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Conversion momentum draws on combo of drivers

Oct 12, 2023 | Public | 0 comments

Replicating Calgary’s nascent office-to-residential conversion momentum in other markets will likely depend on the same combination of factors: weak office fundamentals; strong housing demand; and a generous dollop of cash to subsidize required capital investment. That’s the reading from Rob Blackwell, chief operating officer with Aspen Properties, even as two noteworthy conversion projects unfold in his company’s Calgary portfolio.

“It would not make financial sense at all if the City of Calgary was not providing a very meaningful grant of $75 a foot to help convert,” he told attendees at the Building Owners and Managers Association (BOMA) of Canada’s recent national conference in Edmonton. “That’s even with extremely depressed (office) values in Calgary and a pretty robust rental market right now. You’re buying at the bottom and you’re basically renting at the top, and it still barely pencils out.”

Other senior real estate executives joining Blackwell in a discussion of industry issues concurred that asset conversion is unlikely to be a common or easy fix for either the affordable housing shortage or the office sector’s doldrums, but that it can be feasible in some scenarios with a resulting positive impact on the surrounding urban dynamic. While conversion of downtown office buildings to multifamily residential is still relatively rare, there is an established record of productive redevelopment of vintage warehouses, factories and churches in many Canadian cities.

In Calgary, Aspen Properties is undertaking one of the first three projects approved through the City’s downtown development incentive program. Roughly half or about 200,000 square feet of the 27-storey tower, known as Palliser One, will be converted to residential uses, comprising 176 one- and two-bedroom rental units and amenity space. Another 225 rental units are slated to be delivered in about 215,000 square feet of former office in the other two buildings.

Since choosing these initial conversion candidates in the spring of 2022, the City has announced five more in a second phase. The program has also been expanded to include incentives for converting downtown office space into post-secondary educational facilities and for demolishing obsolete office buildings that are not viable for conversion.

Ultimately, the City envisions converting or removing about 6 million square feet of downtown office space by 2031, or roughly equivalent to 14 per cent of total inventory in a market where the vacancy rate has consistently hovered upwards of 25 per cent in recent years. “It’s about salvaging the downtown property tax base. That’s really what that investment from the public sector is about,” Blackwell maintained.

With a floorplate of 16,700 square feet, Palliser One is a little larger than the 15,000-square-foot threshold that Avison Young analysts applied in a recent data scan to plot how many office buildings in various North American cities could practically accommodate typical apartment formats. However, at 53 years of age, it’s well within the demographic of buildings constructed prior to 1990, which the Avison Young analysis established as a plausible cutoff for conversion.

“It depends on the physical attributes of the building. Our building just happens to work fairly well,” Blackwell said.

“There are more buildings that are able to convert than you might think. It just might not be the most efficient two-bedroom apartment building you’ve ever seen,” he added. “We’re going to have to think bigger — student housing, seniors housing, storage.”

Meanwhile, an even more unique conversion project is planned nearby for 65,000 square feet of underused office space at the base of the Calgary Tower. Earlier this year, Aspen Properties inked a deal with the vertical farming enterprise, Agriplay Ventures, to house a “showcase facility” that will eventually see 150 varieties of crops growing in the downtown location.

Blackwell characterized it as a happy fit for aging circa-1968 office space in a venue that should support the aim of attracting attention to the technology, given the location at the foot of a major tourist attraction. However, he predicted it will remain a one-of-a-kind tenancy, speculating that most vertical farmers will opt for lower-cost and/or purpose-built facilities with less traffic congestion and more loading space when there’s no showcasing agenda to fulfill.

“I don’t think vertical farming is going to do anything for the office world, although where it might work is New York City, where there’s so much population density that could be a local customer base,” Blackwell mused.

Other panellists noted that such heretofore untested concepts are being afforded at least an exploratory consideration as the industry grapples with continued low office occupancy and other fallout from the COVID-19 pandemic.

“It’s got significant complications like water and weight and structure, but we do have a duty to some extent to ask ourselves: Can it work somewhere for some specific reason?” observed Lachlan MacQuarrie, senior vice president, national real estate management, with Epic Investment Services. “It’s a case of trying to figure it out so we’re not falling behind if it does turn out to be something.”

Blackwell suggested that the industry is really just beginning to tackle the pandemic’s drain on downtown vibrancy, which has seen the daytime population drop by half in some office districts. Nor will office-to-residential conversions provide an equivalent replacement for those missing workers.

“Yes, asset conversion will help, but we’re still not solving that gap of all the people that need to come downtown just to take our vibrancy back to the way it was,” he asserted. “We’ve got to be on the pull side of getting people downtown. Certainly, when we talk to the tenants, that’s what they want help with. It’s: Help me get my employees back to the office.”

The post Conversion momentum draws on combo of drivers appeared first on REMINET.


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