Converting thousands of square feet of empty office space into housing in downtown Toronto may not be as easy as some city officials had hoped.
Amid an increase of vacant office space in Toronto, a new study to be presented to the city investigated the viability of turning empty offices into residential space to combat the city's prolonged housing and affordability crises.
Researchers considered several possibilities for creating housing, including demolition and rebuilding, which the report said is often more financially viable than converting an existing office space directly into housing.
The report goes to the city's planning and housing committee on Thursday. The city commissioned the study to analyze current office market conditions, and look at the benefits — and risks — of converting office space for alternative use.
As is, building new office towers is not profitable, with vacancies across the city still rising in the years since the COVID-19 pandemic.
Pandemic measures spawned a work-from-home culture that is unlikely to be totally reversed, except within certain sectors. The report said Toronto's high office vacancy rate means the city is unlikely to need new office space for at least 10 years.
The study claimed even under ideal development conditions, the construction of new standalone office space is not practical, for example, building a AAA office tower in the Financial District.
As newer, higher quality office buildings already in the development pipeline are completed, the report found many office space tenants simply move to the higher quality buildings and leave vacant space in Class B or C buildings behind.
The report said “affordable ownership and rental housing” could be an ideal use of vacant office and commercial spaces.
But for the owners of the existing office buildings, converting work spaces for other uses can be challenging.
"Although some types of office conversion projects appear to be 'profitable', most—regardless of location—do not achieve sufficient investment returns to be pursued by the development industry, regardless of location," the study found.
Replacement policies, which necessitate offices in major employment areas maintain a certain percentage of office space, hamper feasibility of conversion projects, according to the report.
"Generally, projects become unviable when more than 25 per cent of existing office space is required to be replaced," the study's authors maintained.
The actual size of the building is also a key consideration when determining whether or not to convert a vacant office into potential housing. Small office buildings (less than 40,000 sq. ft.) have the potential to generate strong returns and allow for up to 100 per cent replacement. Large office buildings (100,000 sq. ft. or more) are unlikely to be profitable.
While the report acknowledges the city's desire for "complete communities" in all areas of the city, it suggests allowing for redevelopment of these smaller office buildings is more favourable. Conversion of smaller buildings could create thousands of new residential units without seriously impacting the total supply of office space in the city or impacting the long-term prospects for the city's downtown business area, findings suggested.
Medium-sized office buildings (from 60,000 to 80,000 sq. ft.) also showed the potential for conversion, though that potential declines for sites further from the downtown core.
The report has recommended the city relax and add flexibility to the office replacement policy, including when it comes to substituting affordable housing and non-residential uses for required office space replacement.
The city should “regularly monitor and update" its policies in accordance with the state of the housing and business markets, researchers urged.
"Changes to the office replacement policy should have the capacity to be turned on or off in response to market conditions to mitigate the loss of too much office space and the associated negative impacts on the city’s economy," the report concluded.
