Downtown has a problem. Calgary developers, urban planners and City number–crunchers have a solution. Conversions!
In simplified, nutshell terms, because the reasons and mitigating factors are complex, the commercial spaces which were once drivers of Calgary’s once-booming downtown core are now streetscapes riddled with record–high vacancies, where people no longer work, restaurants and retail struggles, and City tax revenues take huge hits.
Since the ’80s, or longer, it was boom times for downtown buildings. Then the 2014 jolt happened. Falling oil and other commodity prices triggered job reductions, slumps in demand for office space and depressed market values, and losses of the crucial tax revenues which fund Calgary transit, infrastructure, sanitation, and parks and community programs.
According to Eddie Lee, Calgary’s director of Assessment and Tax and City assessor, “When the economy started slumping in 2015, office vacancies spiked. In 2020, COVID did exacerbate the vacancy problem, particularly the sudden trend of remote work forcing companies to downsize office footprints.”
By the end of 2020, Calgary’s downtown vacancy rate was over 30 per cent. More than 14 million square feet of empty office space and office buildings were devalued, shrivelled the property tax base and triggered a revenue crisis at city hall. “In 2023, the distribution of municipal property taxes for non-residential properties was 48 per cent, versus 52 per cent residential,” he explains.
In Calgary, and many major business markets from Vancouver, Ottawa and Halifax to as far as San Francisco and Dallas, converting empty office spaces to residential caught on.
Jennifer Barrett, managing director of Programs, Planning and Policy with the Canadian Urban Institute (CUI), the respected national non-profit dedicated to city building, highlights that “CUI’s Case for Conversions Report tracked the numbers for six Canadian municipalities to come up with a set of conditions that favour commercial-to-residential conversions. The report found that, along with building typology and location, policy and economic conditions are the two most influential areas where governments can play a role in increasing the viability of conversion projects through measures like adaptive regulations, more flexible zoning and incentivization programs.
“Some key factors which spurred the conversion trend included aging offices (mostly class B and C) in need of upgrades, work from home and hybrid work further diminished the need for office space, a need for housing, especially well-located housing around existing services, transit, etc.”
She notes that Calgary was ahead of the game, primarily due to an extremely high vacancy rate in late 2019, a result of the downturn in the oil and gas sector.
The impact of increased unused Calgary office space, with fewer people in the downtown core, and the sizeable hit for projected tax revenues, prompted Calgary to get proactive and boost the viability of commercial-to-residential conversions. It is how and why Calgary’s Greater Downtown Plan: Roadmap to Reinvention was approved in April 2021. A strategy to tackle the plummeting commercial real estate market and revitalize the city’s central core.
The ambitious intention was to repurpose 557,420 square metres of unused office space, by offering grants to developers willing to take on the challenge of transforming empty office spaces into residential, restaurant and retail people spaces.
The initial phase of the 10-year plan was for residential-conversion projects, and eligible for grants of $75 per square foot, up to $15 million. The program targeted removing about six million square feet of unused office space from downtown by 2031.
“The opportunity for building owners in converting a low demand office building to residential units are that they can take a vacant office property and repurpose it to housing, which is currently in high demand in Calgary,” says Sheryl McMullen, Calgary’s manager, Marketing and Investment for the Downtown Strategy.
“Essentially, an underperforming asset can be converted into a performing asset in a defined timeline. Alternatively, vacant buildings are being put up for sale and are being offered at much lower price points that have been seen in recent years.”
She adds that primary risks for developers are often the building floorplate itself and the unanticipated construction challenges that are faced in the conversion process, around building facades and systems. “Also, today’s high interest environment, coupled with uncertainty in the capital markets in relation to commercial office property investments, sometimes creates a challenge to secure capital. Our incentive program funding provides some mitigation to those risks.”
“Calgary has 13 current office conversions,” McMullen says, “and there are four more conversions planned. Collectively, they will create a total of 2,300 homes, and remove 2.3 million square feet of downtown office space from the market.”
The City’s $170 million conversion investment is being leveraged into more than $567 million of partner investment in Calgary’s downtown. She is enthusiastic that the buildings provide an opportunity for experienced developers to secure buildings that are strong candidates for office-to-residential conversions at an attractive price point, with support for the overall project proforma. “
One dynamic example is Calgary’s gung-ho Peoplefirst Developments, which has achieved the $40 million transformation of the old SNC-Lavalin building at 909 5th Avenue into The Cornerstone, with more than 100 apartments and retail on the first floor.
“With the redevelopment and pending arrival of tenants, the building’s assessed value has jumped from $5.5 million last year to an estimated $33 million, based on the project being 80 per cent completed,” according City assessor Eddie Lee. “And its municipal property tax bill will climb to an estimated $180,000 from $41,000 last year, and could go higher once it’s complete.”
Maxim Olshevsky, the personable Peoplefirst managing director points out that, “Conversion projects bring key advantages, such as revitalizing downtown areas and addressing the demand for housing.”
“Conversions can also have inherent challenges, particularly in adapting older structures for new purposes. The ROI in these projects is highly dependent on several critical factors, from the strategic selection of properties and the diligence used. But the growing number of such projects speaks to their potential and indicates a positive trend.”
He cautions that conversion projects are no easy task, requiring intricate coordination and meticulous attention to detail. “With the right approach, projects can be highly effective.”
As well as The Cornerstone, Peoplefirst is converting two additional office towers into residential. Petro Fina at 736 8th Avenue SW, and Place 800 at 800 6th Avenue SW, each in various stages of development.
“We are currently transforming approximately half a million square feet of Calgary space,” he says.
McMullen underscores that conversions are a win-win for developers, the City and for the downtown community. “The office to residential conversion program will result in a mix of new homes in the downtown area, that will welcome thousands of new residents over the next several years. There are all types of units being offered, from studios to three bedrooms, providing housing choice for Calgarians.
“Many of these properties are clustered towards the west end of downtown, which is the most concentrated inventory of largely vacant B and C class buildings. As a result, the area will naturally transform to become a new residential hub where restaurants and businesses will no longer just focus on 9-5 office workers, and they will increase their offerings to provide much desired restaurant options and services to residents long into the evenings and weekends.”
Olshevsky is gung-ho about the pace of Calgary conversions. “They will significantly reshape the area’s character and focus, creating a more vibrant and diverse urban environment. They will boost support for local businesses and introduce new activities, helping to transform our downtown into an active, around-the-clock destination. The transformation will make downtown Calgary a more engaging and welcoming space.”