DECEMBER 2021
Issue #01 | Article 02 / 03
Space conversions that suit evolving needs
Forget reconfiguring offices into different (but still office) space – some buildings are being completely converted from one use into another. Why?
Oftentimes, we reconfigure an office space into a new office space for another occupier. However, in recent years, we are seeing some spaces (or entire buildings) go through substantial conversion from one use into another – for example, an office space becoming affordable housing, or hotels becoming seniors’ residences. We call this trend adaptive reuse.
Turning vacant office space into affordable housing – A look at Sierra Place in Calgary, AB
Sierra Place is a 10-storey, 100,000 sf office tower in downtown Calgary that had been vacant for several years when sold. A first-of-its-kind project, HomeSpace is partnering with Inn From the Cold to convert the building into six floors and 82 units of affordable housing for vulnerable populations. The remaining four floors will house shelter, transitional, and support services.
How did you help Sierra Place? Did they have specific needs / challenges / opportunities?
Chris: The client is a socially responsible, not for profit, very experienced developer. Together we identified that the cost of new construction would outweigh rental revenue potential. Instead, we helped to identify an asset that could be renovated into residential, affordable housing – potentially at a lower cost than acquiring a site, demolishing and starting from scratch. The client was receptive to the idea and we pursued it.
Challenges included identifying a building that would accommodate major renovation, with a small enough floor plate so units would not be too narrow. The sale price had to reflect a vacant office building with no hope of office occupancy, and conventional financing was not available.
Meanwhile, this project presented many opportunities: We established a team of architects, project managers, construction professionals and consulted with the agencies that fund this type of development (CMHC, the City of Calgary, etc.). Our client embraced a cautious, risk-adverse approach, which allowed us to be very methodical and detailed as a team.
Today, the project is set for a “best chance of success” result. Knowing we are a part of a greater good – helping the community and bringing together people who are making a difference – is perhaps the most satisfying.
Are you seeing more activity related to conversions?
Chris: Most ‘value add’ real estate projects have an element of ‘conversion’, whether it is unused storage space to retail or rooftop space to patio or office to boutique hotel. Identifying the opportunity is the first step. This is a first office to residential conversion but not a first conversion project.
Rethinking malls to entice shoppers to keep coming back
With pandemic restrictions lifting, many Canadians are eagerly returning to malls for in-person shopping experiences – but the novelty may wear off and malls must rethink how to use their space, to keep shoppers coming back.
What is the shopping mall landscape now – and are you seeing conversions there?
Hani: Even prior to the pandemic, foot traffic in malls was changing and this was only accelerated with the arrival of COVID-19. More so than ever, shopping malls are exploring different ways to add on to their space and to use their existing space. For example, they are contemplating residential density: building condominiums on top of the mall or immediately surrounding the mall. This might also include reconfiguring enclosed malls to convert them into open air malls – something we saw happen with success at Deer Foot City in Calgary.
Mall owners are also creating space for other tenant types that were previously considered very rare in mall settings – such as doctors’, lawyers’, or accountants’ offices. This instantly changes the way an asset is marketed because it’s no longer just a place to shop; it’s a place to shop, live and work, giving people access to everything they need in such close proximity.
What’s the most significant change you see happening in malls of today?
Hani: Tenant mixes are certainly changing in that we are seeing more diversification, with a greater mix of higher end with discount, rather than all of one or the other. Perhaps the most notable trend is a shift away from fashion to food. Historically, fashion encompassed around 60% of a mall’s footprint whereas food encompassed 5%. Today, the food experience is taking up around 20-25% - and not just as food courts. We’re seeing a rise in entire restaurant rows in a mall, in patios and other outdoor spaces.
What is the role of outdoor and indoor space?
Hani: The outdoors are becoming a prominent feature of malls, giving mall-goers green space to walk around or sit. Owners are also finding new ways to activate, entertain and attract visitors to the indoor spaces beyond simply shopping. For example, they’re adding ice rinks. Or, in South Centre Mall in Calgary last winter, people were encouraged to bring their dogs to walk them inside, out of the cold. It was a huge success.
National outlook on Canadian hotel conversions
Are you noting any general conversion trends from coast to coast – or is it fair to say we’re seeing pockets of activity in specific regions only?
