E70: Converting Offices Into Homes, an Emerging Industry Trend

[INTERVIEW]

[0:00:58.2] MH: All right, welcome back to another episode of Sync or Swim, the podcast where we take a deep dive into the PropTech, multi-family, and rental housing industry. I'm your host today Matt Hildebrand, and today, I'm joined by Howard Chai, staff writer at STOREYS, a leading real estate news platform in Canada. Howard, thank you so much for joining me today.

[0:01:15.7] HC: Thanks for having me, Matt, glad to be here.

[0:01:18.1] MH: Now, on the podcast in recent months, we've delved deep into the pressing issue of the lack of rental supply across Canada, where the obvious solution would be to construct more buildings, the limitations of available land and resources present a significant challenge.

However, there's a creative and innovative solution that deserves our attention, repurposing vacant buildings. Howard has been writing about this topic for a while now and has chatted with many industry experts. So we wanted to have him on and discuss this idea even further. So without further ado, let's dive right in.

So, Howard, my first question to you would be really, just what are your thoughts on the current rental housing situation in Canada?

[0:01:58.1] HC: Thanks, Matt, well, I think it's good that we definitely do have a rental housing problem. It's obviously a fall-through because I think the supply by finance has definitely has fallen behind and to be honest, to not be too pessimistic but I think it's going to require a lot of change just for us to catch up. The same amount of people that are coming into Canada now and also coming in the future with Canada's immigration plans.

So yeah, I think a lot has to change for us to catch up, let alone how to solve the people in coming. On kind of a more local level, I'm based in British Columbia and that can be outside of Canada but in BC, I feel like a lot of anger has kind of aimed at municipal governments. I think a lot of the anger is reasonable about there because I think just about with reasons to be angry and I think some of the municipal government stuff, they probably do deserve it. 

I think technology doing some parts, some things better but I think the rental housing crisis problem is simply really more of a provincial than a federal problem. I think municipal governments kind of just take a part of the anger because they seem a bit more accessible compared to provincial and future developments, so people will want to have anger to kind of direct the municipal office.

What stopped and resolved in municipal conference I think like in most municipalities, it can probably be doing more input of when one way or another, but it's not like the incredible high ask merchandise where somebody draw a path when you cross over into anew big cities. That's kind of an indicator that it's something that could be helped by municipal governments but I think it's really more of a provincial than a federal issue and I think it would be beneficial for us to discuss [inaudible 0:03:28.1] this kind of bigger picture, national level. 

I talk to a lot of developers here in British Columbia and I think just the size of seeing probably the event. I think a lot of people in public feel like developers are kind of this general stereotype of the developer is wanting to making more and more money. While I'm sure some developers, potentially, I'm sure there are a couple that are doing that, I think they generally do want to build rental housing.

I think developers know that the population of renters in Canada is growing faster than the population of homeowners. I think they've noticed it's becoming much harder for people to buy homes. I think they know that there's a need in the rental housing and most people would agree that most businesses that are successful are businesses that succeed by filling needs and satisfying demands.

So I don't think this is a case for developers who just don't want to build rental housing. I think part of the problem comes from what developers have thought they have totally used that. It is hard making the numbers make sense and I think that's been the business. If it doesn't make money, it doesn't really make sense. How far do you want to bring out?

Whether or not we like it, whether we like it or not, rental housing is a business. A lot of it just comes down to whether or not the financial. It is going to be that our current financial set of it is just from what developers have told me, just totally make building rent housing financially viable for them.

Even for nonprofit housing providers, even though it's not for profit, financials still have to make sense and right now, even nonprofits are having a hard time making the numbers make sense to build rental housing and I think it's kind of the crux of the issue here as well.

[0:04:56.6] MH: Yeah, I couldn't agree more. The main reason why we've been talking about it on this podcast for many months now, it definitely needs more attention, you said it across Canada and we're Toronto based and you know we've been talking a lot about Toronto issues. You know, we've been having Tony Irwin on from FRPO to talk about Ontario issues in Toronto but in Vancouver, we're facing issues. 

