A change of space: More developers eye office-to-residential conversions as demand for housing grows

110 O'Connor rendering
Montreal based Groupe Mach is considering a plan to convert this former DND building at 110 O'Connor St. into a residential complex. Image courtesy Groupe Mach
Editor's Note

This is the first in a series of articles exploring the issue of converting office towers into residential spaces.

At first glance, the 14-storey highrise just a stone’s throw from Parliament Hill doesn’t look like anything special.

Opened in the early 1970s, the now-vacant office building at 110 O’Connor St., on the corner of Slater Street, resembles dozens of other greyish-brown office towers in the downtown core that were built to accommodate the burgeoning public service decades ago.

But according to some veteran real estate experts, the former Department of National Defence building could be the shape of things to come for downtown towers that have outlived their usefulness as offices.

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Shape, as in rectangular. The 202,000-square-foot building is long and narrow, making it an ideal potential candidate to be converted into residential space, according to the Montreal-based company that bought it late last year from Cominar REIT for $40 million.

“It’s an appealing option,” explains John Esposito, Groupe Mach’s director of leasing for Ottawa. “But no decision has been made yet. Whatever strategy we adopt, we want to ensure that it does fit in the community and it does contribute positively to the neighbourhood.”

DND pulled up stakes at 110 O’Connor and other downtown sites two years ago when it moved into its new west-end campus in the former Nortel complex on Carling Avenue. A building that once teemed with hundreds of workers on a daily basis is now gathering dust, with only a couple of retail tenants remaining on the ground floor.

But it’s also just one of many significant chunks of aging office space in the city’s core that could gain a new lease on life as multi-residential projects, some longtime real estate executives say.

“If a building gets to the end of its useful economic life, not doing something is not an option,” says Michael Church, managing director of Avison Young’s Ottawa office. “It’ll deteriorate, and then nothing is possible.”

The idea of turning offices that are past their best-before dates into apartments or condominiums is hardly novel. 

A number of examples already exist in the capital’s downtown core. They include Théo, another repurposed former DND building at the corner of Rideau Street and King Edward Avenue that’s now home to a privately owned residence for University of Ottawa students, and The Slayte, a new luxury apartment complex built by CLV Group and InterRent REIT at a converted 50-year-old government office tower at 473 Albert St.

But real estate observers say a number of factors could ramp up the office-to-residential conversion trend in the next few years.

With more and more employers rethinking their need for downtown office space as the hybrid work model becomes a way of life, class-B and C buildings that were already hard to fill before the pandemic have become even less attractive to tenants, they note. 

According to Colliers International, the city’s vacancy rate in those asset classes was nearly 19 per cent at the end of September, up from 13.1 per cent for class-B buildings and 15.1 per cent for class-C buildings a year earlier.

“The owners of those asset classes, they really need to rethink their asset strategy,” says Scott Pickles, a Toronto-based principal and senior vice-president at Avison Young. “Do they stay or do they innovate? Conversion is just one option to innovate, but really it’s a great opportunity – even though it might not feel that way – to rethink what they should do with their assets.

“If they (have) older, smaller footprints, if they have some unique characteristics and amenity spaces, a conversion would give them that uniqueness that will help position them well in the marketplace.”

Pickles’ Ottawa-based colleague, Church, notes that newly elected mayor Mark Sutcliffe made housing a key plank in his campaign platform. Sutcliffe pledged that 100,000 new homes would be built in the capital over the next decade, and Church says repurposing outdated offices as rentals or condos could help the city hit that target.

Church says the federal government’s plan to sell up to 20 per cent of its office portfolio in the National Capital Region – as much as seven million square feet, or seven buildings the size of the L’Esplanade Laurier complex – could provide opportunities for ambitious developers to gut some of that space and turn it into housing.

“It’s about the opportunity on any given day,” he says. “Given the political climate locally, I think (conversions are) going to come into greater focus. In short, I think there’s some momentum that way.”

Still, transforming a decaying office tower into a place where people actually want to live is often easier said than done, experts caution.

“There are a whole host of issues,” says veteran Ottawa real estate executive Shawn Hamilton, who now serves as Montreal-based Canderel’s senior vice-president of business development in the National Capital Region. 

“The idea of conversion is often a sound bite that sounds better than the idea of building new. And people will often say, ‘Look, it must be cheaper and quicker to convert an old office facility into residential than it would be to build new.’ In some cases, that is correct. But the reality is, the conversion of a building is a much more complicated process than people give it credit for.”

Hamilton points out, for example, that a building has to be the right size and shape to accommodate apartment units that don’t end up looking like “bowling alleys” – that is, suites that are long and skinny in order to have a window while still conforming to the typical apartment size of around 750 square feet that makes rental projects economically viable.

“You need efficiency to have things make economic sense,” he explains. “A larger floorplate, although not impossible to subdivide, may not lend itself well to it. You also need to be able to offer a product that meets the demand that’s being asked for.”

Hamilton cites 473 Albert St. as an example of a property that lent itself to such a conversion due to its configuration. “Because it was a narrow rectangle, it subdivided well.”

Then there are the costs and headaches associated with upgrading and expanding the plumbing, heating and air conditioning systems in office buildings, which aren’t designed to handle the number of bathrooms, kitchens and other such facilities required in a residential space with dozens or hundreds of units.

That often means stripping a building down to its skeleton and reconstructing it from scratch – all the while working around typical structural elements like post-tension cables within the floor slabs.

“You never really know what’s behind the walls until you open up the walls,” says Pickles. “In some ways, the stars need to align to make sure all those systems will work for the new purpose.”

Even if a building is the right shape and a developer is willing to shell out the necessary cash to refurbish it for residential use, it might still be in the wrong place. 

Towers that are crammed in between other highrises might saddle residents with what Hamilton calls a “quintessential Manhattan view” – a brick wall right outside their windows – while offering no room for balconies or backyards. 

Today’s tenants, he says, are demanding more from their domestic spaces.

“In a world of hybrid work, I think the comfort of home will take on an even greater meaning than it might have in the past, given you’re going to be spending more time at home than you might have traditionally done,” Hamilton says.

Yet despite all the potential pitfalls, one of the city’s largest property managers says it is actively “exploring opportunities” to acquire office space and repurpose it into residential units.

“Does it work for every building? Absolutely not,” says Regional Group chief executive Sender Gordon. “Developers have to be thinking down this line. However, in order for it to really be a reality, it takes partnerships. These are very costly projects.”

Church suspects Regional Group won’t be the only local developer looking to jump on the conversion bandwagon. 

While acknowledging that such undertakings are “not something that’s done lightly,” he says turning empty offices into a steady flow of monthly rental income is an enticing proposition that will prove hard to resist if the conditions are right.

“There is lots of opportunity out there, if people know what rock to look under,” Church adds.

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