Residential Conversion in Toronto
Ok ok… we got the message back in Q4 2022 that we were beating up on the commercial office space too much (here and here). So, we took a break. Unfortunately, the City of Toronto did not. Here’s the elephant in the room: Toronto’s commercial vacancy rate of 17% is rising and is clearly massively understated. If you haven’t read the Globe’s detailed work on the subject (here), you should. Some vacancy and availability lowlights:
Class C availability rate at 45.7%
121 King St. W vacancy at 42% and availability at 50%
Scotia Plaza availability rate at 23.8%
“Extend and pretend” has been working to a point, but the writing is on the wall: we need to rethink our commercial office stock. And we need it to happen now. Whether it’s commercial conversion to residential (in obviously dire need), logistics hubs, vertical farming, recreation and play-spaces – heck, even pickleball courts – there are so many opportunities to transition this derelict space into a useful, modern resource. Turn concrete into community.
Incredible mixed-use project like The Well (https://thewelltoronto.com/) represent a big step in the right direction. But creative projects are sadly the exception in Toronto as low vacancy rates and incredible residential demand pre-covid created little incentive to innovate in yesteryears.
Yes, yes… we’re well-aware that this is not a panacea to reduce office supply or increase housing stock. And we’re not saying that not every building is a candidate for conversion. We’re saying that it’s a place to start to create win-wins and it should spark creative thinking around the art of the possible – a welcome change from the sterile development we have seen in the city over the last couple of decades given virtually zero competitive pressures.
Fortunately, we have models to learn from. In recent months we have been evaluating what’s worked in Calgary and Boston, respectively. Calgary, which first began thinking through its office collapse in 2014 (post oil-boom), officially created a conversion program in 2021 with a direct, per square foot subsidy. It currently has more than a dozen approved projects totaling more than 1000 units.
Boston is perhaps an even better analogue as we’ve discussed previously. Like Toronto, Boston:
Has a perpetual housing supply shortage, and
Has taken longer than many metros to recover post-covid, especially as it relates to foot traffic
We sat down with two senior officials from the Boston Planning & Development agency to get an update on their unique office to residential conversion program, which began in mid-2023. Impressively, it is ahead of expectations in terms of applications (with more expected by the end of June). It is a thoughtful program, which has clearly been informed by the appropriate on-the-ground risk takers. The main ingredients are as follows and have been refined since the program was first announced:
A 75% tax abatement for up to 29 years. Importantly, this now includes flexibility on the timing of the abatement, which can begin even BEFORE construction to help with cash flow.
Reduced permitting timeframes through an interdisciplinary approach the approval process where all stakeholders are empowered to collaborate (think collective project management); this has brought permitting timeline downs to 6 months from 18-24 previously.
A willingness to be creative around adding height (1-3 additional floors will be considered as part of adaptive reuse if structurally viable).
Requirements for 20% affordable housing + green energy standards + preservation of ground level retail
Strict timelines for applications and breaking ground (with penalties) to ensure action vs. project “banking”
The first project under the program will begin this summer. The clear interest has been from older, C-class office between 6 and 12 stories. In one case, vacancy was a shocking 80%! That’s not good for anyone. Not the owner, not the city, not the community.
What we love about this program is that it epitomizes the action, energy and buy-in that can truly inspire change. The program will add 100s, not 1000s of units, but it creates a real win-win across stakeholders. Better asset utilization, more housing, appropriate incentives for developers to act, more work for the trades, etc. Equally important, it fosters a renewed effort around tactical and creative problem solving. We in fact can do more (and better) with less if we get back to first principles and understand the incentive structure of all stakeholders in the chain.
Next up, Toronto. The elephant is stomping! Is anyone listening? Thought leader and architect, Steven Paynter of Gensler suggests that conversions in downtown Toronto could add more than 25,000 new units! Pension funds along with other major commercial asset owners may consider taking the lead to effect change here but we’re happy to assist. We’d like to call on Mayor Olivia Chow to create a working group to explore what a similar program could look like for Toronto.
There’s a colossal need, there are customers, there is space, there are lenders, there are trades people that currently aren’t building other homes, there is opportunity – what is lost? That’s an open question, and we’d love to hear some answers, but our gut is that there aren’t any.