In other provinces, we're facing issues but there are some interesting cities that have been doing a pretty good job at it. So we'll get into those specific cities a little bit later, but as I said off the top, we want to talk about this idea of repurposing vacant buildings. So we've written an article about it, we call it �the office the residential conversion,” but there is another name for it, it's called adaptive reuse. 

I know you've written about this topic, so can you just provide a little overview of the concept of adaptive reuse and its significance in the context of office-to-residential conversions?

[0:05:53.6] HC: Well, the general concept of adaptive reuse is really just taking existing buildings and changing how we use it and mostly we do a few modifications not redeveloping redevelopment. It's kind of a separate thing where you demolish and then redevelop. Adaptive reuse is kind of keeping most of the stuff. It is just modifying it to put it into good use.

I personally like to think of it as kind of a – it's like, how you recycle buildings because similar to recycling cardboard, it's particularly that we don't need anymore and kind of modifying it in a way that allows us to use to for something else that we do need, and you also get a lot of the same kind of environmental benefits.

We're using something that reduces the amount of waste, like the demolition of buildings creates waste. So with the converting buildings to a different use, it kind of eliminates a lot of waste, and less waste is also generated from having to construct a new building from the ground up. 

In terms of the office residential conversion, I'd say that really depends on. It's not really a new concept; it's kind of been around for decades, where we just the form of it has kind of changed depending on the needs of the time. So currently, there needs to be examples of the industrial spaces being converted into retail space.

With the distillery district in Toronto is an example of that and I know that just nowadays, a lot of cities around in North America with your life in housing are the most common form these days is office buildings to apartments and housing.

[0:07:12.5] MH: So, what would you say are some key factors that are driving the trend of repurposing office space for residential use? I mean, you mentioned it's not a new concept but we're seeing it more and more in the news every month. So in your opinion, what are some of the key factors driving this?

[0:07:26.7] HC: The key factor is kind of baseline factors where you just need to talk to the need for housing and how strong that need is. Like I mentioned, a lot of cities in North America are facing a housing crisis and are – just kind of come up with different ways to fix the problem, and you see a multitude of options. I know this is one option. So another factor is, obviously, whether or not you actually have office vacancies that you can really convert vacant office buildings if you don't have any, to begin with. 

This is the part that kind of how they developed [inaudible 0:07:52.9] COVID. So when the pandemic hit, the world's kind of stumbled on to remote work, and I think it's kind of safe to say that we'll probably never going to get back to the days, the pre-pandemic days, in terms of the amount of people work in offices. 

So we have those, and then we have the vacant office space, and we have the need for housing, and I think a lot of municipalities coverage is just kind of putting those two things together and seeing how to kind of putting two and two together has seen that we have offices that is not being used, but we need more housing. 

Then it basically it kind of makes sense to kind of use to turn that unused office space into housing, and I think that's kind of what we're seeing now. That's kind of the spur of what's sparking out in a lot of these cities to look at this potential solution to the housing crisis.

[0:08:31.7] MH: Yeah, you're right about the hybrid work. A lot of companies are definitely sending people back to the office, but a lot of companies are also just adopting the hybrid work or downgrading and getting smaller office space. We're seeing a lot of large empty buildings sitting around major cities, especially Toronto, that you know, on paper, seem like a good idea.

Now, you mentioned in one of your articles, adapt or die, which is a really good article, I'd want you to go check it out at storeys.com, really cover this topic quite well. You mentioned how in the States, there's some really, really good use cases of this and there's a couple in Canada, too but in your research, what specific cities or regions have you seen a high prevalence of office-to-residential conversions and the success stories happening there?

[0:09:15.1] HC: Oh, in Canada it's definitely – I'd say that in Calgary kind of by a long mile, that Calgary is definitely leading it in terms of converting offices. So there will be offices that are converting it in Canada. I think it would even be fair to say that Calgary is one of the leaders on conversions in all of North America, including the States. I know if I'm just leasing in the States, I know New York created an office conversion task force a few years ago. 

