Calgary's office conversion program is on pause. What's next?

As the city looks to integrate its new housing plan into the office conversion program, developers say major public funding would be needed for conversions to become viable non-market housing.

Source: The Calgary Herald

Matt Scace

Pictured is United Place (808 4 Avenue S.W.), one of the five building included in the downtown office-to-residential conversion projects approved for funding by the City of Calgary on Wednesday, July 6, 2022.PHOTO BY AZIN GHAFFARI /Postmedia file

Calgary’s high-profile effort to convert empty offices blew through a major milestone recently when the city paused the program after maxing out its funding.

But the program is far from complete as the city waits for developers to finish construction and it moves to advocate for funding that would allow applications to reopen, leaving several questions about where the city goes next.

The city will also need to flesh out amendments for the program to fit with its newly adopted housing strategy, one of the reasons cited for pausing the program. City administration said the new terms will focus on market, non-market, affordable, inclusive and student housing.

The city expects to see its first office-to-residential conversion open later this fall when 112 units at The Cornerstone, a project by PeopleFirst Developments on 5th Avenue S.W., are scheduled to open.

And while the city awaits 16 more projects to come to fruition — three which have not been publicly announced, while four remain under review — Ward 8 Coun. Courtney Walcott said the program bears enough success for the city to get back to the table with the federal and provincial governments to request more funding.

“The proof is already there, the success is already laid out,” said the councillor, who represents a large portion of downtown. “We just want to know if (the federal government) wants in on helping to heal the downtown.”

The Alberta region managing director at CBRE argued in an interview last week that the city might choose to resume the program when more conversions go to market.

“Smartly, I think they’re holding off … they’re just saying, ‘Look, are you going to go ahead or not?” said Greg Kwong.

Calgary city council will be reviewing $50 million in potential program bridge funding at this November’s budget deliberations, the city told Postmedia on Monday. The funding was recommended by the city’s Housing and Affordability Task Force.

Pictured is The Cornerstone, located at 909 5 Avenue S.W. in downtown Calgary on Tuesday, February 28, 2023. The Cornerstone is one of the office buildings which is being converted into a residential complex.Azin Ghaffari/Postmedia file

‘The math doesn’t math unless you get public support’

The city said last Wednesday it will be adjusting the program’s terms of reference to align it with its new housing strategy, a seven-year roadmap to increase market and non-market housing supply. The plan aims to create 1,000 market homes and 3,000 non-market homes annually.

Walcott and Ward 7 Coun. Terry Wong both said it’s too early to say what adjustments will be made to the terms.

It’s unlikely developers will pursue conversions on their own due to the sheer cost associated with such projects without government support, said Ray Wong, vice-president of data solutions at AltusGroup, a commercial real estate services and software company.

“Unless the developer (finds) it makes sense on the pro forma — unless they have those subsidies or incentives — it’s hard for it to make sense.”

And incentivizing developers to provide non-market housing through conversions will be a challenge, he said.

One of the city’s first-ever completed conversions, a 95,000 square-foot former office acquired by HomeSpace Society in 2021, created 82 rooms of non-market housing and 10 emergency shelter units.

The city approved $5.5 million in funding for the roughly $30-million project. HomeSpace also received $16.6 million from the Canada Mortgage and Housing Corp. (CMHC) through its Rapid Housing Initiative and $2 million from the province. The society fundraised the remainder of the budget.

As a non-market housing provider, its rents cover the society’s basic costs. For it to pursue additional projects like a conversion, it needs every dollar to come through public bodies and through fundraising, said Emily Campbell, a spokeswoman for HomeSpace.

“The math is different for us than it is for market developers … Because we’re charging such low rent, we actually need to get some of those capital costs covered,” she said.

“The math doesn’t math unless you get public support.”

HomeSpace’s rents are 37 per cent below market rate, Campbell said. That would mean renters pay about $1,089 per month for a one-bedroom apartment. (The average one-bedroom rent in Calgary for September was $1,730, according to Rentals.ca.)

Once paid for, construction was its own challenge. Office buildings feature floor plates often inappropriate for normal apartment layouts, which means some bedrooms are windowless.

The same goes for developers undergoing conversions for at-market apartments. At the historic Barron Building on 8th Avenue S.W., which is being redeveloped by Strategic Group, builders have been forced to build around heritage elements — and work without drawings of the building, which were never created for the 73-year-old skyscraper.

Workers have also encountered deterioration and structural problems. Strategic Group anticipated these issues when it decided to pursue the conversion, said Ken Toews, its senior vice-president of development. The city has contributed $8.5 million to the project that will create 118 homes. Like HomeSpace, it is not being funded under the city’s conversion incentive program.

Toews said the project will cost about $50 per square foot more than a typical conversion.

“It’s probably one of the most challenging projects of my career … This is the project that I’ll be talking about 30 years from now,” he said of the Barron Building, which he added will be a major “legacy asset” for Strategic Group. Strategic has its own construction company, making it easier to adapt to unexpected problems.

Developers are also contending with unruly supply chains and change-work orders, said Wong of AltusGroup.

“You’re still looking at some of those costs that are difficult to control … the government can’t regulate labour costs or construction costs, to a certain extent, without taxes,” Wong said.

Artist rendering of the conversion of downtown Calgary’s Barron Building. Opening in 2024, the Barron Building will be transformed from a heritage office tower into a modern, vibrant residential community.Courtesy Strategic Group

‘Success is the challenge here’

The city’s investments in the ongoing conversions have still been significant.

Among the 10 publicly approved projects, the Palliser One building on 9th Avenue S.E. next to Calgary Tower is receiving the most funding from the city at $15 million. The conversion will open 176 units, breaking down to an investment of $85,000 per unit. Owned by Aspen Properties, the company says it expects to complete the conversion by early next year.

Between the 17 conversions, the city says there will have been $4 of private investment for every $1 of public investment.

It’s unclear whether the conversions will release enough new housing to lower rents in Calgary, which have increased 13.2 per cent since last September, Wong said. Together, the 17 projects would create about 2,300 homes in Calgary, according to the city.

“We’re not going to see all that new supply hit the marketplace at once,” Wong said.

Meanwhile, a new report by Avison Young showed Calgary’s downtown office vacancy rate hit 27.2 per cent in the third quarter, down 0.1 percentage point since the previous quarter.

At this juncture, Calgary still remains a distance from its targeted amount of eliminated office space: Once the remaining projects are completed, it will have removed approximately 2.3 million square feet of office space from downtown. It’s aiming to remove six million square feet from downtown by 2031.

“To put it bluntly, success is the challenge here,” said Walcott.

“We created this program without full clarity of what it would become, and … we’ve just been finding out more and more that it is something that both the market wants and public needs.”