Curtis: Hotel conversions are taking place coast to coast. The predominant conversions are for social housing, student housing and seniors’ residences. The local demographic and economic market conditions will dictate the viability of conversion potential.
What does the future of conversions look like for hotels – here to stay or a temporary response to the current landscape?
Curtis: Hotel conversions will continue in future. New hotel supply, escalating construction costs and market demand for alternative uses will continue for hotels approaching the end of their economic life.
Turning a vacant hotel into a senior’s residence – A look at Rocky View Foundation in Airdrie, AB
Rocky View Foundation, a non-profit organization, is converting this former 96-room hotel into a seniors’ residence for half the cost of building brand new. The residence already has a waiting list, with a target open date of Spring 2022.
Are you seeing more activity related to conversions?
Haig: Our team has been tremendously active in projects with strategies to convert current building use to alternative use. In Calgary, this is generally most common among office and hospitality assets. We expect this trend will continue as demand for certain assets increase, such as seniors’ housing, and as cost-effective opportunities for conversions continue to present themselves (thereby saving time and money for buyers as development costs are notably higher).
Were there any unique factors to consider for this conversion?
Haig: The property is in a predominantly industrial area and the vacant hotel had been rezoned from a hospitality property back to industrial use. Using the property for anything other than industrial would require rezoning permission from the City of Airdrie – creating uncertainty for buyers. This deal marked an unconventional, one-of-a-kind process that was approximately six months in the making. Through our vast network, we were able to align the property with Rocky View Foundation, which had the patience and willingness to navigate through the rezoning and conversion complexities. Rocky View has shared with us that they highly recommend exploring space conversions because they are less time-consuming and more cost-effective. Modifying an existing property in excellent condition is a viable alternate to building new, particularly for NFPs.
Are you seeing space conversions to uses other than housing / residential or hospitality?
Kevin: We have seen some conversion of older office buildings into self-storage facilities. This is an incredibly innovative way to serve the needs of a growing population of inner-city residents that might have less storage space in high-rise multi-residential buildings. Self-storage operators are actively seeking vacant office buildings as candidates for conversion to storage use.
Overall, conversions offer many benefits to any market – and particularly to Calgary, where the office market has been challenged by increasingly high vacancy over the last several years. Conversions are a welcomed relief by repurposing some of the older, more functionally obsolete building stock – and this helps chip away at an inventory of square footage that disproportionately contributes to the overall downtown office vacancy rate.
What’s the motivation for hotel conversions in Calgary and surrounding area?
Kevin: A common theme in feedback is that, with COVID-19 lockdown measures having some of the most severe repercussions on the hospitality sector, few (if any) investors felt confident predicting when a recovery would occur. This made it difficult to view hotel investments as viable decisions, given no cash flow and no return on investment in the pandemic. Layer on to this the challenges with arranging new financing for hospitality ventures.
Converting hotels into affordable housing in Vancouver
What does the hotel conversion market look like in Vancouver?
Jake: The hotel conversion market did not exist in a meaningful way in Vancouver prior to the pandemic. With the pandemic, the travel industry (business and recreation) screeched to a halt. This left hotel owners and operators with exceptionally low occupancy and no clear end in sight.
Concurrently, the federal government launched the Rapid Housing Initiative, which aimed to create new affordable housing by providing $1B in funding to projects that were able to deliver net new housing units within a 12-month period. One year is not sufficient for many ground-up developments so applicants searched for hotel properties that could be converted to long-term stay more quickly. Notable examples include the former Ramada on W Pender Street; former Hostelling International on Granville Street; and former Best Western on Kingsway.
What do you see for the future of the hotel conversion market?
Jake: Speaking specifically to the Vancouver market, I see hotel conversions being tied to available government funding – whether that is the Rapid Housing Initiative program or similar programs that incentivise creating more affordable housing. Converting hotels to affordable housing in a city like Vancouver where hotel rates are typically high and vacancy low does not make economic sense for the private sector. There has been community benefit in the delivery of new affordable housing units through conversions and we are monitoring the impact of the decreased hotel room supply as business and recreation travel resumes.
With decades of experience, Avison Young’s team of professionals is uniquely positioned to work closely with clients on property conversions, supporting all life stages of a project from start to completion.
Visit avisonyoung.ca to learn more about the services provided in this article.
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