Last fall, I think California passed that decision to facilitate office conversions. It's also happening in a bunch of cities like Seattle and Chicago. Mostly often are just recently kind of mentioned; they're starting to have a lot more office vacancies. I think I can't speak for all the cities, but I think a lot of them are have an even higher than what we've been seeing in Canada. So there's kind of been more of an urgent problem in the States.

I think a lot of those cities also like redeveloping articles on other news organizers into easy; we'll mention Calgary in one way or another. I think that's kind of saying that Calgary was kind of the thing that kind of provided the first kind of proof of concept of how cities can adopt as opposed to kind of like on a mass scale rather than one-offs, which is kind of one-off. 

One-off has happened in Vancouver. I'm aware of those two that happened years ago, probably a decade as I can't really think of too many reasoning, and I know Toronto also has several one-off budgets that has not – currently, at the moment, I don't think there's anything as big on as the scale as it is in Calgary.

Kind of what's happening in Calgary was that, according to the city, between around 2013 and 2018, they go and stirred two million in investment. It was about four million square feet of new offices to buy, and then immediately right after that, they saw a strike and then in office space demand and other about – I think that's made six million. So they're kind of left with that remaining two million square feet of office space and nothing to do with it.

So they tried to figure out what to do, talked to experts in the industry and they all of a sudden settled on converting those office buildings to housing in New York. It ultimately created and sought on an incentive program financial and to put up a [inaudible 0:11:08.8] to kind of help developers take on conversion projects.

[0:11:12.3] MH: Now you mentioned the incentive program there. Developers always looking for more reasons to build because it has to obviously make sense financially. So can you touch a little bit more on the downtown Calgary Development Incentive Program? Maybe a couple of key points in there and why that's programmed to, maybe, other cities can kind of look at adopting in the future? 

[0:11:32.7] HC: Yeah, the program, in a nutshell, is a financial assistance program for developers. Essentially, it's CAD 75 per square feet, often fixing office spaces to be converted. Yeah, that essentially, I do mention and helps the developers when they're looking at their proformas and the financial pockets, it helps them make sense.

I think the cost that there's converting office buildings to rental apartments is this actually sounds pretty cool on paper, but it is not as simple as just going in and converting and then changing the furnitures, swapping out furnitures, and stuff like that. There's a lot of considerations and a lot of that results in various costs, and then I think, in general, when I talk to the developers, save some money on some aspects. 

But there are some other costs that come with conversions that you don't really get on a regular building from the ground up projects. There's usually a gap between the numbers that developers would want it to be ideally and the number that it is in reality, and the financial incentives kind of help pose that gap potentially.

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[INTERVIEW CONTINUED]

[0:12:45.6] MH: It sounds easy on paper, empty office building; we need more apartments or rental housing, why not convert it? But there's a lot more to it, and you're not an architect, I'm not an architect but from talking with people across your research and your various interviews, what are some of the major challenges and considerations that architects and developers encounter when undertaking these types of projects that maybe the common folk wouldn't really think about.

[0:13:12.1] HC: Yeah, there definitely are a lot of factors. With that, I think about it is that we take out a lot of surface buildings are office buildings that eventually that there's the typically constructed specifically for their intended purposes. I'm sure everybody's familiar with the code that the form follows the function.

That was actually a quote that was – I had to point by an architect, so that kind of tells you that buildings are usually developed and constructed and designed specifically for their purpose. So typically in an office building, compared to residential building, you're from the outside, they come in, you just couldn't tell them apart, is this office buildings typically are just fine to finish on the outside.

Residential buildings typically have balconies all over the place. So if you see a building with a bunch of balconies, it's mostly like a residential building, and again, that's one of the things that the balcony thing is one thing that have positioned a lot of residential uses typically like balconies.

Although, I know in some places a long time that I think developers that are kind of looking at getting rid of balconies because there are some places where you have a balcony that people may not use compared to other locations, but in general, I think residents still like their balconies, still with the views in their inner high-rise part of the cost. You pay for the unit for the view, and the balconies is how you enjoy that view. 

So yeah, that's one of the aspects that conversions to consider, whether or not you can build balconies. I know some projects in Calgary that's in conversion projects thinking they're adding balconies and pull out of their mind, so that is one constriction. Also, the floor place for office buildings to residential buildings are typically not the same. Residential buildings are typically a bit wider; office buildings are typically a bit narrow. 

