Is converting office buildings into apartments here to stay?

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Jordan Heath-Rawlings It is something that seems so simple that it makes you wonder why it’s not happening everywhere. If you live in a big city city, and you spend any time downtown these days, you have surely noticed that while many workers have returned to their offices, many others have not. Some companies downsized, others just went fully remote. And there’s a lot of unused office space in most downtowns right now. And also there’s a housing crisis. So, like I said, it seems so simple. Even more of downtown Calgary’s empty office space is being turned into housing. The city has approved two more projects and is considering three more. Calgary is leading the way on this. So much so that American media in San Francisco and other cities have picked up on it, asking the obvious question, why can’t we do this here? Why can’t we do it everywhere? The answer is that they can and so can other Canadian cities. But it is not quite as simple as I made it out to be. So how does premium downtown office space become apartment housing? What’s required to get it off the ground in terms of legislation, but also just practically, what happens inside those buildings? And could these projects scale up quickly enough to solve two problems at once? I’m Jordan Heath-Rawlings. This is The Big Story. Tracy Loh is a fellow with Anne T. and Robert M. Bass Center for Transformative Placemaking at Brookings Metro. Hey, Tracy.

Tracy Loh Good morning.

Jordan We’re now, well, I was going to say two and a half years. We’re now more than two and a half years into this pandemic. In most cases, maybe once a company has decided whether it’s going to go completely remote or it’s downsized, it’s office space, and there’s a lot of vacant stuff there, what happens to that vacant space? Is it sold at a discount? Does it just sit there empty, demolished for other things?

Tracy Loh So the sectors of the economy that use office space are the growing sectors of the economy. And so, even if existing employers decide to consume fewer square feet per worker or to completely give up their office space, there are new firms entering the knowledge economy all the time who are looking for offices. So some of this slack space is simply taken up by new growth. However, a lot of it does need to find some other use because demand right now is for new modern kinds of offices that have more open retail like floor plates, and lots of spaces for collaboration and are set up for lots of connectivity. So there is a lot of office space out there that’s dated and close to functionally obsolete as office space.

Jordan I know you’ve been looking at American data, but I did want to ask you if you’re familiar with what we’ve seen happen to some of the vacant office spaces in Calgary, Alberta right now.

Tracy Loh Yes, I took a look at those proposals and it seems like there’s some really exciting ideas on the table in terms of adaptive reuse.

Jordan How would you define adaptive reuse anyway? What is it?

Tracy Loh So adaptive reuse is just when you take an old building that was originally built for one specific purpose and then you modify the building so that it can be used for another purpose. This is something that’s totally normal in that, you know, most buildings that are older than 50 years old have had more than one use. And this can be anything from a factory becoming chic residential lofts to a church becoming a nightclub, to an office space becoming a school. I see.

Jordan And what’s so interesting about the ones in Calgary that stuck out to your mind? First of all, just for our listeners, what are they going to be used for and how’s it being done?

Tracy Loh So what’s really interesting about the current moment in Calgary and elsewhere is that the surprise is that buildings that people wouldn’t necessarily expect to be adaptively reused are now on the table. Right. The big surprise of COVID has been that amongst the sort of many casualties of the Pandemic, we find some really powerful players, including the owners of Topshelf commercial real estate in major metropolitan downtowns. We don’t usually expect to find those guys down. So what’s really surprising is that there is a unique opportunity to reimagine downtowns right now and to reposition these incredibly located assets because they are caught at the confluence of multiple trends that the Pandemic has accelerated. In terms of what I said earlier about the kind of office space that’s in demand changing at the same time that the quantity of office space demanded is changing. So what’s really remarkable is just that this space that usually goes for a higher rent premium than any other space you could think of retail, residential, industrial it’s really surprising to find the space available and on the table. And so that creates some exciting possibilities.

Jordan And what are those possibilities? What exactly does this proposal make happen?

Tracy Loh What folks are looking at is the possibility of reimagining downtowns not just as centers for commerce, but as neighbourhoods for living. And you know, there are some cities that have already reimagined their downtowns in this way and have been at this for decades. But now there’s a new tranche of cities that are undertaking this work and that have this opportunity. So, you know, looking at the possibility of taking office spaces where people go between nine and five to work and reimagining them as places where people can live and to turn downtown into a 24 hours neighbourhood, how difficult is it? Or maybe it’s not difficult, I don’t know, to get these kinds of things through all the hurdles they must face.

Jordan You know, again, no expert here, but I’m assuming they have to be rezoned and approved as homes and a whole bunch of infrastructure must need to go into them if you’re divvying up large office spaces into apartments, whether those be bachelors or two and three bedrooms. So just really simply building things is hard, right?

