How cities can re-imagine empty downtowns

The streets of many major cities these days have a certain Twilight Zone feel: The buildings are there, but many of the people aren’t.

It’s been almost three years since the pandemic forced many people to work out of their homes, and many downtowns have yet to recover. Cities and developers are now facing a quandary: What happens to all those empty offices?

It’s a particular challenge in high-density cities with expensive real estate and a lack of affordable housing. Toronto, Calgary, New York, Chicago, San Francisco and Los Angeles are all grappling with the prospect of office space that is no longer needed.

Even though Canada is home to three cities with the lowest downtown vacancy rates in North America—Vancouver, Ottawa and Toronto—the national commercial vacancy rate ended 2022 at a high of 17.1 per cent, according to Coldwell Banker Richard Ellis (CBRE).

Downtowns in Canada are hollowing out …

National downtown vs. suburban vacancy rate

Downtown vs. suburban vacancy by major Canadian market

… especially in older, less-desirable buildings

Class A vs. B office vacancy

Adaptive reuse

But just as cities face high office vacancy rates, they also face an acute shortage of housing—especially affordable housing. The result is a mismatch in supply and demand. 

That’s where the concept of adaptive reuse—in this case, the conversion of office space into residential housing—comes in.

The economic need is clear, and the market will adapt, said Tuan Nguyen, an economist with RSM. “In the future, offices will be converted into residential properties,” he said.

Adaptive reuse offers a way not only to potentially ease the housing shortage, but also to combat climate change as developers make buildings more efficient (think HVAC systems, windows, insulation and heat retention). This trend is being further incentivized by government subsidies for energy and building envelope retrofits; the falling cost of renewable energy is spurring the trend along as well.

At first glance, this seems like the ideal solution. After all, similar recent conversions have worked. In Calgary, for example, the city council committed $100 million to support conversions. The result was the SNC Lavalin building, the first empty office building to be turned into affordable housing in Canada. Other projects are set to begin.

But it is a difficult process.

The challenges

The most significant roadblock to conversion is the physical structure of an office building. In most buildings, especially older ones, there is limited natural lighting, a single set of bathrooms at the centre of the building, centralized electrical wiring and switches, and a floorplate that can make repurposing the space difficult. These physical limitations make conversions expensive and produce a limited number of apartments.

Added to the challenges of the physical space is the difficulty in obtaining permits and overcoming restrictive zoning laws. Land designated for commercial use might require an arduous process to rezone for residential. 

For all of these reasons, it can take years and a lot of money to convert an office building into apartments.

Looking ahead

Still, there are some cities that have succeeded. In addition to the SNC Lavalin building in Calgary, there is the former Canada Life building in Montreal and the Millennium in Chicago, among a host of others scattered throughout North America. Of note is the financial district in New York that benefited from government incentives to convert buildings as firms moved out of the area.

While more successful conversions will drive more market focus toward this type of adaptive reuse, the result is not always going to lead to affordable housing. The success of the project depends on the developer, the location and the project financials. Market costs and dynamics, as well as zoning laws, can make adaptive reuse too expensive.

The takeaway

These barriers all point to the growing need for increased public-private partnerships between municipalities and developers, to help ease the housing shortage and address a surge in office vacancies that is not going away. Municipalities and developers have an opportunity to be economic catalysts to ease zoning laws and create easier pathways for adaptive reuse projects.

As these conversions become more common, the market may be encouraged to pursue similar projects and to view buildings as ever-adapting solutions to a rapidly changing world.