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It’s time to get creative, developers say, when it comes to office conversions

October 3, 2024

With an overabundance of empty office space across the city, local experts say it’s time for developers to get creative when it comes to conversion projects.

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With an overabundance of empty office space across the city, local experts say it’s time for developers to get creative when it comes to conversion projects. On Wednesday, four real estate specialists shared their ideas and strategies at the Ottawa Real Estate Forum during a panel discussion on how to address underutilized office space. Panelists agreed that while office-to-residential conversions have garnered the most attention, the housing route isn’t the best solution for most office spaces. It’s a topic that’s top of mind for property owners with empty office space on their hands, according to Sachin Anand, senior director of acquisitions for Regional Group. “The class of the building is quite important. You’ll still get public and private interest, I think, in the class-As that have an (environmental, social, and governance) angle going forward. It’s the class-Bs and Cs that you’re going to have to sort of see,” Anand told the audience at the Shaw Centre. “Do you invest in your property and bring it up to a B-plus or A-minus (standard), or do you reimagine and readapt? Are you converting to residential because that’s the headline that everyone’s focused on, or are you thinking about your box in a different way?” There may be fewer empty buildings outside of the downtown core, but Anand said when those properties do crop up, there’s plenty of room for creativity. Anand said when he approaches a project, he likes to keep his options open. That includes considering asset classes he doesn’t typically operate in, and finding partners who can show him the ropes. Owners and developers, he said, should be asking themselves: “Why don’t I convert it to industrial, which might have a higher net effective (rent) and way cheaper leasing costs, from what I hear, and fit-up costs. Look at it a different way. Look at it outside the box. It could be a hotel. It could be a Japanese-style eight-storey shopping mall.” He added, “You have to look at the box a little differently and factor in your acquisition costs, your cost of investment to convert it to whatever you’ve got to do, and then what your net effective rates are going to be.” Michael Swan, assistant vice-president of property management and leasing at Morguard, said “the jury’s still out” on whether conversions will be profitable for building owners in the long run. “There’s not a lot of money, it’s thin,” he said. “When (guaranteed investment certificate) rates were at five per cent, it's almost like, why even take the risk for two to three years of cost if you’re not sure where they’re going to end up? You’re going to inherit a footprint that you might not get approved. You might inherit parking that you might not be able to get away with today. But the cost of the (demolition), the fit-up … Do I have to change the windows? Do I have to change the facade? “I haven’t seen any home runs or grand slams for anyone,” Swan added. Part of the reason for considering alternatives is because office-to-residential conversions are much more difficult to achieve than they might seem, said Richard Goldstein, vice-president of construction for KRP Properties. Detailed reviews of the building – including configuration, infrastructure, vertical transportation like elevators, and systems such as electrical and plumbing – account for a significant portion of the cost, Goldstein said. Such reviews often reveal that the building is not well-suited to be transformed from its original commercial use into housing. “In the pro forma, what is a bit different these days is special program funding,” he said. “(Investors) don’t just hand you the money you need to really take a look at things. You need to really look at things like energy efficiency, accessibility and affordability. Those are the three things that will allow you to apply to these special programs. You may need to put in some significant dollars.” Goldstein said the challenges of office conversions alongside the fact that, in his opinion, some form of hybrid work is here to stay should encourage developers and property owners to look at buildings in a different light. “(We should be) evaluating the potential asset for uses other than residential,” he said. “People need to open their minds.” That could mean moving away from residential or combining it with other uses. For example, Goldstein said his company is working on a residential conversion attached to a hotel and is looking for unique ways to make the most of the arrangement. “In terms of synergy, can our residential tenants have access to the hotel’s facilities? Yeah,” he said. “That’s a pretty good marketing play. We have a golf course out there. Can we provide incentives for tenants to play some golf? So it really goes to the creativity of the team who is responsible for looking at the asset, where it is, and then make the decision based on the pro forma to make sure the costs are in line and the whole thing makes sense.” He added that it doesn’t hurt to consider whether the building itself can be made into an attraction, something he said he’s seeing less of in recent years. “Maybe there’s another reason why you just want to do it, (such as) a complete sense of whimsy,” he said. “I just got back from Chicago, and you see things that make you say, ‘Why did they do it like that? Why would I cut that corner out when I could lease it?’ Well, because it looks cool and people will come. It’s an attraction.”