Tracy Loh That’s just something that’s true across the board. It’s not just true about building literally building buildings. It’s true about building companies, building families, building countries, building communities. This is hard, creative work that only happens in the real world and you have to grapple with a lot of different realities in order to get it done. So, you know, in the case of adaptive reuse construction, it’s hard, just like building anything is hard. And it attracts a really unique kind of builder and developer that loves a challenge and loves solving problems because there are a lot of problems and surprises that can come up during an adaptive reuse project and so it presents a unique kind of opportunity and achievement to do this kind of work. Do you have any examples you could give me of the kind of problems that can crop up during this? Any you may have heard of from some firms that have been doing this? Yeah, sure, I’ve been talking to a lot of builders who do this kind of work and typically with adaptive reuse you’re going to be talking about older buildings. So depending on exactly how old the building is, there might be asbestos, for example. Especially when you’re doing adaptive reuse of office buildings, you’re going to run into capacity issues in terms of the pipes, in terms of the electricity and a lot of the internal infrastructure inside the building is going to need major reworking or may need to essentially be built from scratch. But there are also some savings and some great opportunities with adaptive reuse, which is that really expensive elements like the steel frame that holds up a taller building or elevators, those assets may already be in place, they may be salvageable, they may have decades of usable life left in them and those elements are very expensive. So being able to salvage those is a great thing.

Jordan In terms of what these buildings become. How much of this and I’m kind of speaking about what’s going on in Calgary and a little bit in Ottawa right now. But also just in general in terms of adaptive reuse. How much of those apartments become like totally desirable. Expensive downtown condos and how much of them become the kind of units that we’re constantly talking about the need to create to help solve the housing crisis.

Tracy Loh So new construction as a rule is expensive whether it’s adaptive reuse or whether you’re building from the ground up. And the reality is that if something is expensive in terms of the inputs to the production, then the final product is going to be expensive as well. So that presents a challenge in terms of the timeline, right? Because the way that most lower cost housing is created is by building new housing and then letting it get old. So we have a housing crisis in the US. And in Canada right now because for decades now we haven’t been building enough housing and so the middle aged and older product is in much shorter supply than it should be and there’s nowhere for people to go. So trying to solve affordable housing with new construction is a problem because of the cost and the only way to solve it is to address the cost of the inputs to housing production whether it’s the cost of land, the cost of labor and materials, the cost of capital. You have to address one of those touch points in order to make the final product cost less. So governments try to touch all of those costs in different ways in order to adjust the cost of the final product when they want new construction to provide affordable housing. Is there a significant price difference? I know they’re both expensive and take a lot of investment but is there a significant price difference in converting something like office space in a downtown compared to building newer somewhere else? Yeah, I mean, generally new construction is going to be cheaper than adaptive reuse. It’s going to be cheaper? Yeah, it’s going to be cheaper to do new construction. Why is that? That’s just because adaptive reuse comes with some unique expenses like such as, for example, like if you need to remediate asbestos or if you need to address structural issues but there can be ways to make adaptive reuse actually cheaper. So for example, if someone working on an adaptive reuse project doesn’t have to add parking in order to comply with modern parking minimums, then the adaptive reuse project can end up being cheaper than new construction that has to tackle a parking garage. And the environmental benefits, I think, are obvious that existing buildings contain a lot of embodied carbon already and so there can be simply no question that the environmental costs of adaptive reuse are far lower than the environmental costs of new construction. Is adaptive reuse also a way to tackle for want of a better term, I’ll call it nimbism. I know here in Toronto, where we are, there are constantly fights being put up whenever a new building, especially multi home or apartment buildings, are proposed. Does adapting one that exists get around that or do you still face the same kind of fights? Well, in a lot of cases you’re going to face the same kind of fights because if the entitlement for the use of the land, if the zoning is commercial and you want to convert it to residential, then, you know, that’s still going to impose a process and any process can be hijacked by special interests that aren’t invested in a successful outcome. So one way in which it can be a hack though, is that because a building already exists in a particular shape, right, the building envelope is a certain height, a certain mass. Adaptive reuse can be a way to get around one mechanism that can serve as a barrier to development, which is design review because the structure in terms of its essential framework already exists. If you preserve that you can essentially sneak around design review by just putting something new inside the envelope. I’m going to ask another question that I think I know the answer to but I thought I knew the answer to what costs more too. So I’m going to just ask it. Does this make it faster to get housing to the market? Is it faster to adaptively reuse something than it would be to build from ground up?

Tracy Loh You know, that’s tough to answer because it’s going to depend so much from project to project on. Adaptive reuse can be easy or can be complicated because once you start taking down walls you just don’t know what surprises you might find inside.

Jordan Is this something that you are seeing governments, and I don’t necessarily mean the federal governments but municipalities push for. And who is really advocating for this kind of stuff? Is it the governments? Is it the housing advocates? Is it the developers? Like who wants it?

