Insider Only Ottawa, Real Estate

City proposals to spur office-to-residential conversions fall short, developers say

David Sali

October 27, 2023
4:02 PM
ET

Organizations: CLV Group, Regional Group

People: Ariel Troster, Kelly Rhodenizer, Oz Drewniak

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A city staff report calling for a more streamlined approval process and lower fees for office-to-residential conversions is “a step in the right direction” but doesn’t go far enough, prominent local developers say. With office vacancies soaring in the downtown core and rental housing in short supply, the document slated to go to the planning and housing committee next week is recommending a number of measures aimed at smoothing the path for builders to convert aging office towers into apartments. They include reducing application fees for procedures such as Official Plan amendments and other items that typically amount to tens of thousands of dollars per building – in some cases, as much as $54,000 just for complex site plan controls. Staff also suggest ways to cut red tape in the application process, including waiving items like transportation impact assessments and urban design review panel reports and broadening exemptions for developers to file records of site condition. In another move aimed at saving real estate firms time and money, the report recommends that conversions be exempt from zoning amendments for things like setbacks, as long as the size of the building envelope remains unchanged. CLV Group president Oz Drewniak, whose company has already completed one downtown office conversion project and has another in the works, praises city staff for their willingness to work with developers to ease the conversion process. While he’s on board with the changes proposed in the report, he is urging the city to go further in its push to encourage such projects. “I think it’s a step in the right direction, but it’s not far enough,” Drewniak says of the report. “I think council needs to take courage to be able to pull all the right levers that they have at their disposal – and I don’t think they’re pulling all the levers to their full capacity.” Even if all of the current application fees for conversions were dropped, Drewniak says, the total savings would be just a drop in the bucket for projects that often run well past $100 million in construction costs, or virtually as much as brand-new builds. “If you were to break that down in terms of rent (savings for tenants), we’re talking about pennies,” he says. “There’s no significant value to that.” Kelly Rhodenizer, vice-president of commercial and multi-family development at Regional Group, agrees. Estimating that construction costs have skyrocketed more than 50 per cent since before the pandemic, she says her firm has looked at transforming an office building that’s been vacant for five years into a residential complex, but concluded the margins on the project would be “borderline” at best. “Conversions are really tough from a constructability standpoint,” Rhodenizer says. “There are all sorts of structural issues, and when you pull everything down, you don’t know what’s there. (City staff) have tried to make the process easier from a planning approval standpoint, which I think is fantastic, but the cost of developing has gone up so much in the last couple of years, and my pro formas don’t work right now. “This new (report) doesn’t push me to pull the trigger to say yes.”

Bolder steps needed

If the city is serious about kickstarting more conversions, Drewniak says, it needs to take bolder steps, such as eliminating fees-in-lieu of parkland and implementing an incentive program similar to that of Calgary. Drewniak estimates that waiving parkland fees would save CLV Group as much as $1 million on its next conversion project at 360 Laurier Ave. W., or about $7,000 per unit. Rhodenizer also questions the need for parkland fees on buildings that were constructed decades ago and are being considered for conversions. “(The original developer) paid a parkland dedication fee already,” she says. “Why pay it again when it’s already been paid?” While noting that her ward has the lowest percentage of green space in the city, Somerset Coun. Ariel Troster says she’d consider supporting a move to waive or reduce parkland fees for conversions, as long as there was a provision to ensure that savings get passed on to tenants. “We have so little parkland in downtown Ottawa, and that fund is one of the places where we can revitalize our downtown,” Troster says. “It is about getting the balance right.” Meanwhile, developers argue an incentive program would have a “real, meaningful” impact on reducing costs for developers. Calgary launched its program in 2021, granting developers $75 per square foot of vacant office space that gets converted into residential. The initiative has proven so popular that the Alberta city announced earlier this month it was pausing the program because it has hit its $153-million funding threshold. So far, 13 conversion projects have been approved and another four are under review, with as much as 2.3 million square feet of office space slated to be replaced with 2,300 new housing units. Even the most straightforward of conversions are still expensive, Drewniak notes, meaning some projects won’t go ahead unless developers get additional financial support. He figures a program like Calgary’s could allow his firm to reduce rents by more than $300 per month. “These incentives are going to be increasingly important as the easy (conversions) are picked off,” he explains. “The problem is the break-even rent to support these conversions is quite high. “The only way these conversions are useful – and to be frank, almost any development – is at market rent. And to be able to provide an affordable component, it would be at a loss. No one’s going to build at a loss.”

'The right thing to do'

Rhodenizer attended a roundtable on conversions at last month’s Canadian Apartment Investment Conference in Toronto. She says panellists from Calgary raved about the city’s incentive policy. “It’s the right thing to do for the city and the community to bring liveliness to the downtown,” she says. “These incentives just basically pushed them over the edge so they could actually do it.” The city staff report touches on incentive programs, but stops short of recommending Ottawa adopt one. Staff argue that “over incentivizing” conversions could lower the supply of available office space below a “healthy” vacancy rate of 10 per cent, potentially driving up rents and displacing workers. Ottawa’s downtown vacancy rate currently sits around 14 per cent. If council were to explore financial incentives for conversions, the report says, it may be “prudent” to offer the program only when the vacancy rate is above 10 per cent. “Should council wish for staff to explore a fund, such a threshold could be explored,” the report says. Drewniak says he would be fine with placing limits on incentives. “Once there’s a healthy amount of vacancy reduction and (the market) becomes balanced, then that specific program can be pulled,” he says. “It doesn’t have to be a permanent thing.” Troster – whose ward includes nearly a dozen office buildings identified by the Canadian Urban Institute as potential candidates for conversions – says she’d be open to a program offering inducements to developers, provided there are clear guidelines for which buildings were eligible. “I think Calgary has shown us an interesting example of what can be done,” Troster says. “I think we can pilot some incentives on a case-by-case basis, but I think we need to be almost surgical in our precision.” The report will be tabled at the planning and housing committee meeting on Nov. 1.