Converting Toronto’s empty office space into housing will not be a straightforward process – and may not even be feasible in some cases, a new report indicates.
The new report written for the City of Toronto shows that while some past office conversions appear to be “profitable,” most don’t yield sufficient investment returns to be pursued by developers, regardless of location.
Office conversations had been considered a way for Toronto to provide desperately needed housing for residents in an attempt to lower prices and sky-high rents.
The idea, which has proved successful in other places like Calgary, meant retrofitting empty and underused offices. But because of Toronto’s office replacement polices, city councillors are set to be told that won’t be as easy as it may sound.
Instead, knocking offices buildings down and starting again on the vacant land is one solution, according to the report, which also looks at why building new offices is not profitable anymore.
“Now is the time to consider a marked policy response that enables an appropriate amount/type of conversion activity in response to a wholesale shift in the market, with a focus on providing flexibility and relaxation of the city’s policy structure,” the report reads.
Office vacancies on the rise
Office vacancies, triggered by the COVID-19 pandemic and hybrid work, have not slowed down in Toronto.
Last year, the percentage of vacant office space rose throughout every quarter, closing out 2023 at 17.5 per cent – a three per cent increase from the same period in 2022, and a 13.6 per cent spike from the fourth quarter of 2019.
In October 2023, Toronto’s planning and housing committee directed staff to look into the conversion of offices into housing units, using Calgary as an example.
An oil and gas bust nearly a decade ago forced Alberta’s most populous city to start exploring office-to-housing conversions.
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The City of Calgary’s Sheryl McMullen told Global News at the time that the city’s grant program for those conversions was so popular that it had to pause the process because funding ran out.
McMullen said converting offices into homes would be a “quick way” to deal with the housing crisis.
However, the new report – which will be presented to the city’s planning committee on Thursday – shows that as it stands, demolishing and rebuilding empty offices in Toronto is more viable than converting them.
“Conversions involving the re-use of existing building envelopes without expansion are generally not feasible,” the report reads, adding the city’s office replacement policy — which requires redeveloped offices in key employment areas to maintain a certain percentage of office space — hampers feasibility.
“Generally, projects become unviable when more than 25 per cent of existing office space is required to be replaced,” it said.
In terms of what could replace these office spaces, the report indicated “affordable ownership and rental housing” are an ideal alternative use relative to other office/commercial (non-residential) uses, which may require additional incentivization.
Large office buildings unsuitable for conversion
The authors looked at several cases of office conversions, mostly demos and rebuilds, and found 95 per cent of existing projects are tied to what it called “Class B” and “Class C” buildings – small and medium-sized offices.
“Class A” buildings – such as towers in the Financial District – are unlikely to generate sufficient returns to support a significant amount of office replacement, the report found. It also indicated the development of new standalone office space like those towers is “currently infeasible” in Toronto.
Medium-size offices and small buildings, in particular, have the greatest potential, especially if they’re within key “centres” such as the Yonge Street corridor, the report found.
“Small office buildings represent nearly 60 per cent of buildings and six per cent of space within the key geographies. … It is therefore recommended that redevelopment of these sites be encouraged, as larger buildings are less likely to achieve financial feasibility,” the report reads.
It presented a hypothetical scenario: if 10 per cent of those sites were redeveloped for mixed-use residential, it would have the potential to create 27,000 to 35,000 new residential units, while reducing office space supply by 2.3 million square feet, or less than 1.3 per cent of the city’s total existing supply.
The space replaced would result in either: 313 to 901 affordable housing units; or, 200,000 to 600,000 square feet of maintained non-residential/employment-generating space.
City must ‘regularly monitor and update’ its policies
The report makes eight recommendations, including the city should enable developments to “mix and match” the types of uses integrated in place of office space to help support the creation of mixed-use buildings.
Furthermore, the city must “regularly monitor and update” its policies in response to ever-changing market conditions.
“With the exact inflection point where demand could outstrip supply difficult to quantify, the city should advance a policy response that maintains the flexibility to pro-actively monitor market conditions as they improve/deteriorate,” it said.
“Opportunity to activate or deactivate the policy through a motion of council could also help ensure the city’s appropriate response to fluctuating market conditions.”
Members of the city’s planning committee will decide Thursday whether to have the city solicitor report back on the report’s implementation in the first quarter of 2025.
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