Canada is in the grips of a housing crisis as the people who need homes far outnumber the available residential units. At the same time, Canada is also experiencing a vacancy problem after the steep decline in office space demand post-COVID. It would make sense, then, to convert the empty office spaces into residential units, but as today's guest, Steven Paynter explains, this process is far from simple. Steven is the Global Leader of Building Transformation and Adaptive Reuse at Gensler – an elite global architecture, design, and planning firm. Steven and his team developed an algorithm to rapidly assess project viability for office-to-residential conversions, and he explains how this helped Gensler form a successful relationship with Calgary Economic Development. Our guest details the challenges that he comes across in other parts of North America, as well as the areas of opportunity to mirror the success of the work done in Calgary. We also discuss why offices will never be the same post-COVID, how "trash” office spaces can turn into diamond residential units, why most buildings are not suitable for office-to-residential conversions, and the costs of converting versus construction. To end, we gain a better understanding of the true value of Gensler's algorithm, and what the future may hold for this game-changing initiative.
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[0:00:53] GL: Hi, everyone. Welcome back to another episode of Sync or Swim, the podcast where we take a deep dive into the prop tech, multifamily and rental housing industry. I'm your host, Giacomo Ladas, and I am joined today by Steven Paynter. Steven is the global leader of building transformation and adaptive reuse at Gensler. Steven led Gensler's original research team, which developed a conversion algorithm for the rapid assessment of existing office building stock and ESG assessment. Steven, I know you're a very busy man, so thank you so much for joining us today.
[0:01:21] SP: No problem. Thanks for inviting me on.
[0:01:22] GL: Yes, of course. The main reason why we want to have you on is to really dive deeper into an updated blog post, where you guys discuss what you've learned in assessing more than 1,000 potential office to residential conversions. I think just a good place to start is maybe to give some background on yourself in the specific industry and your contributions at Gensler.
[0:01:42] SP: Yeah, for sure. I've been working in the architecture field for about 20 years now, and originally started in the UK. Came to Canada in 2012, when the UK economy was very much in trouble, as it is again now, actually, but came here because Toronto at the time and still now is the most construction cranes of any city in the world. Great place to come and be an architect.
My career is really focused on the complicated, weird projects that no one else really wanted to touch. They're the ones that were most interesting. They're the ones with the best design fees, and is a real niche that I got into for complicated adaptive reuse, or luxury retail, or difficult sites. It's a thing I enjoy doing and a great opportunity to do that against all across the US and most of Europe, too.
[0:02:31] GL: Well, hey, from someone from Toronto, we're thrilled that you did, because the contributions that we've seen has been amazing. We're going to dive right into it. Let's talk about the approach mentioned in the blog for assessing potential office to residential conversions. Maybe give people a little deeper dive into what this algorithm is, what the approach is, and just a little background on that.
[0:02:49] SP: Yeah. We actually started in the end of 2019. We were worried then, believe it or not, that there was a recession coming in the real estate industry, and everyone was starting to freak out. Obviously, no one knew that the real impact of what was going to happen. It started to look like the Class C and B office buildings, the ones that people really didn't love. We're going to struggle, and they were going to struggle more and more as time progressed. You'd started to see vacancy in those buildings rising, essentially since 2015, up until 2019. We wanted to work out what to do with them.
We went to clients and said, "There's a huge housing crisis in Canada. Why don't you convert some of these to housing?” The answer we got back most of the time was, "We spent loads of time and loads of money on studying a project, and it just didn't work. We never want to think about doing it again.” At the same time, though, we had other projects in the US that were under construction, some that were finished, and they were beautiful, and the clients are really happy.
