Kitchener Leads the Way on Office to Residential Conversions

Calgary isn’t the only city making progress converting office space to housing. Look no further than Waterloo Region, Ontario.

Canada’s national office vacancy rate has hit a 30-year high as the market faces a perfect storm of challenges, as detailed in CBRE’s most recent Figures report.

And the growing divide between outdated Class B properties and high-performing modern buildings is forcing owners to consider repurposing their older office holdings. The ongoing housing crisis makes this a desirable replacement – if it’s feasible.

Forward-thinking building owners are exploring the possibilities of office-to-residential conversion projects, also known as adaptive reuse, as a two birds-one stone solution. Repurposing under-performing buildings can improve the office vacancy situation – as it has done in Calgary over the past year – while creating much-needed housing supply in city centres.

In Kitchener, Ontario, James Craig, a broker on CBRE’s Southern Ontario Investment Team, is assisting Setman Properties in an office-to-residential conversion project at 30 Duke Street West, a set of sister towers in the city’s downtown.

“Residential buildings in transit-oriented, business districts are in high demand,” says Craig. “So office conversions can put life back into an asset that’s not performing well in its current form.”

Needing to Pivot

When Setman Properties converted the first of the two towers in 2017, they were the first commercial property owners in Waterloo Region to undertake such a project.

“I’d heard about the success of mixed-use projects and thought it would be a good fit for our Kitchener property,” says Denny Cybalski, president of Setman Properties. “The floorplate and structure were conducive to a conversion to residential.”

Initially the scope of the project involved only the conversion of four floors in the smaller Ontario Tower, keeping one floor of the building and the other Duke Tower for office use, while retailers occupied the ground floor podium.

Eventually, however, the success of the first converted floors at Ontario Tower convinced Setman to also transform the remaining office section of the building, creating 33 loft-style one-bedroom apartments.

By 2022, it had become clear that the office market recovery would be a slow one. So Cybalski and his team reassessed their plans for the Duke Tower.

“The office tenants weren’t renewing their leases, we weren’t getting new requests for the space, and occupancy rates were lower than they’d been in our over 20 years of ownership,” he says. “We needed to pivot.”

Cybalski is now waiting to receive the final building permits for the conversion of eight floors at Duke Tower into 128 apartments. This will include 16 affordable units and 24 accessible units. The City of Kitchener has not provided any incentives for these conversions, according to Cybalski.

Appealing Opportunities, Hard Realities

CBRE’s James Craig is optimistic the project will garner a lot of interest once the conversions are complete.

“The building’s access to downtown transit, colleges and amenities is really appealing,” he says. “With so few apartment buildings on the market in that area, it’s an opportunity for investors to take on a property that promises to perform well in the long run.”

Others in Southwestern Ontario and elsewhere in Canada are starting to follow Setman Properties’ lead in looking at converting struggling office buildings into student housing or apartment units.

But there’s a lot for investors to consider before diving into a conversion project.

“You have to take into account the cost of the building itself, the cost of converting and the rents you could achieve,” says Craig. “And with any retrofit, you’re bound to find surprises along the way.”

In the case of 30 Duke Street West, the mechanical systems needed to be reworked to comply with residential building requirements, and remaining office tenants had to be moved to accommodate the renovations.

Obtaining the building permits for that project was also a challenge since the project was the first of its kind at the time.

“Conversions are a lot of work,” Craig says, “but they can be a good way to take a well-located property from obsolete to performant.”

Calgary Conversions

Office-to-residential conversions are all the rage a few provinces over in Calgary.

Three years ago the City of Calgary introduced the Downtown Development Incentive Programs to support the conversion of underused office space and the demolition of end-of-life office buildings. The program came in response to owners and developers asking for funding to provide additional housing.

These city-sponsored financial initiatives were introduced as part of the City of Calgary’s target to replace six million square feet of downtown office space by 2031. So far 13 projects have been approved.

“The current office market’s economic structure is not sustainable,” says Greg Kwong, CBRE’s Alberta Regional Managing Director. “Older office buildings are struggling to generate acceptable returns.”

But Kwong doesn’t see conversions as the only solution to dealing with outdated office buildings.

“Office conversions will help stabilize vacancy, but it’s important to look at all avenues to reduce our vacancy,” he says. “That involves diversification of the tenant base in the core and providing incentives for international companies to move here. Some buildings will need to be demolished while others will be kept as offices as companies solidify their workplace strategies.”

“Whatever course we take in dealing with Calgary’s older office buildings,” Kwong adds, “the next few years will be critical to revitalizing our downtown and creating a city that’s ready to face the future.”

And while many look to the biggest cities for what comes next, smaller urban centres like Kitchener are also able to innovate.

“Don’t underestimate the savvy and skill of private capital in secondary markets. Our owners see opportunities and have the tenacity to achieve them. It’s exciting that Kitchener can be a leader in office conversions when we already do so many other things well,” says Craig.