2023 could be turning point for office-to-housing conversions: Colliers - Yahoo Canada Finance

Office vacancies remain elevated across the country after the pandemic-fuelled shift to remote work. Meanwhile, the rental market has a severe shortage of units, partly as Canada's population booms. THE CANADIAN PRESS/Jeff McIntosh

This year could be pivotal for Canada's office market as developers increasingly eye empty and underused office buildings to help solve the country's worsening housing shortage, according to Colliers Canada. And one recent conversion in downtown Calgary could serve as a successful playbook.

"2023 could mark a shift in how excess office towers are to be treated," real estate consulting firm Colliers said in a report.

"Several markets have either announced or have already begun converting certain office towers into residential spaces. This may have a ripple effect on the office construction pipeline if projects are put on pause or even cancelled outright."

The report, which was released on Mar. 30, said the national office vacancy rate was 13.3 per cent in the first quarter this year, a slight increase from the prior three-month period. It's also significantly higher than the pre-pandemic first quarter of 2020, when the national office vacancy rate was roughly eight per cent.

Calgary's conversion 'experiment'

The challenges and ultimate success of an office-to-housing conversion are on full display in Calgary.

Meet Neoma, an 82-unit affordable housing building that was renovated from an office building in the city's downtown. It's owned and operated by affordable housing provider HomeSpace and was renovated by PCL Construction.

HomeSpace operates Neoma, an affordable housing building that was converted from an office tower.

HomeSpace bought the building for $4.7 million in 2020 from Artis REIT (AX-UN.TO) and the fast-tracked 12-month renovation of the building costs $30 million. It officially opened in September last year.

"Converting office towers into housing is no easy task," said Emily Campbell, communications advisor at HomeSpace.

"I would say it was a long, kind of, experimental process to gut the building."

Canada is staring down a worsening housing crisis while, at the same time, many office towers sit underused thanks to the prevalence of remote work, so it might seem fitting to convert some of these office buildings to help fill the housing need.

Data from commercial real estate firm Avison Young have found that as much as 30 per cent of office towers across Canada, or more than 3,000 properties, are candidates to be converted into housing.

There are roughly three to five different elements that need to align in order for a building to be the perfect prospect for a conversion, Scott Pickles, principal and Canada consulting leader at Avison Young, tells Yahoo Finance Canada. He is also a registered architect.

Whether housing fits with the building owner's business strategy, financing, location and the work needed to overhaul the building all need to be considered, Pickles says.

The shape of the building and the floor plates, or the structure and layout of an individual floor, also determine if the space can be divided into liveable and desirable apartment units.

Converting electrical and plumbing systems for residential needs can be stymied by whether the elevators are in the right spot, he says.

Older buildings, particularly those built pre-1990, often are better candidates than newer ones, Pickles says, not just because they're more likely due for upgrades and renovations, but because they tend to have more equity built up and therefore the ability to fund renovations through new debt.

In the case of the Calgary conversion, HomeSpace's Campbell says the organization looked at "so many" buildings before landing on this one that fits the bill for a residential conversion. Even then, dividing up the floor plan was a "struggle."

The building sat empty for two years before HomeSpace purchased it.

A look at the building during renovations.

One of the biggest risks going into the renovation, according to Rob Mitschke, the PCL Construction project manager tasked with the massive overhaul, was understanding where to start.

Everything, from the foundation to the roof, including the original materials used in the construction, structural integrity, building codes, plumbing, electrical, stairwells, elevators (the list goes on), needed to be assessed, he told Yahoo Finance Canada.

Multiple phases of the renovation were happening at once because of the tight schedule.

"You're not dealing with an empty field where you dig a hole and build whatever you want. You have to understand your starting point," he said.

Because of the tight schedule, different phases of the renovation were happening all at once.

"We didn't have the luxury of completing our demolition, clearing the building out and then starting construction," Mitschke said.

"So we were simultaneously removing the outside of the building, reinstalling the outside of the building at the same time, floor by floor, gutting the inside of the building, demolition top down and then also starting construction all simultaneously which, given other circumstances, you may give a little space between those items," he added, jokingly.

The project was funded by the federal and Alberta governments and the City of Calgary, among other public and private donors.

The 10-storey building features a family emergency centre, transitional housing and affordable one, two and three-bedroom units, which are geared towards families.

The building features one, two and three bedroom units

Monthly rent is 30 per cent below market rates and proportional to residents' income.

The newest real estate trend?

Mitschke says he has since been approached by "multiple other developers" and is "engaging on a number of [office] buildings" to determine the viability of converting them into housing.

The Calgary office market has a staggering vacancy rate of roughly 28 per cent, according to Colliers data. This is the result of multiple oil price collapses in recent years that ravaged energy companies.

Meanwhile, HomeSpace's Campbell says residents of the Neoma building are grateful to have a safe and stable place that addresses the root causes of what led some to housing insecurity in the first place.

The mural, one of Calgary's biggest, on the side of the building

An added bonus is it brings vibrancy back to downtown Calgary, she says.

"Downtown was starting to feel a little bit dangerous because there's nobody around. As soon as people clear out of work at six o'clock, Calgary downtown was pretty dead. So, to bring people in creates a sense of safety and security and just brings life back to downtown, which has been struggling," Campbell said.

Michelle Zadikian is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @m_zadikian.

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2023-04-05 16:47:21Z
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