Insider Only Ottawa, Real Estate

More incentives needed to spur office-to-residential conversions, real estate execs say

October 20, 2023
4:29 PM
ET

Organizations: BOMA, City of Ottawa, Huntington Properties, KingSett Capital

People: Derek Noble, Erin Nagy, Hanif Sachedina, Mark Sutcliffe

Panellists at Thursday’s Ottawa Real Estate Forum argued that office-to-residential conversions could play a key role in helping solve the city’s escalating housing crisis.

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As more developers look to transform empty downtown office towers into residential complexes, real estate executives are calling on governments to subsidize conversion projects they say often cost as much as building from scratch. Panellists at Thursday’s Ottawa Real Estate Forum argued that office-to-residential conversions could play a key role in helping solve the city’s escalating housing crisis. But they said the prohibitive cost of gutting offices and turning them into apartments is a major obstacle to getting more such projects off the ground. They want governments at all levels to take some of the financial burden off developers through measures such as subsidizing construction costs and waiving development fees. “If you want (more rental housing construction) to truly happen, you’ve got to do something drastic,” Derek Noble, a partner at Ottawa-based Huntington Property Group, told an audience of industry insiders at the Ottawa Conference and Event Centre on Thursday afternoon. Noble said the City of Ottawa “has an opportunity here to really take an enhanced leadership position” by encouraging developers to repurpose aging, less desirable office properties as apartments. While Ottawa’s downtown office vacancy rate was officially about 14 per cent at the end of the third quarter, Noble estimated that the actual percentage of office space in the city’s core that sits empty or will be vacated once current leases expire is probably closer to 30 per cent. “When you walk through downtown, it can be like a scene out of the Walking Dead,” he said, referring to the hit TV series about survivors of a zombie apocalypse. “It’s really, really hurting the city. We’re at an inflection point where we as a city have got to make some significant changes.” Office-to-residential conversions have become a hot topic of late as commercial vacancy rates across North America spiked after workers fled offices during the pandemic and a shortage of rental accommodation has driven rent prices to record highs. Advocates say conversions achieve dual goals by giving a much-needed boost to the rental housing inventory while at the same time getting rid of unwanted office real estate. Firms such as CLV Group and District Realty have already completed a number of conversions in the downtown core and several more developments are in the works. But real estate experts say such projects are not for the faint of heart. It often takes more than a year to gain the necessary provincial and municipal permits and approvals to convert an office to residential use, and the process can be riddled with unforeseen complications that come with completely gutting and retrofitting decades-old commercial buildings to make them habitable.

'Extremely difficult to do'

Conversions are “extremely difficult to do,” Hanif Sachedina, managing director of investments at Toronto-based KingSett Capital, explained on Thursday, adding that in many cases it’s easier for developers to demolish an office tower and construct a brand-new building. “You really need the perfect set of circumstances for (conversions),” he said. Noble and Sachedina urged city officials to take a page out of Calgary’s book and consider creating an incentive program aimed at spurring the redevelopment of offices into housing units. The Alberta city 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 Calgary announced this week it was pausing further grants because the program 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. Sachedina said the price of converting an existing office into a residence is often “comparable” to constructing a whole new building, meaning some projects likely won’t go ahead unless developers can offset some of their costs through subsidies or other inducements. “I think that’s where you need the government to come and step up and help the developers convert some of these office buildings in the form of some sort of incentives as we’ve seen in Calgary,” he said. Noble also urged the city to look at other ways of helping builders reduce costs such as waiving development charges on certain types of housing projects. “That’s a policy that needs to be seriously examined,” he said. The city would likely need the backing of the provincial government to secure funding and set up an incentive program for conversions. In a separate Q&A at the real estate forum on Thursday, Mayor Mark Sutcliffe said the city is also negotiating with the province and the federal government for “what potentially could be a significant chunk of funding to support the building of affordable homes in Ottawa.” Sutcliffe said city hall is committed to cutting red tape in a bid to “shorten the timelines” for developers to get projects to market. “We’re trying to do everything we can to streamline processes at the city, to make approvals happen faster, to use city land in some cases to build affordable housing,” he told Erin Nagy, president of the Building Owners and Managers Association of Ottawa. “So there’s a lot of different pieces, and we’re doing everything we can to make things happen as quickly as possible.”