Will The City’s Incentive For Downtown Office to Residential Conversions Work?

The City of Calgary recently announced it will grant the owners of downtown office buildings  $75 per square foot up to a maximum of $10 million per property to convert them to residential. If you do the math that means to get the full $75/sf the building size could only be up to 135,000 sf, if the building is larger say 250,000 sf the subsidy is only $38/sf and it shrinks further as the building gets even larger.  

Currently the City has a total budget of $45 million for the office conversions program which at $75 per square foot would support 600,000 square feet of conversion for smaller buildings eligible for the full subsidy.  With a maximum of $10 million per building it would support only four larger office conversions.  

So “Will the subsidy entice office owners to convert to residential?” Another question would be “Is there demand for more residential in the downtown core, where most of the empty office space is located?” 

Calgary’s downtown core or central business district is dominated by office buildings (owned mostly by wealthy pension funds and REITS), of which 10+ million square feet are vacant. One of the key strategies of the City of Calgary’s new “Greater Downtown Plan” is to convert some of the old office buildings into other uses, including residential. Link: Calgary’s Greater Downtown Plan

Complicated

The conversion of older downtown office buildings to residential is complicated as there are several building code, floor plate, elevator, site and parking issues that are significant barriers to conversions. That being said it can and is happening.  Strategic Inc. converted an small office building at the corner of 11th Ave and 11th St SW into the funky Cube building with 65 one and two bedroom homes.   At 52,000 square feet, the former office building that cost $25 million to convert, would be eligible today for $3.9 million grant i.e. 15.6% of the total cost, which is not insignificant.   

Currently, HomeSpace and Inn From the Cold have partnered to convert the Sierra Place office building into 108 new non-market homes (a variety of studios, two and three-bedroom) with the help of a $5.5 million grant from the City.  At 92,000 square feet, that is a $60 per square foot grant from the City.  The project will also receive a $3 million grant from CMHC Co-investment and a $1.1 million grant from the Government of Alberta, resulting in a total subsidy is $9.6 million or $104 per square foot.  

The projected budget for the conversion is $28.5 million for the renovations and $4.8 million to purchase the building which equates to $308,000 per home.  

Industry Leaders Think 

Bruce McKenzie, Vice President, Business Development at NORR (Calgary’s leading multi-family architectural firm) thinks “there will be a few takers, especially for smaller buildings that will be eligible for the full $75 per square foot subsidy, that are also well located and easier to convert. At best there might be half a dozen buildings totalling no more than one million square feet of conversions. Unfortunately most of Calgary’s older downtown the office buildings are not great sites for residential development.”  

Andrew Wallace, Sr. Vice President Development and Construction at OPUS Corporation shared with me that they looked at a few smaller office buildings (all under 100,000 square feet) and tried to buy one but their offer wasn’t accepted.  He noted, “It is hard to find a good deal that makes sense.  Many of the buildings are owned by pension funds willing to wait for a better opportunity to develop the building or the site.” In his research he also found many of the older office buildings are not great sites for residential development for various reasons.  

For example, few are corner sites which are best for conversions as they offer the best curb appeal and more windows to the street than mid-block buildings with buildings on either side. FYI: Both CUBE and Sierra Place are corner sites.

In discussions with several other architects and developers, it was nearly unanimous that issues like the lack of balconies and the cost of removal of asbestos is a huge barrier (the $75 psf would barely cover the cost of asbestos removal) is deterring private building owners and developers. They also have concerns that office conversions in the core can’t compete with new residential construction outside of the core with their modern amenities, balconies, parking and better sites for urban living. 

CUBE is an office to residential conversion on the edge of the downtown core. It is on a corner site, near three grocery stores and walking distance to downtown and an LRT station.

Ambitious Goal

The City’s ultimate goal is to remove 6 million square feet of outdated office space from the downtown inventory.  City planners have identified 28 older downtown office buildings they think have the potential to be converted to affordable housing, seniors residences, student housing or perhaps artists live work studios.  

It is interesting to note the City also doesn’t see any of the office conversion being to market housing, which is unfortunate as vibrant neighbourhoods are home to people of all income levels.  The downtown core already has a significantly higher percentage of households spending more than 30% of their income on shelter (37% compared to the City average of 22%) and the median total household income for the downtown core is on 56% of city median ($54,502 vs $97,329). (Source City of Calgary, Community Profiles) 

What the downtown core really needs is more market housing for young professionals and middle-income young families and empty nesters to make it a viable and vibrant neighbourhood.  Unfortunately the downtown core where the empty office buildings are located are not as attractive for urban living as the dozens of new and under construction residential projects on the edge of the core in the Beltline, Sunalta, Kensington, Bridgeland/Riverside, Mission and Inglewood. 

At best probably eight of the 28 office buildings will be converted to residential for a total of maybe one million square feet.

While this is a good start, obviously the City is going to need to create more incentives and innovative initiatives to achieve its goal of converting six million square feet of downtown office space to other uses.  What about converting one of the office buildings into a permanent medical facility for COVID testing, treatment and related research.

Last Word 

Office to residential conversion in Calgary’s downtown core will be a daunting task, especially given how COVID will changed the way we live, work and play in the future.  

If you like this blog, you will like these links:

CBC: Downtown’s biggest issue is safety, not empty office buildings

Office-To-Residential Conversions Won’t Save Calgary’s Downtown (2017)

Calgary: Hypothetical Office to residential conversion math!