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What Downtown Office Developers Can Learn From Canada’s Energy Capital

At long last, COVID-19 may finally be on its way out, but the virus’ impact is still reverberating in downtown centers. Now that remote and hybrid work seems officially here to stay, the downtowns that had previously relied on bustling office activity have a choice to make: beg for businesses to come back in full swing (whether that be through tax abatements or generous incentive programs to keep companies anchored within city limits), or, like one Canadian city, pivot and completely reimagine the city’s layout. 

City planners have a history of overstocking office buildings in central business districts, and large office spaces were a necessity, if not a status symbol, for most corporations. But that simply hasn’t been enough to shield a city center from being vulnerable to economic shockwaves, especially if that shockwave is a virus that completely dismantled the way people work. An office glut plus a cultural shift away from coming to the office five days a week equals property investors possibly sitting on big losses

With significantly less people in the office every day, businesses are frequently choosing smaller offices when their leases are up for renewal (if they’re not abandoning the office altogether), leaving landlords with tons of empty space. Many downtowns have subsequently turned into “ghost towns,” and the one downtown that’s feeling the vacancy pinch the most can be found in Alberta, Canada. The amount of empty square footage in the city of Calgary is staggeringly high. For a city of 1.3 million people, Calgary has over 45 million square feet of office space. To put that ratio into perspective, that’s double the office footprint of Canada’s most populous city, Toronto. Calgary has the highest per capita square footage of office space in all of North America, and as of now, 30 percent of that breadth (approximately 12 million square feet) sits vacant.

Calgary’s monoculture of office buildings is a relic from the oil and gas boom of the 1970s. The demand for industry office buildings was so outsized that it pushed prices out of reach for other asset classes. Cut to today, where Calgary is not only scrambling to recover from the pandemic and the excess office real estate from a bygone era, it’s still healing from the oil market crash that wiped out downtown activity in 2014. Activity isn’t nearly as comatose as it used to be, but it’s still woefully low. Avison Young’s Third Quarter 2022 Calgary Office Market Report shows that the overall downtown vacancy rate is hovering around 27.5 percent.

An overt lack of residential development is one of the main contributors to Calgary’s empty streets, according to the city of Calgary’s Director of Downtown Strategy, Thom Mahler. “Calgary was purely designed around accommodating people getting to and from work, the original construct suffered from a lack of placemaking,” he said. Mahler told me that Calgary wasn’t designed to be intentionally welcoming, whether that be to attract tourists in the downtown area or to offer public amenities for locals. 

The lack of diversification at Calgary’s downtown core is really felt in the city’s tax base, and Calgary’s real estate makeup is not exactly a recipe for success since the city is strongly reliant on the tax value of downtown office buildings. Property values everywhere took a hit when the pandemic emerged, but commercial property values in Calgary had fallen so far that the suddenly defunct downtown, as Mahler puts it, sent ‘shockwaves’ throughout the entire tax system. “People were so used to having this massive office core that basically subsidized the city and kept taxes low. So when COVID caused us to lose 16 billion dollars’ worth of property values, there were pitchforks at City Hall to keep from raising taxes,” said Mahler, before he had to chuckle. “But they didn’t want us to cut city services.”

As Canada’s energy capital that’s deeply entrenched in the sale of oil, Calgary is a boom-and-bust economy. So even when the market fell and the downtown was emptied almost a decade ago, not much had changed, as there was a pervasive belief that the pendulum would quickly swing back. Office buildings in Calgary are usually owned by pension funds and real estate trusts, which are very reluctant and resistant to steer the course. Mahler explained that these building owners tend to wait a few years and see what’s going to happen, but their attitude completely flipped when the devastation from COVID-19 was felt worldwide. “That’s when owners realized that Calgary’s situation was even worse compared to the rest of the world,” Mahler added. 

The city realized that all the services it provides were really just catered to office employees coming in to work for the day before they turned around and went on their merry way home. Streets, parks, transit systems, even Calgary’s pedestrian skywalk was designed for getting people in and out to do their jobs. That “Eureka” moment coupled with the pandemic-induced decline of its central business district prompted the city to launch a 10-year plan to revitalize Calgary’s downtown core.