We wanted to figure out why most of the time clients hated this idea and couldn't make it function. Then sometimes it did, and it created great projects. If you assume that all clients are of equal ability and all architects are of equal ability, then it must come down to the physical constraints of the building and the location. All of that, all the physical constraints, all of the information about building is basically data. It's information. It's not design. The algorithm that we built started to look at buildings as if they were a data set. What can I get about the building? What metrics can I plug in to an algorithm to compare the office building, floor plate size, quarter window depth, floor to floor height, all that stuff, vantage of the building. Run calculations against that data, and then compare it to a Goldilocks residential building. That's essentially what we're doing.
We're saying, the bones of this office building and the location of this office building is X percentage match to a Goldilocks residential building. Therefore, we know if it could be converted, or not. From the 1,000 buildings, as you said, 1,005 buildings as of today that we've studied, about 30% physically work. Every location people would want to live have access to transit, or parking, or whatever. The rest don't. Instead of spending three or four months and $150,000, $200,000 working that out for every building, we can do it less than a day, typically.
It really speeds up the process, gets you to the buildings that are going to work, gets you there quickly, and prevents all of the heartache and wasted money and frustration of spending three months on a project that was never going to physically work in the first place.
[0:05:29] GL: All right. It sounds like, you can scale it, you can do it quicker. It just almost makes more sense if you can do anything with a little bit more, same as in an algorithm. Why not try that with this field? That's what we found so interesting about that. It started out with the Calgary Economic Development, right? On the western side of Canada?
[0:05:45] SP: They were the first people to really be interested in it. We'd created the algorithm. We'd written a few blog posts about it. What I always do with these new ideas is you half create the idea and then you go and tell people. If they're excited, then you finish the work. If you go and tell people, "Hey, I have this thing,” and nobody cares, then you don't have a prospect.
We were there. We had the concept working. Wrote a blog about it and did some interviews on CBC and stuff. The team from Calgary Economic Development saw that and came to us and said, "Hey, we have a huge vacancy problem.” Calgary pre-COVID had about 38% vacancy. They wanted to know what to do about it. They liked the idea of creating housing, obviously, and some huge importance in Canada right now. Could they take that vacancy, that 14 million square foot vacancy they had in the city? Could they make housing out of it? We said, "Sure, let's take a look.”
We actually reviewed almost every single office building in the downtown. We went back to them and said, look, the market can support about 3 million square feet of conversions. That's about what you'd be able to do, market ready, physically viable. If you want to get to half of the vacancy being removed, so 7 million square feet, then you need to start looking incentives. You need to start looking at process improvements and things like that.
We went back to them with a number of $75 a square foot. That was the gap between getting 3 million square feet done and 7 million. To my honest surprise, they were like, "Okay, great. Let's do it.” Took about three months. They put the incentive program together. You can now get $75 a square foot cash incentive on the completion of the project up to a cap of 15 million per building. It's been incredibly successful. They've just announced, I think, their 17th building. They're the only city in North America that has a decreasing vacancy right now. It's creating the first five projects that are finishing this year.
It's going to increase the housing population in downtown by 24%. The impact has been extraordinary. We've been able to actually take that and use that approach in dozens of US and Canadian cities now. I've got to say, none of them have done it as smoothly and as efficiently as Calgary, but it is moving with federal incentive programs, and so on. It's starting to really happen.
[0:08:11] GL: Yeah, it's interesting you mentioned Calgary, because what we're seeing right now with the rental market the way it is, there's literally tens of thousands of people who left Ontario last month to go to Calgary and search for more affordable rent. It seems like Calgary is meeting that challenge through things such as this by the office residential conversions to the point where even though they have such an influx of people looking for apartments, they're actually, like you mentioned, actually the vacancies are reducing a little bit, because they're meeting that challenge. That seems to be the hotspot right now where yes, it's working great, but it needs to work great because there's a huge need for it, right, with the people coming in.
[0:08:46] SP: There's a huge need in Toronto and Ontario too, of course. What they really realized was that if they did that, if they took those vacant buildings away, it would actually help support the rest of the office market, because there's less supply. It would help create housing and it would actually really help their tax base, too, because they could start charging tax on these buildings that had been essentially vacant for years. There was a win-win-win situation, more housing, less vacancy, more tax revenue for the city, really just a good play for them.