So you have to kind of find the right fit in terms of the buildings because if you're building to know, you kind of fit a good amount of units on the wrong single floor, which hopefully helps. It comes back to whether or not if the balconies are going to make the project financially viable. Office buildings typically also don't have as many walls. A lot of office buildings, office business and companies have at least have these open concepts, where employees can talk to each other and communicate and collaborate. 

So the residential component in buildings or the laws, we'd have to get it up and I think there's cost. You know, office buildings also, typically, washrooms are closer together because of this communal space we have all the washroom because of the other top players in a residential building, their kind of washroom is kind of – they've kind of scattered all across the floor in different floors and have aggregated kind of in one corner of the building. 

So that can affect things like plumbing and then how the kind of how wires and structures of the building that you can lease that are kind of like behind the walls that you apparently see. Same with things like HVAC, a lot of those things are kind of other things that we kind of think about. When we're in an office building or residential buildings particularly kind of differ in terms of office-to-office compared to residential, and the energy use is also different. 

Office buildings typically use energy during the day because that is where employees are in the building but in residential buildings typically use energy at night because that is when people are at home, away from work, and so that has also been lots of energy use being different and that can also affect how you build a building, especially with the environmental sentiments we have nowadays. 

So all those things have to be analyzed and considered, and developers have to figure out how much these modifications will cost them, add them up, see how much the entire decking will cost and then factor in the things that they can't foresee or anything. I know some of them have gotten into that and compared that to the rents that they can charge to see what the margins are of the project. 

The project if the margins are acceptable to them, then they'll go for it, but if it doesn't, it doesn't make sense, and with the Calgary – with Calgary's downtown incentive program, with this, it provides a fair cost, really where the margin makes sense, then perhaps the developers can go to their city and get some financial help a bit, and then they'll make sense. 

[0:16:46.3] MH: Now, let's say a building makes sense financially and everything's go-ahead, has there or speaking with anybody in your research, has there been any other outside pushback from the community? We talked about NIMBYs a couple of weeks ago or is the community mostly accepting of this idea of converting office space to rental housing? 

[0:17:07.5] HC: I haven't seen too much pushback. The NIMBY thing is definitely an issue around the country, around North America really and I think where some developers I talked to with has talked about how this conversion also kind of bypasses the NIMBY public. If the buildings, most of the buildings are already there. So people with NIMBYs are typically are closed to erecting new buildings because then you highlight is these typical buildings are by the fact that they're converting, they're already there. 

So there's nothing really to be opposed wherein I think a lot of people within the cities, in the cities that I was looking at there's an auction art and these cities that are in need of housing and I think despite whether you're not a NIMBY or not, I think most are open. Obviously, if there is a housing crisis in whatever city you're in. So I think most people, I haven't seen too much pushback about converting office spaces into residential just because that office building, most typically they're not being – there is a high number of vacancy in them. 

So a lot of them aren't leased, just kind of going to waste and gathering dust. So I think, I believe we're just clearly vacant. So it is just making something that is underused and not really through anything for assuming [inaudible 0:18:13.6] So I think that I have not seen any pushback from the community and I don't really expect there to be too much for it either. 

[0:18:21.2] MH: I wouldn't think so, it seems kind of a win-win for the communities, the developers, and the city if you can get these projects off the ground. Now, we've spoken about Calgary and how it's kind of leading the charge in this type of office-to-residential project, are there some successful examples that you can think of that people can maybe look up and point to as that worked for the community and kind of brought a positive change for developers, immigration, really just trying to move the needle when it comes to building more rental supply? 

[0:18:53.9] HC: Oh, in Calgary whether [inaudible 0:18:55.5] weather is definitely the most on companies. Their program nearly started kicking in until the last couple of years. So I believe construction on some of the [inaudible 0:19:03.9] because I believe none of them have actually completed construction and I believe the first one called the Cornerstone is set to complete later this year. 

