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Can surplus office space help solve the housing crisis?

Office vacancy rates soared during the pandemic and remain high, far above historical norms. Canadians need more housing options. Can these problems solve each other?

The shift to working from home upended commercial real estate and left many downtown office buildings underused or even empty. According to CBRE, the global commercial real estate services and investment firm, Canada’s national office vacancy rate was 18.6% in Q3, 2024. The downtown/suburban split was 19.7% in downtown areas and 17.3% in suburbs. The overall rate ticked up slightly from Q2 but has fluctuated within a narrow band of 0.3% since mid-2023. 1

As commercial real estate languished residential real estate boomed, leading to a housing affordability crisis across North America. So converting unused office space into housing seems like a no-brainer – until you get into the details. Every building and location is essentially unique and presents specific challenges. But in addition to providing badly needed housing options the potential benefits include revitalizing once busy business districts with pedestrian traffic that can boost local small businesses.

Big isn’t beautiful anymore

The most unused space is in downtown business districts developed over the past hundred years with ever taller towers. During the past 50 years those buildings became both wider and higher as tenants increasingly sought larger, open floor plans to accommodate the cubicle model of work spaces. These vast areas spread out from a central core of windowless meeting rooms, elevator banks and washrooms.

The residential redesign potential of those big floorplates is limited from both a practical and economic perspective. Living spaces – your home – require natural light and at least some windows that open for ventilation purposes.  Modern floorplates, usually square or rectangular in shape, can be 30,000 square feet and more, which is too large to absorb more than just one series of 1–2-bedroom apartments facing exterior building walls and windows. Filling in the remaining floor space with an inner layer of windowless units lacking fresh air is impractical – nobody would want them – and goes against standard design practice (or zoning bylaws) regarding natural light and ventilation. And if all that extra space isn’t generating revenue the math doesn’t add up for landlords.

What’s old is new

Older (or smaller) office buildings, often built pre-World War II, are a better fit. The main reason is the much smaller floor plates are anchored by elevators that open onto hallways with many doors leading into square or rectangular offices with windows. Another plus is that repurposing older office buildings is much less environmentally damaging than tearing them down and building a residential property from scratch. Challenges include cost and regulatory hurdles. Landlords want local governments to help, not hinder, and need to see residential revenue potential that can eventually cover significant conversion costs and generate net income.

Conversion activity, also known as adaptive reuse, increased as the housing shortage intensified. In the U.S., New York City is a leader, and as of May 2024 has 64 office buildings earmarked for conversion into 20,000 new apartments in the next decade, with one project containing 1,200 apartments.2 In Canada, office into residential projects comprise 62% of reuse activity (followed by industrial, educational and multi-use) in Q3, 2024, according to CBRE.3

High vacancy rates get city governments involved

Local economic realities are a key factor too. Downtown core office vacancy rates in Q3, 2024 for major cities varied widely, from 11.8% in Vancouver to 31.4% in London, Ontario. Close behind London is downtown Calgary, at 29.6%, and on September 19th, the City of Calgary relaunched its Downtown Development Incentive Program “with a strategic emphasis on converting vacant office spaces into much-needed housing for Calgarians.” Eligible projects can get up to $75 per square foot for conversions, up to a maximum of $15 million per property.

Calgary has a been here before. When the program first launched in 2021, demand quickly surpassed available funding, but eleven conversions were approved to create 1,500 new residential units downtown. The first completed project, a nine-storey building that was empty for 10 years, opened in April 2024 with 112 new two and three-bedroom rental units. $52.5 million in new funding is available for this latest round. 4

London has a similar initiative, the Office-to-Residential Incentive program, with $10 million in available grant money. To date two projects have received funding and the city hopes the program will help add 285 residential units to its downtown. 5

Vancouver is in a different position with a much lower core office vacancy rate (11.8%) but one of the tightest and most expensive housing markets in the country. Coincidentally or not, several new office projects there recently switched to residential mid-construction. The developers, as the saying goes, may have seen the writing on the wall. 6

A growing trend

During Q3, 2024, 674,000 sq. ft of vacant space left the office category across Canada via adaptive reuse. Five new projects were started in the quarter and 2024 is shaping up to be the biggest year for conversions yet. Since 2021 a total of 6.9 million square feet of former office space has either begun or completed conversion. While that may look like a big number, it’s far exceeded by new office space that has come online nationally in the same period. New development has essentially ground to a halt, but large projects can take years and are still being completed. 7

Conversions probably won’t move the needle much on vacancy rates, but they can help address the housing crunch and secure new revenue streams for strapped landlords. It’s a trend that likely has a long life ahead as our digital society and economy become ever more mobile and capital invested in commercial real estate reorientates to new realities.   

 

Sources

1 Canada Office Figures Q3 2024 | CBRE Canada

2 64 NYC office buildings are looking to tranform into housing

3 Canada Office Figures Q3 2024 | CBRE Canada

4 City relaunches popular Downtown Development Incentive Program with ambitious focus on housing

5 Second Office-to-Residential Conversion Project Receives CIP Incentive Program Funding

6 https://www.collierscanada.com/en-ca/research/vancouver-office-market-report-2024-q3

7 Canada Office Figures Q3 2024 | CBRE Canada