With the primary goal of transforming downtown Calgary into a thriving city neighborhood that doesn’t shut down at 5 p.m. when the offices close, the city of Calgary is reportedly planning to invest $1 billion CAD ($721 million USD at the time of the announcement) to redevelop and diversify downtown Calgary’s real estate. The plan is structured in 3 phases: Phase 1 emphasizes investment in the private sector with $100 million CAD to convert existing office stock into other uses (residential developments to start, followed by post-secondary education). Phase 2 is the creation of a capital spending program geared towards upgrading the look and feel of the downtown cityscape (with the goal of attracting new residential tenants and tech talent). Finally, Phase 3 is a wave of investments towards public safety and community culture programs that will support existing residences and businesses. 

It’s clear that downtown Calgary is in desperate need of a residential presence in order to spark economic growth, which is exactly why Calgary is leaning hard into office-to-housing conversions. Converting these properties increases the supply of housing while decreasing the excess supply of office space, making the remaining space more valuable. So as part of Phase 1, the city of Calgary is offering a grant for office owners to convert their buildings into residential use. The grant offers $75 CAD per square foot for a conversion, but it caps at $10 million CAD per property (unless the building owner is granted council approval for additional funding). If you do the math, the building may only reach up to 135,000 square feet in size in order to receive the full $75 CAD per square foot, which means that larger buildings are looking at a smaller subsidy per square foot. Still, Calgary’s investment is aggressive compared to other cities, so much so that the city has garnered international attention for its conversion efforts. 

The revitalization plan was first approved in early April of last year, but when I spoke with Mahler this week, he informed me that the city council has officially funded about $450 million CAD of the projected $1 billion CAD expenditure for Phase 1 in their 4-year budget plan. Now, converting just one office building is a huge undertaking of planning, building, and, of course, funding. As of right now, several office towers in downtown Calgary are currently undergoing conversions to either residential or mixed-use developments. One of those conversions is already up and running. A former office building that sat vacant for years reopened as “Neoma,” a low-income housing development for vulnerable Calgarians, last October.

Formerly known as “Sierra Place,” a cubicle farm for a petroleum company, Neoma now hosts 82 affordable apartment units, complete with amenities and family shelter supports. Source: HomeSpace Society

The most amazing part about Calgary’s redevelopment, aside from the sheer scale of it, was the fact that there was very little opposition from the city itself to dive into conversion projects and fast-track development with ample funding. “Our city council is relatively new, they were elected a year ago,” explained Mahler. “And what’s so great about them is that they’re eager. You often hear that conversions are too costly, but in Calgary, the people who are holding the purse strings are the ones pushing for amenities and public spaces and to redesign the downtown to make room for housing. It just goes to show that if you’re going to expect the private sector to work fast, the city needs to be just as motivated.” 

So far, the redevelopment efforts seem to be paying off, even though the redevelopment plan is technically in its toddler years. Recent data from CBRE shows not only did office vacancy rates in downtown Calgary drop by 80 basis points since the previous quarter, but Q3 was downtown Calgary’s best quarter to date since the 2014 oil crash. Additionally, sublease vacancy has fallen to its lowest point in a decade. The city-wide office market has already witnessed four consecutive quarters of positive absorption activity, with positive absorption of about 300,000 square feet.

Calgary is a city with a long-term ambition of creating a mixed-use downtown with a significant residential presence. What’s more, its local government shares that ambition, so bureaucratic hurdles have been substantially eased. The trend of office-to-residential conversions has taken off in multiple cities since the pandemic began, but in terms of enthusiasm from the public sector, conversions in other downtowns aren’t happening at the same pace as conversions in Calgary. So far, the council has approved one-quarter of the Greater Downtown redevelopment plan, so we’ll be keeping an eye on how Calgary’s redevelopment moves forward. For now, Calgary’s redevelopment plan is a perfect case study of how government can tip the scales of real estate.

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