Outside of Calgary, you know, there are some like one-off examples that I mentioned around the country. I believe in BC we have one called the Electra helping those that OSA, and they're the odds they could be around with. That one is definitely completed after, it is just a rental building now. Toronto, I am aware of, a couple of rental projects as well. I'm not sure what states they are in now; I believe they're also kind of in the process or about to be converted, so not completely yet. 

But the benefit is definitely just more housing. Like I mentioned, all these cities in terms of the community, but it is definitely we need housing in Toronto and Vancouver, to be specific. So I think there is definitely more housing and now going to – keep going the – also important with pulling with conversion out is just delivery of housing. Obviously, you're not demolishing and then leave it, be construction from the ground up. 

So the project, these constructions will take a lot less time. I'd mentioned of course the budget that we have, that had started construction last year and it's going to be completed later this year. So that's less than two years and it will be something like 112 residential units and that's coming to the LP, coming to market in 102 years. That is definitely another benefit. 

Just kind of on a more bigger picture can we be – in fact, I would say just kind of the proof of concept that I mentioned. I think what Calgary's incentive has provided a case for other cities around the country and North America. I feel like that we see how this can be done on a city-wide scale, on a big-picture scale on where they rather than just put an office in. 

I think it's a proof of concept and I think from what I've seen most cities view it as a positive example, I think it's only better to get more seen and become popular in. I think it is going to serve, as you just said, as kind of like a beacon and a good example of how it can be done on a city level. 

[0:20:57.0] MH: Now, I'm wondering why Calgary is leading the charge and not some of the other cities. Would you say that there's a lack of data maybe in this type of projects that are kind of limiting? I know in your article, you know, you reached out to CMHC because, in their rapid housing initiative, it specifically includes conversion projects, yet they're really unable to compile data on which units have kind of been created by repurposing. 

There is not much data out there to prove. Would you say that's kind of a minor issue maybe and why it's not being adopted as much across other major cities? 

[0:21:32.5] HC: I'd say it's a minor issue. It definitely is a huge [inaudible 0:21:35.8]. I think the article you're referring about, you're referring to as on [inaudible 0:21:39.6]. That was – I was trying to see what I was – duplex that I thought they were trying to look for data about just trying to get a sense of how widely adopted with that reassessing, it is in Canada. So yeah, like you mentioned, the CMHC has I think, conversion buyers to the rapid housing initiative on each side. 

I think a lot of people don't even realize that we're talking, I have been taking advantage of, and I was kind of stunned that they didn't really have any data about how many projects have basically taken advantage of that and I think they've provided, they provided a small amount. I think there is 200 unit – just have 2,000 units across Canada I think they've rented. That was just not really that much and I've been in back in the fall there also wasn't much data about the amount of buildings around Canada that can really be subjected to converting to units. 

Not all buildings that can be – are suitable for conversions. So typically, it's registered as we talked about the kind of buildings. Typically office buildings are split into class, triple-A buildings, class-A, class-B, class-C type buildings, as if we only can see your conversions as with this kind of class-B or class-C buildings. So you see them now, they're like the 30-storey, 40 storeys to be sorted out.

We saw already kind of more of the, as I say in Calgary, most of them are around 10 storeys or under 20, probably the reason also is because they stay and connect with real estate. I know everybody is talking about they kind of fight the quality and so a lot of companies a lot of your employees back or your new hires, they want to move into high-quality office businesses and so those are typically gathering triple-A type buildings across the office buildings and oftentimes bringing up class-B and class-C buildings I know. So those are the ones that are apparently left over for potential conversions. 

[0:23:17.2] MH: Awesome. Well, I think this has really been a good overview of how office-to-residential conversions can work. Calgary is a beacon for some of the other cities to kind of look towards. Kind of as we wrap up here, you've been writing and interviewing on this topic for a while now. So in your opinion, how do you see the future of office space and residential conversions evolving in the coming years? 

[0:23:41.1] HC: Well, I think we definitely still need more momentum. Like I said, outside of Calgary, I haven't really seen too much action or discussion of it. I think there's a little bit more recently conventional brokerages, and Young recently released some data of kind of analyzing the amount of buildings that cost North America that can be potentially suitable for conversions. Their studies was fairly broad, though, like they just put that buildings that were constructed before a certain image and certain floor plan size. 

