Office Space Conversions – Solutions Lab

CMHC (Canadian Mortgage and Housing Corporation) has engaged Canadian Urban Institute (CUI) to assist stakeholders in developing approaches to office-to-housing conversions in Canada’s downtowns and commercial business districts. 

Objective 

• develop a general framework for incentivizing and implementing successful office-to-housing conversions in Canadian cities 

Timeline 

• February to November 2022 

Steps/deliverables 

• identify and analyze feasibility, opportunities, and barriers to successful office-to-housing conversions in select cities 
• evaluate best practices and develop a general prototype (framework) for making it easier to convert office buildings to housing (e.g., policy and program)  
• provide recommendations to federal, provincial/territorial, and municipal levels to support easier office-to-housing conversions 

Stakeholders 

• municipalities 
• building owners 
• commercial real estate sector 
• housing advocates 
• affordable housing providers 
• lenders and investors 
• building industry (architects, engineers, contractors)  

Premise 

• commercial real estate vacancy rates have increased considerably since start of pandemic, a trend that is expected to persist  
• lag in housing construction, especially purpose-built rental 
• widespread need for more affordable housing  
• potential federal, provincial/territorial and/or municipal policy or incentives to support 
• currently no multi-dimensional framework to support office conversions that would increase the supply of housing in downtowns and commercial business districts 

In-Scope

• office conversions (not other building types) 
• select cities (Victoria, Calgary, Regina, Winnipeg, Ottawa, Halifax, Moncton as case examples) 
• characteristics of good building candidates, not specific building code changes 
• general framework, not for a specific conversion 

This project is one of many National Housing Strategy Solutions Labs funded by CMHC. Solutions Labs provide funding to stakeholder project teams to examine persistent, complex housing issues and rapidly develop potential solutions. 

About the Canadian Urban Institute (CUI)                         

CUI is a national platform that houses the best in Canadian city building, where policymakers, urban professionals, civic and business leaders, community activists and academics can learn, share and collaborate with one another from coast to coast to coast. Through research, engagement and storytelling, our mission is to ensure Canada builds vibrant, suitable, liveable and resilient cities.  

About the CMHC’s Solutions Lab Program 

Canada Mortgage and Housing Corporation (CMHC) is providing funding for this project under the National Housing Strategy (NHS) Solutions Lab program to look at how Canada’s housing system can be improved.  

NHS Solutions Labs offer organizations assistance with funding and expertise to help them solve complex housing problems. The funding is used to explore new ways of making progress on a housing challenge. Organizations receiving funding create project teams that bring together a variety of stakeholders to gather diverse perspectives on an issue and co-develop potential solutions to be prototyped and tested.  

What sets the NHS Solutions Lab program apart is that the solutions are developed by stakeholders for consideration by governments, rather than the other way around. However, there is no requirement for the Government of Canada or CMHC to adopt any of the proposals that may come out in the lab’s final reports. Further, the views expressed are the personal views of the author and CMHC accepts no responsibility for them. 

CUI has developed a comprehensive list of enabling conditions for office conversion, which includes the types of buildings that are suitable for conversion, the characteristics of locations that make conversions feasible, and the regulatory and economic conditions that support conversions. CUI will further explore these enabling condition in greater details by working with Cities that have been selected as case examples in Phase Four of this project (June-October).

A. Building types

1. Floor plates. Buildings with shallow floor plates are great candidates for office conversion as they allow natural light and ventilation to enter. Meanwhile, buildings with deep floor plates are unfit for office conversion as they block natural light and ventilation.[1]
2. Historical and cultural elements of a building. Buildings with historical or cultural characteristics tend to be more marketable, hence they offer higher return of investments for developers.[2]

• Building façade. Altering a façade is a costly undertaking that could reduce the financial viability of office conversion.[3]As such, buildings with façade that meets meet current (residential) performance standards are more suitable for office conversions.