[0:09:14] GL: Yeah, I'm curious too, if we're just going off in all that city, what are the challenges and opportunities that you've found in other areas in North America? The blog mentions Toronto. I believe, it even mentions Philadelphia. Compare and contrast maybe what you were met with at Calgary compared to other areas, such as Toronto or Philadelphia?
[0:09:32] SP: Bring it back to Toronto, it's the opposite story right now. There is discussions with Councillors and so on about trying to do a similar thing in Toronto. At the moment, if you remove a one square foot of office anywhere in Toronto, you have to replace that somewhere else. No one in their right mind is going to convert an office building and then build a new office building to meet that by law somewhere down the street for it to sit empty. It's an insane policy.
That is a problem that Toronto is trying to work through. But Calgary did it. They did it in three months. They got their policy together. They shortened their approvals timeline from 18 months down to six weeks and they did it very, very quickly. Toronto is behind. We're working with small cities across the US and Canada that are ahead and it's a shame, honestly, to see one of the biggest cities in North America lagging behind on this stuff, especially when there's a critical housing need right now.
[0:10:32] GL: Yeah, especially in Toronto. That sounds like that would be something that would help this process is maybe, let's not replace every foot of office that we take with a new one, right? There has to be some things that you've seen that they say, "Hey, if we just do this, we can maybe really promote this office to residential conversions,” right?
[0:10:47] SP: There's going to be a need for office space, new office space again in the future, but it's going to be new space. Let's remove the defunct 70s space that pre-COVID, no one likes; is depressing office space. Now they have a choice, they're just not going to it. Let's take that offline. Let's create housing. Then in 10 years when the office market is back, or five years when the office market is back, let's build a new office then. Let's build great office space, then that people really want – let's build it in the right locations. But we have an urgent need now that we need to deal with and I think we're worrying about some perceived future concept and hurting ourselves in the short term.
[0:11:27] GL: Yeah, we're in that weird middle phase where we're like, are things going to go back how they were? Wait, no one's coming back to the office, or they are sometimes. People moved to tertiary markets. They didn't have to live in the downtown core and now they're coming back. Just that weird middle phase we're in right now.
[0:11:41] SP: Yeah, it is. I think there's still a lot of people in real estate that have to bet on the office market coming back, because that's where all of their eggs are, or whatever euphemism you want to use. But the clear facts are it's not. The class A, the trophy class stuff is doing pretty well. People are moving to that space. But the buildings that people don't want are dead. The discussion on that really should be finished at this point.
That's fine. As a country and as a world, a huge history of recycling buildings when they became redundant, they look at around Toronto, all of the amazing loft buildings that used to be manufacturing, used to be office a 100 years ago, or 50 years ago, and we've converted them. I used to live in a Robert Watson loft, which is a converted factory building. I used to live in an old tobacco factory before that. There's this big past of doing this stuff. We just need to keep doing it now as well.
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[INTERVIEW CONTINUED]
[0:12:52] GL: Yeah, I want to circle back to the point that you mentioned about these older out of date office spaces. Something surprising is that features that would make an unpleasant office, actually make for an ideal multifamily home. What are those features? Go on some details about that, because I don't think I really had a grasp on that, and I don't really know the differences and what people are actually looking for, what they don't want and don't want. Yeah.
[0:13:15] SP: It's funny, the presentation that we do about this. We used to call it bad office makes good residential. Then some people got upset with us calling their offices bad. We've changed it over. But it's really true, honestly. The buildings that we're talking to our clients about and encouraging our clients to buy now are the worst buildings. They are low ceilings. They are outdated. All of the equipment is defunct, mechanical equipment. The facades are leaking, and that's great, because you've got to replace all the mechanical equipment anyway. Why not, instead of buying a building which has functioning, or new equipment, buy one that's the equipment's dead. Great, take that space.