So there is like fairly popular and good starting point, and also I think with that, the people can start kind of analyzing buildings. Part of the problem with analyzing buildings and why it hasn't taken off is a lot of considerations to go into it like I mentioned, and a lot of that requires you to be onsite to analyze the building from head to toe really, but the one thing that has kind of, I believe, kind of changed the game is this algorithm developed by Steven Paynter, who is an architect at Gensler's, who developed an algorithm that can essentially, basically, you punch in a bunch of [inaudible 0:24:40.2] on the building that might have things like the floor to window. 

Like a floor-to-window like kind of ratio and a bunch of other factors in the building and you know kind of spit out a score to tell you how simple is for things potentially [inaudible 0:24:52.2] that kind of full save developers a lot of time. Basically, you don't have to go building by building inspecting it and inspecting can take weeks just for one building. I've talked to a developer in Calgary who is kind of the – converting the Petro-Fina building in Calgary. They said it took about a month to analyze the building. So imagine having to do that for all the potential buildings that is being converted. 

I think that's the big reason why it hasn't taken off. So having an algorithm to kind of cut through that, to kind of do the initial value work, really is I think, would be very helpful. Hopefully, buildings, hopefully cities that are thinking about this can take advantage of that and kind of think about it more. 

I think just being like Toronto and Vancouver, I'm a little bit skeptical about how much it could really take off because like I mentioned, you can hardly convert office buildings into residential apartments if you don't have any vacant office spaces, to begin with, and Toronto and Vancouver has some of the highest office demand in North America. I don't think there is really any evidence that that's going to be changed. So I kind of struggle seeing how conversions are going to take off here outside of potential like one-off buildings and starting for another. 

I know here in Toronto, there's been some well projects that we've covered. In BC though, I have not really heard really any chatter about co-working studios. I think just because of the – there is going to be extremely low office vacancies. I think one of those things will eventually have to give way for us to gain momentum.

Either the housing crisis has to – unfortunately, get even worse for people to kind of really consider this newer option, or we didn't have to see the significant drop off in our office demand for us to really gain more steam. You know, like I mentioned, converting office space you can't really do without a vacant office space, but I do think it's possible. 

What I would like to see, I guess, developers into cities kind of look at even these office buildings that aren't necessarily all vacant; I think I don't really – I haven't talked to anybody about this, or I know perhaps there's some things that I'm not considering, but I feel like it would be possible for the governments to kind of create incentives for companies to take, to kind of move their operations to make them remote, which would free up all these buildings. 

You know, we already have; again, like I mentioned this, you mentioned you already have a natural incentive for conversion. So that is kind of what we're doing in place. So we kind of just need to free up the office space essentially. I don't see why we couldn't give some incentives around that and kind of get creative to kind of free up office space and then see if conversions can take off and more housing that we obviously desperately need. 

[0:27:23.2] MH: Yeah, that's an interesting trend to keep an eye on is seeing these are not just completely empty office spaces but slightly full or half full or quarter full, what do we do with that space, and can the government kind of push us towards a model where the companies are incentivized to kind of ditch that space and convert it into residential. Definitely, an interesting trend to keep an eye on. 

If that gains any steam or we see some good examples, I'd love to have you back on and talk about that trend if we see any momentum, but again, just kind of wrapping up here. I really appreciate the glimpse into Calgary's model and how incentive program can really accelerate some office-to-residential growth and start picking away at the lack of supply that we're facing. So Howard, thank you again for joining us today. I really appreciate it. 

[0:28:08.0] HC: Thanks Matt; happy to talk about the subject that I think it's actually cities around the north will be thinking about and happy to talk about it with you. 

[0:28:15.6] MH: Awesome. So yeah, again, Howard does some great work at STOREYS. Check out his page; he has written a bunch of articles on this topic, one as well on the algorithm he mentioned at the end there, so keep an eye on him. He's keeping up the good work. So again, thanks Howard and have a good day, everybody. 

[END OF INTERVIEW]

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