1. Functional and aesthetic factors. Conversions are best suited to buildings with strong functional and aesthetic attributes such as large number of elevators,[4] tall ceilings,[5] and high-quality floor finishes. Conversely, buildings with deep floorplates and wide interior corridors pose challenges for efficient residential layouts.[6]
2. Compliance with current building code. Older buildings that require major work to comply with current safety and environmental standards are more challenging for office conversions. For example, many older buildings require asbestos removal, which could significantly increase the office conversion costs.[7]
3. Other design factors that could support conversion. In addition to the key factors above, there are other design-related factors that could make a building suitable for conversion, including:

• Smaller depths (rectangular buildings, maximizing window views) and greater spacing between columns (more unobstructed space) will yield more dwelling units.[8]
• Less space dedicated to building core functions (elevators, stairwells) allow greater flexibility in floor plans and yield more dwelling units.[9]

B. Location of a building

1. Type of neighborhood. Successful conversion projects usually occur in established residential or mixed-use neighborhoods, especially in neighborhoods with close access to amenities such as public transit, schools, hospitals, and entertainment.[10]
2. Demand for office space vs residential space. Areas with low office space demand and high housing demand are conducive to office conversions.[11]
3. Environment and health. Areas with high-level of noise pollution and poor air quality are not conducive to office conversion.[12]

C.      Policy/regulatory

1. Zoning/land use. Flexible and permissive zoning/land use bylaws that allow different uses of properties can encourage adaptive reuse.
2. Parking requirements. waiving parking requirements could eliminate the need for a variance or zoning amendments and reduce the cost of construction in cases where a portion of the building would need to be dedicated to parking. Reducing parking requirements can also help increase the number of units a project can produce.[13]
3. Flexible building codes. Simple and flexible building code requirements that do not require projects to undertake costly and lengthy physical upgrades can increase the feasibility of office conversions.[14]
4. Approval process. Streamlined and quick approval process can help reduce the risks and costs associated with office conversions.[15]
5. Environmental/climate goals. Governments’ environmental and/or climate goals can help facilitate office conversions since office conversions yield environmental and climate benefits. The National Trust for Historic Preservation found that “building reuse almost always yields fewer environmental impacts than new construction when comparing buildings of similar size and functionality”.[16] Aligning office conversion programs with governments’ environmental agenda could also help increase public buy-in and provide an opportunity for partnerships and better resource allocation. Some of these environmental/climate advantages include[17]:
   • Lower carbon emissions due to energy efficiency and embodied carbon of the building.
   • Lower material waste by reusing existing building materials.
   • Increasing density by encouraging more people to live in dense, mixed-use neighborhood.
   • Reducing the disruption of hazardous materials that demolitions would typically produce.
     
6. Education and training. Governments can help encourage conversions and reduce uncertainty and risks by providing technical guidance or training in building inspections.[18]
7. Harmonization with affordable housing targets. Studies suggest that non-profit housing developers (that are generally focused on developing affordable housing units), would be more interested in conversion projects as they are less concerned about short term financial returns, which are unlikely to occur in conversions.[19] As such, aligning conversion policies with affordable housing policies and programs can encourage non-profit housing providers to undertake office conversion projects, hence improve the feasibility of conversions.

D. Financial, economic, and market conditions

1. Financial incentives. Government incentives at all levels of government can encourage office conversion projects by reducing risks and costs, thereby increasing the feasibility of a conversion project.
   
2. Pandemic-driven reduction in the demand for office space. The demand for office space around the world including in Canada has been in decline due to the changing nature of work, mainly driven by the COVID-19 pandemic. Since the pandemic began, companies have closed their offices and allowing workers to work from home. Although public health restrictions have eased across the country, many companies are maintaining their work-from-home policy or allowing workers to work in hybrid work arrangement. This has reduced the demand for office space, hence creating an opportunity for office conversions in cities across Canada.[20]

• Rental gap between commercial and residential units. To be financially feasible, there must be an appropriate rent gap in the likely revenue generated between commercial and residential rents. For example, by the mid-1990s in Toronto, the return on residential space was 90-per-cent higher than commercial returns, a gap large enough to stimulate the conversion of office space to residential use.

[1] David Garcia and Elliot Kwon, Adaptive Reuse Challenges and Opportunities in California (Berkeley: Terner Center for Housing Innovation, 2021)

[2] Hilde Remøy and DJM Van der Voordt, Adaptive Reuse of Office Buildings into Housing: Opportunities and Risks (Delft: Building Research and Information: The International Journal of Research, Development, and Demonstration, 2014).

