Garry Marr: Why office to residential conversions may be slowing down, even if they’re still a good idea

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London, Ont., has the worst office vacancy problems in the country at 36 per cent, and Shmuel Farhi, owner of Farhi Holdings Corporation, the city’s largest commercial property owner, said revitalization is key to the downtown and can only happen with municipal support.

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“We can create more housing supply without extensive (new) infrastructure; we are talking millions of savings,” said Farhi, adding London’s subsidy was about $50,000 per conversion but it’s back to $35,000 because funding from the federal government dried up.

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The drop in funding comes as the federal government continues to commit more money to housing, which could be targeted at conversions. Farhi said the conversions, which require extensive changes to plumbing and electricity, are not feasible without the money.

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“When municipalities provide incentives, it typically increases property value, and the building is more likely to increase the assessment, and that will mean more taxes,” said Farhi. “The city will make more money. You will get a stronger tax base over time.”

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Robert Bernard, chief executive of Toboggan Flats, which is looking to redevelop office space in Ottawa, Calgary and Toronto into co-living space, said another key advantage is the timeline.

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He believes it is possible to convert and occupy a building in two years, a fraction of the time needed to build a new building. That short time window also creates cost certainty in a sector where construction prices have risen steeply.

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“We are looking for buildings with mechanical and electrical systems we can reuse. We are looking for buildings for young professionals. And the nice thing about these office buildings is they are near employers,” said Bernard, whose buildings take advantage of the interior space in old office buildings with large floor plates by converting that space into community space as part of the co-living model.

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One things that may have stalled conversions in Canada is that office valuations haven’t corrected enough to make projects work, as they have in New York City.

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“It’s like the five stages of grief, and right now a lot of owners in Canada are in the denial stage. They went through this stage in New York and Chicago (but in Canada) people say, ‘I know my building is empty, but it will get better’,” said Gensler’s Paynter.

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New York, meanwhile, is grappling with a different dilemma. In July, a retrofit of a building on East 42nd Street in which additional floors were added led to fears the building might collapse. Two other projects were temporarily halted in the following weeks, as city officials scrutinized other sites. While cities such Calgary still have plenty of vacant space to work with without the need to engage in more complex projects, the New York experience showed there may be limits to how far you can push a conversion.

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Paynter suggests conversions will continue to be driven by the reality that vacant sites are getting harder to find.

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But developers like Hugh Gorman, chief executive of Ottawa-based Colonnade BridgePort, said the risk profile for conversion will always attract different players than a new ground-up project, which his company has focused on.

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“For the risk-reward, we think conversion yields are close to new development, but we know that better,” said Gorman, adding that demolition costs are high enough that empty lots make more sense for development. Tearing down an office building is rarely an option from a cost perspective.

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The opportunities for conversions are going to be in the older B and C class buildings even if development plateaus for a bit, predicts Mary Rowe, president and chief executive of the Canadian Urban Institute.

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As more people have continued to work from home, the higher-tier A space has become readily available for companies looking to lease new space.

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Rowe said the biggest question for people redesigning the buildings is which ones can be converted the most easily.

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“Those B and C buildings are just up for grabs, and that’s why so many are available.”

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