In Calgary, Alberta, officials are luring developers by paying $55 a square foot to convert offices to residential
By Peter Grant, June 11, 2024
U.S. cities aiming to convert half-filled office towers into residential buildings are looking north of the border to Calgary, Alberta, which has one of the most aggressive programs in North America to promote these conversions.
American officials have been studying the Calgary program, and some cities have even sent delegations to visit the western Canadian city. Early returns show the promise—and limitations—of conversion plans.
A plunge in oil prices between 2014 and 2016 sent vacancy rates soaring and commercial-property values tumbling in Calgary, a city of 1.3 million and the center of the country’s energy industry.
Facing an enormous hole in its property-tax base, Calgary in 2021 approved a conversion program featuring an unprecedented subsidy of 75 Canadian dollars a square foot, equivalent to $55 a square foot. Unlike many conversion programs in the U.S., Calgary’s plan has no major strings attached, such as an affordable-housing requirement.
Calgary’s experience holds out hope for New York, San Francisco, Chicago, Washington and other U.S. cities that are desperate for conversion programs to solve the twin problems of too much unwanted office space and not enough housing.
“There is a network among cities that are going through this,” said Thom Mahler, Calgary’s director of downtown strategy.
Calgary can point to some progress. In April, a 10-floor building with 112 rental apartments known as the Cornerstone was the first former office to open as an apartment building. Another 11 conversion projects with more than 2,100 units are in different stages of planning and construction.
A plunge in oil prices between 2014 and 2016 sent vacancy rates soaring and commercial-property values tumbling in Calgary. Photo: Todd Korol/Bloomberg News
But some of the city’s experiences are sobering. Even with Calgary’s subsidy, the economics of these conversions work only because developers were able to purchase buildings for prices roughly equal to what the underlying land is worth.
Many more budget-constrained U.S. cities might also be hard-pressed to match Calgary’s ability to offer cash for these conversions. Instead, places like Boston and New York are offering benefits like tax breaks and zoning changes.
Meanwhile, a number of the conversion projects in Calgary are showing little progress. That is partly because, as in the U.S., construction and labor costs have skyrocketed since the city approved the subsidy.
“Three years ago, C$75 a square foot was exactly the right amount to bridge the gap,” said Greg Kwong, who heads CBRE Group’s Calgary region. “With the advent of higher construction costs, that C$75 really isn’t enough.”
A glut of office space mushroomed throughout North America during the pandemic, as companies adopted new workplace strategies permitting more remote work. The U.S. vacancy rate hit a record 13.8% in the second quarter and is expected to continue rising as prepandemic leases expire, according to data firm CoStar Group.
U.S. conversion programs place more conditions on developers than in Calgary. Chicago has moved forward with a plan to offer developers $150 million in subsidies to convert four buildings. But that program requires about one-third of the units to be set aside as affordable.
New York state this spring approved a housing package that includes a 90% tax break for office-to-residential conversions. That includes a large affordable-housing requirement, which continues even after the tax break sunsets.
A decade ago, Calgary was the North American city with the most office space per capita. Packed with energy companies, the buildings contributed heavily to tax collections that enabled the city to provide a high level of services.
That ended when energy prices nosedived. Businesses contracted, sending office vacancy rates soaring above 30%. Tax collections evaporated along with building values, forcing the city to make up the loss by collecting more tax from other commercial property.
Owners of those properties showed up to meetings “with pitchforks,” said Mahler. “They were not happy about it.”
The conversion subsidy was part of an effort to revitalize the downtown that also included an expanded convention center, which officially opened last week. Many of the developers who applied for the subsidy were locals lured by the rock-bottom price tags on office buildings, often listed by institutional owners eager to part with them.