Source: The Globe and Mail
Ximena Gonzalez
Since 2017, the office vacancy rate in downtown Calgary has steadily climbed, reaching 32 per cent in the first quarter of 2023.
But Calgary is no longer alone in this trend.
Office vacancies are now rising in downtown Toronto and Vancouver too, as growth in the tech sector stalls and the popularity of work-from-home arrangements remains strong.
As a result, eyes are turning to Calgary’s ambitious plan to reduce office vacancy by converting some Class B and C buildings into residential uses.
Echoing the strategy New York City deployed in the mid-1990s to address a similar problem, in 2021 Calgary’s city council approved the downtown development incentive program, which grants developers $75 per square foot of vacant office space being converted to residential.
With 10 buildings slated for conversion, and 1.35 million square feet of vacant office space to be removed from the market, Calgary has become the poster child for struggling downtowns across North America.
While the completion of the first building conversion supported by Calgary’s development incentive, The Cornerstone, is expected near the end of this year, since 2019 two office buildings in the city’s core have been converted – with varying degrees of success.
The Stephenson Building, a 1981-build owned by Strategic Group, was retrofitted to residential in 2019, when the building’s vacancy reached 95 per cent. Two years later, HomeSpace Society, a charitable developer, acquired Sierra Place, a 1958 office tower expanded in 1980, with the sole purpose of transforming it into affordable housing.
Rebranded as The Cube and Neoma respectively, these two buildings demonstrate the opportunities and challenges of office-to-residential retrofits.
The Cube, formerly the Stephenson Building, at 1177 11th Avenue SW.ANSU ALEX/HANDOUT
The first office building in Calgary’s centre to be converted to residential use was the Stephenson Building, at a cost of $25-million.
The transformation of the 62,000 square-foot, seven-storey building resulted in the creation of 65 one- and two-bedroom rental units, which launched in the spring of 2020.
The Neoma building, formerly Sierra Place, in downtown Calgary, before it was converted to residential.
HOMESPACE SOCIETY
The Neoma building after the conversion.HOMESPACE SOCIETY
While Strategic Group didn’t receive any government subsidies to complete the retrofit, it did benefit from the relaxations enabled by the City Centre Enterprise program, which waves development requirements to streamline the conversion process. “It saves a lot of money, by having a shorter construction time,” says Ken Toews, senior vice-president of development at Strategic Group.
The transformation of the Stephenson Building into The Cube took 10 months – but it wasn’t a smooth process. “We had to use the full contingency allowance,” Mr. Toews says.
A significant challenge was the building’s post-tension concrete structure, a major barrier to retrofitting Class B and C office buildings, explains Brian Rowland, a senior associate at Zeidler, the architecture firm that led the project.
“If you hit a post-tension cable while you’re drilling a hole in the slab for a plumbing stack, [it] kind of explodes out of the sides of the building,” he says. “What that meant for Strategic was they had to x-ray scan every floor and verify where those cables were [located].”
Other features of the building, such as a floor-plate akin to a residential building, as well as its location in Calgary’s Beltline, made it a good candidate for conversion to residential.
“When you have a really big office building, you end up with these really long, narrow residential units,” says Mr. Rowland about the challenges a large footprint poses for conversion. “The Cube’s plate was a little smaller. It was an older office building, so it lended itself much better.”
The building’s 9,120-square-foot floor-plate resulted in spacious units whose sizes range between 500 to 1,050 square foot. And except for the lack of balconies, it’s hard to tell the apartments used to be drab offices.
Calgary’s second office-to-residential conversion was Sierra Place, a 95,000-square-foot building acquired in May, 2021 by HomeSpace Society with the purpose of transforming it into affordable housing units.
The building was purchased after a group of consultants determined its suitability for conversion.
“We went in with our consultant team and did a bit of a building condition assessment, a bit of a due diligence test fit,” says Jonny Hehr, partner at Calgary architecture firm GGA Architecture, noting that his team’s involvement at this stage of the process “allowed HomeSpace to move forward with confidence, knowing that we could achieve this conversion.”