The low ceiling thing is interesting as well, because if you've got an office building, typically they're built with a much higher floor to floor than residential. As an example, one project we did in Philadelphia had 11 foot, 6 floor-to-floor. As an office building, it had about 8-foot 6 ceiling. Strip all of that out. All of the big ducts you need to support a number of people, a number of computers on an office floor. We ended up with 10-foot 6 ceilings in the residential. That's great. That's top of market. As an office, it was the bottom end of the market.
The one we're doing at Yonge + St. Clair, for example, the 8-foot ceilings throughout that office building, even lower, and because when we stripped all of that out, we'll get 10-foot 2 ceilings for residential. Some of those factors that just made low, unpleasant office space are great when you can convert them over to residential.
Even other things, like the typical 70s building, when they were 60s and 70s building, when they were built, they were built for cellular offices and cubicles, right? Small, shallow quarter window depth. When we took all of those out, people started to want to have bigger floor plans, more collaboration space, and so on. Those buildings are now not desirable. You know what residential units are? They're a series of small rooms, or small office size rooms. They plan out great. You get a building with 35-feet quarter window that was originally set up for a corridor on three cubicles. It's now a corridor, a bedroom, a kitchen, and a living space. Great. But it's not desirable for big, open collaborative office space.
[0:15:30] GL: No, it's interesting. There's actually, there's some parts that you keep, and some parts you don't keep that you look for. I never thought, hey, an 8-foot ceiling was actually not 8 feet, because we can remove 2 feet out of that, and then it's going to be higher than you thought. It's interesting. There's some parts that you want, some parts you don't want. I guess, you have the flexibility of, no, I actually can get rid of all the duct work. I can completely change how it looks like up in the ceiling and I'll give you space. Most people probably didn't have that foresight of, "Oh, this actually goes up.” We actually can open the space up.
[0:15:57] SP: Yeah, there's actually stuff above that. I mean, if you could see the office outside my room here, it's got 2-foot deep by 3-foot-wide ducts in it. You think about a typical condo, it has a 6-inch round duct in it. It's just a factor of smaller spaces of less people in residential. You do have that extra height to really lift it up and really do something special with it.
[0:16:22] GL: Steven, you mentioned about 25% to, was 25%, or 30% of buildings that you scored are actually suitable for this type of conversion space. Why is that such a small amount? I know you went into some details about the office space. Is it really much that? There's only so much to work with, or there's not enough? A little more deeper why so many of these aren't actually –
[0:16:41] SP: Yeah, there's some really simple factors, right? If you look around the city office buildings, you will find a surprising number that only have windows on two sides. Say, they're stuck between other buildings, or they are huge floor plates, for example. That just doesn't work for residential. You can't have a residential tower with only windows on two sides, because half the units aren't going to get windows. That doesn't work.
The same with the floor plate sizes. It's not uncommon to come out the elevators and have 60 feet between you and the glazing. Now in an office space that doesn't feel too bad, but when you change that to residential, your 600 square foot 1 plus then unit is now 10 feet wide and 60 feet long. That's not good. A lot of those buildings are just discounted straight away, because they just physically don't work. They don't have the glazing. They don't have the floor plate size, and so on.
That discounts a lot of them, but that's fine. If we can find 30% vacancy, and Toronto right now is, I think, 15%, or something like that. We don't need to convert 30% of buildings, because only 15% of vacancy. What we're aiming for and this is what Calgary aim for is about half of the vacancy in each city. In Toronto, that's going to be somewhere between 5% and 7%. In Calgary, it's 15%, 17%, something like that. That's fine. It feels, falls way below the threshold of number of buildings that we can actually do.
When people say it doesn't work for every building, my answer is yeah, it doesn't need to. It needs to work for 5%. Even at 5%, it creates in the Canadian market tens of thousands of residential units. In the US market over, we talked about 1.2 million residential units that you'd get out of doing the conversions.
