As cities around North America continue to deal with a lack of housing and too much vacant office space, it's only natural that the concept of converting office buildings into residences has garnered more and more attention.
With the exception of Calgary, Canada is still lagging behind on this conversion concept -- also referred to as "adaptive reuse" -- whereas places like New York, Chicago, and California are all taking serious steps towards making office conversions a tool in their toolkit.
There isn't necessarily anybody to blame for Canada's laggardness, however. Converting office buildings into housing is not as simple as adding more walls and swapping out the furniture. Office buildings are often structured differently than apartment buildings, from their façades to floorplates, layouts, and plumbing.
Cities with big housing and affordability problems, such as Toronto and Vancouver, also happen to have some of the lowest vacancies in the country, and vacant office buildings obviously can't be converted if there are none to begin with.
But even if you manage to find an empty office building that can be physically converted into a residential building, that doesn't mean that it makes sense do so, financially. While successful conversions generally do cost less than a demolition-reconstruction approach, the more complex the conversion is, the more money it's going to cost, and the more money it costs, the less viable conversion becomes.
Enter: Toronto-based Principal of San Francisco-based architecture firm Gensler, Steven Paynter, who has created a propriety algorithm that can quickly assess an office building to determine how suitable it is for conversion, drastically shortening an evaluation process that would otherwise require numerous people physically on site to inspect a building.
As mentioned, Calgary is the one big exception in Canada, as it has been a vanguard of adaptive reuse in Canada through its office conversion incentive program, officially called the Downtown Calgary Development Incentive Program. In fact, the program was expanded just this week to also include conversion into post-secondary institutions, hotels, and performing arts spaces.
Between 2013 and 2018, Calgary accumulated well over 4M sq. ft of office space, which was then unfortunately followed by a sharp demand drop off of over 6M sq. ft, leaving Calgary with excessive amounts of unneeded office space.
The City eventually approached Paynter and his team at Gensler, who were ultimately commissioned to assess the vacant office buildings in Calgary, and the Gensler team's findings played a key role in the City's successful incentive program, which is now on its way towards converting over 2M sq. ft of vacant office space into 2,000 units of housing.
STOREYS recently caught up with Paynter and asked him about the state of play as it relates to office conversions, his algorithm, and his involvement with Calgary's incentive program.
Could you give me a lay of the land as it relates to the state of adaptive reuse in both Canada and the United States? How widely-adopted is it?
We were starting to see these projects happening pre-COVID, but it was only a few a year. In the last 12 months, we've seen cities like Calgary and Chicago announce funded incentive programs and others like San Francisco, Toronto and New York announce that they're working on them. In the background, we know that at least a dozen more cities are actively doing it as well. From a developer point of view, we reviewed about 100 potential projects in 2021, [which] leapt to over 700 in the last 6 months of 2022, so it really is a trend that is gaining serious momentum as more incentive programs come on board and the value of Class C office assets continue to fall.
Would it be fair to say that whether a building is suitable to be converted into housing really just comes down to whether the financials make sense? Are there any physical building traits that would make a conversion nearly impossible, even if the financials weren't an issue?
There are two main drivers on whether the asset can be converted: 1) What is the building worth in its current state? This is equivalent to the land cost for a new building. In many cases we're seeing existing values dropping significantly below the loans on the asset, making liquidation/default or conversion inevitable. 2) The physical building itself. This has a huge impact because if it cannot be laid out for units that the market wants, then no amount of money can fix it. That's where we come in, [using] our scorecard to review things like core-to-window depth, floorplate size, number of elevators, parking etc., and compare them against what the market expects. These reviews have shown that only 25-30% of existing Class C buildings are physically suitable for conversion.
Can you provide a numerical sense of the financial aspect of conversions?How much do developers save from not having to demolish and build from the ground up?
From the costs we've seen to date, a conversion will be +/-30% cheaper than new construction and even more cost efficient against demolition and reconstruction. There are some other advantages as well: 1) Many existing offices are built to lot line or over the allowable density (existing non-conforming). By converting, you can squeeze more FSR out of a site than you could with new construction. 2) There are huge sustainability benefits, which average 2,000,000 kgCO2e in carbon savings per building. In addition, conversions that we have completed, such as Franklin Tower in Philadelphia, are renting at the top of the market because the amenity package and ceiling heights are better than any new-build product.
How does your algorithm fit into the puzzle? Does it measure the feasibility from a financial aspect of office conversion, or just the physical elements like its location and layout?
It really measures and evaluates the physical assets and compares them to what the residential market in that city is looking for. However, we then weigh the scoring against the things [that] most impact cost. So a building that does not require a façade replacement, for example, will score higher than one that does, because it will cost significantly less. We also factor in the building's location in a significant way, as it has to be a place that people will want to live.
What other factors does the algorithm take into consideration? How has the algorithm evolved since it was first created?
We look at five main areas, but underneath that is nearly 100 different data points and all of those are graded on a bell curve and then weighted against impact on the viability of the project. It may sound complicated, but it adds accuracy and takes into account that no two buildings are ever really the same. Over time we've been able to add more accuracy by tweaking the ideal measurements to suit what we've learned from designing and planning dozens of projects and scoring over 700. We've also added more location-specific data, such as the desired unit sizes in certain markets and things like the ideal parking ratios. We're now starting to work on a planning/financial analysis tool, which should be added later this year.
The City of Calgary approached you to survey its buildings. What was the City’s mindset at the time? How did you approach the task?
At the time, the City had a vacancy rate approaching 35% and had seen a $17.3B loss in the value of its downtown real estate. This had a huge impact in the tax revenue they were collecting and was obviously unsustainable in the long run. They asked us and local developers to find 6M sq. ft of buildings to be converted to housing and, if that wasn't possible, to establish the amount of cash incentive required to hit the target. Using publicly available data and CoStar, we were able to make that happen. This guided the $75 per sq. ft incentive program that was established and, importantly, the change in zoning rules to make conversions an easier process.
Is there any possibility that other cities in Canada can be pushed towards following what Calgary has done with conversions? Office vacancies are drastically lower in cities like Vancouver, but could, hypothetically, businesses be incentivized to move more operations to remote work, in order to open up office buildings for conversions?
Other cities will certainly follow suit and Toronto announced that it is looking at similar changes in rules. I do not, however, think it will mean more remote work because even in cities with lower overall vacancy, the empty space is concentrated in the lower class/older assets, meaning there are still plenty of opportunities to be had. This will continue to be true as new high quality space comes online over the next two years, effectively draining more old buildings where leases will not be renewed.
It’s also worth noting that many developers are still saying conversions are impossible despite dozens of successful projects being built and occupied across North America. Through studying over 700 buildings now, we know that both sides of that coin are true. For the majority of buildings it's not feasible, but we can now quickly identify the ones where it can work and work really well.
This article has been updated to better reflect Paynter's job title at Gensler.