Although the cost of retrofitting an existing building would be higher than a new build, the location of the building, adjacent to an LRT platform on 7th Avenue, would be beneficial for the prospective tenants.
“For us, it really became about doing the right thing, not only for our residents, but for our community,” says Bernadette Majdell, CEO at the HomeSpace Society. “At that time, our [office] vacancy rates downtown were significant and we just thought it was the right thing to do for the city.”
After two years vacant, the 10-storey building came at a bargain price of $4.7 million – a far cry from the building’s peak assessed value of $22.6-million in 2009.
Neoma’s 82 apartments and 10 emergency shelter units, were completed after 14 months of construction – on time and on budget. A significant accomplishment, as according to Duanne Render, a senior associate and design manager at Gensler, it takes an average of 18 months to complete the conversion of typical 100,000-square-foot office building.
The organization’s budget of roughly $30-million included $5.5-million from the City of Calgary, and $16.6-million from CMHC’s Rapid Housing Initiative, which supports the conversion of non-residential buildings to housing.
Because residents of Neoma are clients of Inn from the Cold, an agency that supports families at risk of homelessness, the building was designed using a trauma-informed approach to support health, safety and well-being.
However, the relatively small size of the building’s floor plate made the inclusion of windows in all bedrooms difficult.
“We took the approach of going with some inboard bedrooms,” Mr. Hehr says, adding that windowless bedrooms have the advantage of being quieter and darker, important concerns for those living in a bustling downtown.
To compensate for the absence of bedroom windows, large expanse, punched windows were installed to allow sunlight and fresh air into each apartment. “It’s a bit of a shift as to how we as people live,” Mr. Hehr says. “You don’t want to sacrifice the natural light in the space you’re living 90 per cent of the time.”
According to Mr. Render of Gensler, access to daylight in all living spaces is an important challenge office-to-residential conversions face, because the number of units required to make the pro forma work isn’t always compatible with the spatial configuration of the building.
“Most of the time, the units [have] unconventional proportions,” he says. “Therefore it’s important to lay them out to understand whether they’re going to make nice, livable units.”
But the benefits of converting vacant office buildings, can outweigh the risks.
“For a property owner, the biggest benefit [of conversions] is value,” Mr. Render says. “As opposed to having to sell a property or end up defaulting.”
In January, 2020, while The Cube was undergoing renovations, 50 properties owned by Strategic Group went into receivership, as the company struggled with high vacancy rates across its Alberta portfolio.
After more than five years of declining in value, the transformation of The Cube and Neoma resulted in a remarkable recovery.
According to the City of Calgary’s 2023 tax roll, upon conversion, the assessed value of The Cube has tripled since 2019, and currently sits at $21.7-million. Similarly, Neoma’s assessed value has risen to $18.5-million.
But this has come with a hefty price tag.
Strategic Group’s retrofit of the Cube cost $350 per square foot, or about 35 per cent more than the estimated construction cost of a typical high-end multi-family building in Calgary. Similarly, the cost per square foot at Neoma can be calculated at $315.
For this reason some believe conversion isn’t the most efficient approach to reducing office vacancy, at least not generally.
“I like the idea of office conversion,” says Ray Wong, vice-president of data solutions delivery at Altus Group, noting that retrofits make financial sense in very specific cases only. “Being realistic with the pro forma and the cost to convert the space, I’m a little bit cautious.”
To make up for the cost discrepancy, and balance their pro forma, developers rely on the conversion incentive created by the City of Calgary. “It assists in making the projects pencil,” Mr. Render says. “Without it, it would be very, very hard to get a project to work as a conversion.”
Acknowledging that not all buildings can be converted to residential, in March Calgary city council approved the expansion of the downtown development incentive. The updated framework includes funding to convert vacant office buildings into other commercial uses, such as hotels and education and cultural facilities, as well as a demolition grant for buildings that have reached their end-of-life.
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