[0:18:26] GL: I guess, location of the buildings don't really matter too much, right? There's not most office space, they're located X away from necessities and homes, right? That never seems to be, or is it maybe in some other areas across the country, or even the states? We do factor it in, honestly, and there's a couple of reasons for that. You take a suburban office building and a sea of parking, people don't really want to live like that.
When we do look at those projects, and you're actually seeing this a lot around Toronto in shopping malls and office parks, the best idea is to maybe do the conversion, but also, add density. You're seeing a square one, or they're looking at adding huge amounts of density to the site to get rid of that surface parking. That's a different approach to creating housing.
The other location thing that's important is will people pay a premium to live there, right? That makes more projects viable, because you're going to get more rent. If you look at, for example, we're doing a project at 160 Water Street in in New York. It's a difficult building. Only has glazing on three sides. We need to do some real tricks to make the floor plate work, but it's right near Wall Street. It's a great location, great neighborhood, premium rents there, so the project makes sense. That's going to end up being a great building and very successful.
But if I took that building and I put it in suburban Toronto, or Calgary, or something, it would never work, because the rents there aren't the same level as they are in downtown New York, obviously.
[0:19:58] GL: I can't imagine the differences there. We're talking about the average rent in Canada being around $2,100 a month.
[0:20:03] SP: Yeah. I think the studios are like, 3,500 US, and the one-beds are 4,500, I think. US.
[0:20:11] GL: Yeah, US. Oh, my.
[0:20:14] SP: That's a big difference.
[0:20:15] GL: Yeah. Well, let's get on the theme of cost. Obviously, there are costs and sustainability advantages to this approach, especially compared to new construction. I personally would like to know a lot more about this than I know our audience would. Yeah, what are those cost and sustainable advantages from doing this, as opposed to new construction builds?
[0:20:33] SP: Yeah. The cost comes down to a couple of things. Firstly, you already have the structure there, and there's a big saving. Then you're also going to be able to deal them a lot more quickly, because you don't have to build the structure. We all know from living in the city that when you start to see a condo project under construction, it's six to eight months to dig a hole. Another six to eight months to come back up the ground level and then you start going up at one floor every two weeks, or whatever.
There's a huge amount of time saving by starting with a building that exists. That translates, of course, into cost and it translates into savings on the amount of interest that you're paying on your construction loan, or on the loan you took out to buy the site or whatever. That's a big saving. Then, of course, the structural saving. That translates on average across the projects we've been doing about 35% cheaper to do a repositioning project than it is to do a ground up if you start with the right building. Start with the wrong building, it's a disaster. Than start with the right building, you're going to be 30%, 35% cheaper.
The other big saving is the carbon. The number that I always use is that the concrete industry produces 8% of all of the world's carbon emissions, which is massive. Still is another 11%, I think. The airline industry, which is the one that everyone gets bent out of shape about is 2%. Concrete is four times worse. I'm sat here as an architect designing buildings which are producing a huge amount of carbon. If you can maintain that existing concrete structure and reuse it, you avoid all of that embodied carbon. That makes a massive difference.
The average conversion project we're looking at right now will save about 6 million kilograms of carbon just by not doing anything, just by keeping the structure there and it's such a simple win. 6 million kilograms is more carbon than I will generate in my entire lifetime. A big number. It's literally by doing nothing. What simpler sustainable method can you have than just not building something?
[0:22:33] GL: Yeah, it's a little less small approach there. It's interesting, too, the capital, if you have the right building, right? I can imagine there are some situations where that's not the case, right? Then you realize that – and maybe that is what maybe hesitancy to people to do this. "Oh, it's residential. What's that? Oh, no. What if I got the wrong building?” Then, what are the headaches that that implies, right? I'm sure that is what scares people away from it at times.
