Is there a second life for Calgary's empty office towers?

Tuesday, February 2, 2021   /   by Sergey Korostensky

Is there a second life for Calgary's empty office towers?

With the office vacancy rate in downtown Calgary expected to eclipse 30 per cent in the coming months, the city has a big-time problem on its hands.

After much studying and soul searching, can it finally uncover a big-time solution?

That’s the puzzle a new report by the University of Calgary’s School of Public Policy attempts to help solve. And one possible solution could come from converting empty buildings to other uses, including affordable housing.

“The pandemic has highlighted the need for flexible and innovative strategies to deal with the glut of unoccupied office space,” the report states.

“Without the right incentives and processes in place for conversion, the city could be facing an increasingly hollowed-out downtown.”

While the idea of converting unused buildings is not a new concept — councillors, property owners and Calgary Economic Development officials have examined it in recent years — the study provides practical advice on how to encourage such action.

And it comes at a moment when multiple solutions are needed.

“It’s a huge problem with multiple tentacles,” Mayor Naheed Nenshi said Wednesday in an interview.

“We have more vacant space in downtown Calgary than there is space in downtown Winnipeg . . . so this is actually a critical problem of national importance.”

The issue dates back to the collapse in oil prices almost seven years ago from the dizzying heights of US$100 a barrel. Downtown office buildings began to empty out as layoffs in the industry took place.

The office vacancy rate in the core ballooned from six per cent in 2014 to almost 24 per cent three years later, according to commercial real estate services firm Avison Young. Buildings already under construction added to the glut in the following years.

Then came 2020.

The pandemic has led to more people working remotely from home. With additional oilpatch consolidation taking place, the vacancy rate exited last year at nearly 27 per cent.

And the problem is getting worse.

A study last month by Avison Young said under its base-case forecast, the downtown office vacancy rate will top a record 30 per cent sometime next year and remain anchored above that mark by the end of 2023.

“A balanced office market is in the six- to 10-per-cent range of vacancy. And it could take us 20-plus years to get back there,” said Avison Young research manager Susan Thompson.

“We’ve crossed into the territory where everyone needs to realize this is bad and the strategies we used in the past are not enough anymore. What do we need to do to start stemming the tide?”

The “tentacles” of the vacancy issue, as the mayor aptly describes it, extend into many corners.

The problem has shifted the property tax burden in recent years to homeowners and to businesses located outside the core.

It’s affected retailers, restaurants and many small businesses that rely on downtown workers moving in and out of the area daily. The growing number of empty offices also affects transit ridership and the overall vibrancy of the core.

The new U of C report doesn’t just define the issue, but it offers some recommendations to help fix it.

One potential solution is “adaptive reuse,” converting vacant office space to residential or mixed uses. It notes such building conversions have been used successfully in cities such as Toronto, Chicago and Boston.

But the process of transforming highrise towers into residential units is “fraught with barriers,” including the construction costs and technical limitations of adapting some buildings.

Commercial property owners must be convinced it’s a better choice than simply demolishing an obsolete structure or hoping the economy will turn around.

“It’s going to be a made-in-Calgary solution,” said report co-author Jenna Dutton, research co-ordinator at the school’s Urban Policy Platform.

“Just opening up the conversation and understanding what other jurisdictions have done is really helpful in looking at the potential for innovation and possibilities.”

The study recommends the city create an inventory of available buildings in Calgary that would be suitable to convert, and that it engage with community groups and interested parties — such as educational institutions and tech firms — that might be looking for space in the area.

The role of governments in “stimulating office conversions” should be considered, it states, noting the City of Baltimore provides owners with a decade-long tax holiday for converting buildings that create more than 20 residential units.

Converting office properties should also be considered to help provide affordable housing in Calgary, it recommends. Such projects might be able to access funding from senior levels of government; adopting energy efficiency measures might also open up funding from other federal programs.

Calgary Economic Development CEO Mary Moran welcomed the report and said the idea of converting office buildings to residential use was studied by the group’s real estate advisory committee several years ago.

“The economics are definitely the biggest issue,” she said.

“There are a handful of buildings that would be suitable for office-to-residential conversion . . . but (the examination found) to make the economics work, it requires a relatively healthy subsidy.”

Aspen Properties executive chair Scott Hutcheson, who has studied the issue, agreed few office buildings are properly set up to accommodate residential units and said it’s difficult financially to make it work.

However, taking a functionally obsolete building and either partially or completely replacing it — by providing financial incentives and allowing for more density on the site — would make a bigger impact, he suggested.

Nenshi said the city needs to explore its options to get the ball rolling on more office conversion projects, and Calgary will need help from the provincial and federal governments on the broader vacancy issue.

It will take creative action, and likely several different solutions, to solve the problem of filling the city’s empty office towers.

“There is no silver bullet here. One thing is not going to solve this problem,” the mayor said.

“The bell has been ringing for many years. Hopefully, people are now listening.”

Calgary Herald