website, www.hmbulletin.com.
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