[0:22:56] SP: Yeah, it definitely does. We've seen – I was in LA for ULA a couple of weeks ago. There's a few presentations there on projects that they really had struggled with for months to get a performer that worked to get a financially viable project. It's all those classic things of like, well, it doesn't really lay out for nice units. We'll try and replan it. We'll try and change it. Well, the servicing doesn't work. We'll have to try and work that out. It's just those problems end up mounting up and up, until you get to the point where it just doesn't make sense to continue.
That was the problem we wanted to solve. It just puts everyone off. You spend three, four months in that design phase, banging your head against the wall, trying to make a layout work, and it doesn't. Then everyone who's been involved in the process is upset. That's what the algorithm does. It will tell you very, very quickly, this has got a chance. Let's all concentrated on it, or not. That's critical, because we see a lot of projects, even projects that were getting built, honestly, that were just so complicated, so difficult to plan out, so difficult to make sense of that they just shouldn't have really started them. That is a worry that a lot of developers have. It's a thing that's burned a lot of developers when they've studied these previously and has now put them off to anyone in the future. It's tough.
Adaptive reuse of projects is difficult. It's not like just extruding a typical condo tower that you've done 10 times and moving on. Everyone is different. Everyone has its own complexities. With the right approach and the right team on it, you can do a really good job.
[0:24:29] GL: Yeah. See, when you're going to these conferences and talking to people, what are the feedback you should get when you lay all the cell? Because when I hear, when you hear it just by doing nothing, it actually helps the environment. Some of these buildings are actually already in the right layout. It's like, when you tell people about this and the algorithm, pretty good response? Better in some areas than not? Because from my side, it seems like a no-brainer, right?
[0:24:52] SP: Yeah, it's funny, because, as I said, we've been doing this since the end of 2019, and almost no one cared. We kept showing it to people and they were like, "Yeah, but whatever. Office is coming back.” Or it's easier to do a ground up one, because we know how to do it. We kept plugging away at it. Actually, our chairman at the time was like, "No, we've got to charge for this. We've got to charge to use the algorithm. People were interested. They would listen to the presentation, but they're just like, "I don't know. I don't think it's worth it.”
Fast forward to now, everyone is interested. It's just that change in market, the change in the office market, the fact that a huge amount of office buildings are going into receivership, and the fact that the housing crisis has continued to escalate. Four years ago, the reception was, "Oh, that's interesting, but not for us.” Now it's, people are honestly looking relieved that they actually have a path out of these buildings that they've got that 60%, 70% vacant. They're like, "Oh, my God. We're in trouble.” Now, we're giving them a solution. We're giving them a path out.
Actually, surprising to me, even when we go back to them and say, "Your building doesn't work,” there's a sense of relief that they can just be like, "All right, at least I have an answer. At least, I can get some sleep, because I know what we're going to do.” Yeah, and that's why we've now done over a 1,000 of them. It's because that interest level has really changed.
[0:26:14] GL: We love it, Steven, here. If anybody is interested in following what you guys are doing, or maybe yourself, and what's the best way for people to see what's going on at Gensler and following along with what you guys do?
[0:26:24] SP: Yeah. If you look me, or Gensler up on LinkedIn, we're very active on there and in the industry, or you can reach out directly if you've got projects, or buildings you're interested in, I'm always happy to take a look and see what we can do to help people out. It's a big and ever change in topic with federal funding coming in and city incentives and all that stuff. It's definitely something that's worth keeping abreast of as it moves forwards.
[0:26:49] GL: No, absolutely. I really encourage you guys to follow Steven on LinkedIn and Gensler. Again, Steven, I know you're really busy guy, so the fact you took this time today to chat with me is really appreciated. I'd love to have you back on and down the line and see when you're at a 1,000 and 1,500 offices as a conversion and see what more you've learned with an extra few hundred.
[0:27:08] SP: Yeah, definitely. Maybe be good to show you some of the ones we completed and talk about the successes as we start to move more of these through to realization.
[0:27:17] GL: Everybody, thank you for listening. Make sure you like and subscribe to the podcast, so you don't miss next episode. Until next time.