Tracy Loh So I think there are a couple key constituencies here. The first is that local governments have a vested interest in this because they derive a lot of their revenue that they need to provide services to their residents. They derive a lot of that from property taxes and property taxes are going to be tied to the productivity of the properties that they’re taxing. So a lot of under-utilized or vacant assets is going to pose a structural fiscal problem to a local government and there’s a baked in incentive there for the local government to try to encourage assets to be used productively. So local governments are right to have their hair on fire about it. Similarly, the same thing kind of goes for anyone who owns a property in an area where there are these challenges to vitality in terms of underutilized assets or vacant assets. If you own a property and the property next to yours is vacant then there, you know, we don’t all exist in a vacuum. Everything that we do impacts our neighbours and each other. And so for example, if I’m a retail space and the space next to me is vacant, I’m losing out on foot traffic that I might have gotten from my neighbour’s business and I’m stuck counting just on my own foot traffic in a neighbourhood. Each individual property adds up to an aggregate neighbourhood vitality that is more than just the sum of the individual parts. And so people who have property downtown are concerned about this vitality issue right now. And then I think the final constituency that has an interest in this is that many major metro downtowns haven’t necessarily been the most maximally inclusive places. Historically there’s been a lack of diversity in terms of land use in terms of sectors of the economy and in terms of the kinds of people who feel like they are included. And so the current moment presents an opportunity to think about downtowns differently and to think about what new uses, what new activities, what new constituencies can be included and become downtown stakeholders.

Jordan The proposals we’re talking about today are still in the early stages for a couple of Canadian cities. Have you visited any completed adaptive reuse, specifically the kinds that are office space turning into residential space and just what is it like when they’re done and how does it work in the neighborhood and who lives there? Like, just can you describe what it, I guess what a nice ending would look like for these proposals in Canada?

Tracy Loh Yeah, I think the place to look at is Philadelphia in the United States because Philadelphia has had a huge amount of adaptive reuse of old office buildings right in the downtown and they’ve generated thousands of new units of housing right there in the downtown that are affordable at a variety of price points. There’s tons of students living in downtown Philadelphia right alongside millionaires. And what it feels like in downtown Philadelphia even right now, still in the middle of a pandemic, it is so busy, it is bustling with vitality. I was in Philadelphia recently, I had to wait for a table at a restaurant. But it was worth the wait because the Italian food there is great. The streets, the sidewalks are alive, the parks are alive. And what it feels like inside an adaptive reuse building is like, look, these projects are interesting because each one is different. The history of the building comes with it. And so adaptive reuse projects have a ton of character and texture that’s really fascinating, that can have a downside in that you’re using a building for something it wasn’t designed for and so there can be things that are a little clunky about that and don’t work great. Maybe the HVAC is a little off and it’s hard to get the temperature right sometimes, but there are a lot of charming features like vintage elevator buttons or stone facades. Yeah.

Jordan Personality.

Tracy Loh Yeah. These kinds of things are not built new these days. And so to be able to save these things and to save that texture and to enjoy it and give it new life is something that’s really cool. Is this scalable and sustainable or is this something that’s kind of possible right now for a limited time only because of what the pandemic has done to so many downtowns? This has nothing to do with the pandemic and the really big picture. Right. Downtowns have always been evolving and with each generation and each economic transition needing to reimagine themselves from industrial centers to retail centers to knowledge work centers and now to 15 minutes cities. Right. Like this is just part of a process that’s always been going on and always will be going on, and this is just the most recent iteration. What is exciting about this moment is that we are going through a really tough and prolonged protracted crisis, and some of the problems that we’re having right now can be part of the solutions that we need. We’re not going to solve the housing crisis using old office buildings. There’s just not the inventory for that. And we actually need every solution on deck in order to solve the housing crisis. But what we can solve with adaptive reuse in downtown is we can create the next generation of places where we can gather and be together and innovate and be productive after a time of great isolation and division. That’s been really tough.

Jordan Tracy, thank you so much. It’s been a long time since I’ve been able to say this, but that’s a very happy note to end on. Really appreciate it.

Tracy Loh Thanks for having me.

Jordan Tracey Loh, a fellow at Brookings Metro. That was the big story. If you listen to our bonus episode on the weekend and you have any feedback, now that you’ve heard our response to your feedback, keep the feedback chain going. Seriously, over the past few weeks, we’ve all enjoyed hearing so much more from our audience. I can’t promise you we’ll give you everything you want, but I can promise you that we will always listen, read, whatever, so send it along. You can find the big story at thebigstorypodcast CA. And you have many ways to give us feedback on Twitter at thebigstory FPN, via email hello at thebigstory podcast CA and via Voicemail 416-935-5935. Wherever you’re listening to this podcast, I won’t even tell you to rate and review and all those things I’ll just say we’re glad that you are. Thanks for listening. I’m Jordan Heath-Rawlings. We’ll talk tomorrow.