[3] Ibid

[4] Hilde Remøy and S. Wilkinson, Adaptive reuse of offices: Residential Conversions in Sydney (European Real Estate Society, 2015).

[5] Ibid

[6] Ibid

[7] Jessica Lall et al., Adaptive Reuse: Reimagining Our City’s Buildings to Address Our Housing, Economic and Climate Crises Central (Los Angeles: City Association, 2021).

[8] Rick Liu, Converting Office to Residential Is Complicated (Montgomery Planning Department Blog, 2017)

[9] Ibid

[10] Hilde Remøy and DJM Van der Voordt, Adaptive Reuse of Office Buildings into Housing: Opportunities and Risks (Delft: Building Research and Information: The International Journal of Research, Development, and Demonstration, 2014).

[11] Ibid

[12] David Garcia and Elliot Kwon, Adaptive Reuse Challenges and Opportunities in California (Berkeley: Terner Center for Housing Innovation, 2021)

[13] Hilde Remøy and DJM Van der Voordt, Adaptive Reuse of Office Buildings into Housing: Opportunities and Risks (Delft: Building Research and Information: The International Journal of Research, Development, and Demonstration, 2014).

[14] David Garcia and Elliot Kwon, Adaptive Reuse Challenges and Opportunities in California (Berkeley: Terner Center for Housing Innovation, 2021)

[15] David Garcia and Elliot Kwon, Adaptive Reuse Challenges and Opportunities in California (Berkeley: Terner Center for Housing Innovation, 2021)

[16]  The Greenest Building: Quantifying the Environmental Value of Building Reuse (Seattle: Preservation Leadership Forum, National Trust for Historic Preservation, 2011)

[17] Some of these benefits also based on the assumption that underutilized buildings, especially the older ones, will be subject to demolition and rebuild, which produce more emissions and waste.

[18] Example from California: The state could support more adaptive reuse projects by providing technical guidance or training in inspections, as well as by making revisions to the CEBC and/or to the California Residential Code. Providing more flexibility and added clarification in the building code can help lessen risk and reduce the costs associated with adaptive reuse. David Garcia and Elliot Kwon, Adaptive Reuse Challenges and Opportunities in California (Berkeley: Terner Center for Housing Innovation, 2021).

[19] Hilde Remøy and DJM Van der Voordt, Adaptive Reuse of Office Buildings into Housing: Opportunities and Risks (Delft: Building Research and Information: The International Journal of Research, Development, and Demonstration, 2014).

[20] Nancy Lanthier, Canada’s Lease Rates for Office Space Increasing, Despite Increasing Vacancies (Ottawa: Globe and Mail, 2021).

The boundaries of this map were identified by City staff as a relevant geographic area to consider for office conversions. Please note that these boundaries are different from the definition of Downtown in plans and the geographic area considered for the City data from Statistics Canada including in the policy review.

Figure 1 – Downtown Moncton Map for purpose of discussion

Link: https://www.google.com/maps/d/u/0/edit?mid=1hIqptC9xLLt0ZjIZ_HcVAu80aKdwpFo&usp=sharing

Below, a short data profile of Moncton has been provided. Data was gathered from the following sources:  

• Total population 2016, 2021, population change (Stats Canada) 1 

• Land area in square miles, population density (Stats Canada)  

• Land area in downtown, population density in downtown (Stats Canada)  

• Total average rents (2016-2021), annual rent increase (CMHC Rental Market Survey)  

• Rental vacancy rate (October 2021) (CMHC Rental Market Survey)  

• Office Vacancy rate (Q4 2021, Q1 2022, if available) (Various sources) 

• Downtown activity measured by the percentage of workers that have returned to office, where available (Avison & Young Vitality Index) 

The data below is based on the following geographic boundaries use as defined by Statistics Canada (see Figure 2 below). However, for the benefit of discussion, a smaller geographic area (see Map of Downtown Moncton above) will be used.  

City of Moncton – Relevant Policies 

The following information is meant to provide context for discussion including: 

• Provides an overview of current policies/programs that are directly aims to support conversions or other policies and programs that could have an impact on conversions such as policy to increase density. 
• Also provides short information about regulations that may serve as barriers to conversions such as The City’s zoning (parking,) 
• Links to all policy documents included at the end of this section.