When Does Office to Residential Conversion Stack Up?

The commercial real estate market in Canada has been booming in recent years as investors have been looking to cash in on the growing demand for office space. However, with the COVID-19 pandemic changing the way we work, some property owners are now wondering if it makes sense to convert their office space into residential units.


Although this can be a great way to steer away from underperforming assets in the ever-growing real estate market, it's not always the best option. When does it make sense to make an office-to-residential conversion and when doesn't it?


What is an office to residential conversion?


An office to residential conversion is a process of converting an existing office building into a residential property, usually apartments or condominiums. This can be done through a complete renovation of the building or by partitioning the space into smaller units.


The trend of office to residential conversions has been growing in popularity in recent years as businesses have increasingly begun to right-size or move operations entirely online. This has left many office buildings empty or underutilized, making them ripe for conversion.


There are several benefits associated with this type of development, including revitalizing neighborhoods, preserving historic buildings and creating more affordable housing. However, office to residential conversions can also present some challenges, such as opposition from local residents or business owners, zoning restrictions and the need for substantial and costly renovations.

Despite these challenges, office to residential conversions are likely to continue to grow in popularity as a way to repurpose underutilized office space and create new housing units.


The benefits of office to residential conversions


As the world of work changes, so too do the places where we work. Increasingly, office workers are finding that they can get just as much done from home as they can in a traditional office setting. This has led to a trend of converting office buildings into residential properties. There are a number of benefits to this type of conversion, including the following:


1. Increase in Property Value


One of the most obvious benefits of office to residential conversions is the increase in property value. By changing an old, outdated office building into a brand-new residential development, the value of the property will increase significantly. This is great news for investors looking to maximize return on their investment or for homeowners looking to sell their homes in the future.


2. Enhanced Neighborhood


Another benefit of office to residential conversions is the improved location that often comes with them. Older office buildings are often located in prime real estate areas, close to transportation hubs, shops, and restaurants. Redeveloping these properties into residential complexes can provide tenants with desirable locations that are close to everything they need and further attract businesses to the area.


3. Modern Amenities

Older office buildings often lack the modern amenities that today's tenants are looking for. By adapting these properties into residential, developers can add a variety of modern amenities, such as fitness centers, co-working spaces and on-site retail. These amenities can make a complex more attractive to potential tenants, resulting in higher than average occupancy rates.


4. Increased Flexibility


One of the benefits of office to residential conversions is the increased flexibility that they offer. Unlike traditional office space, converted residential units can be divided into smaller, more flexible floorplans. This can be appealing to businesses that are looking for short-term or temporary space or tenants looking for live-work spaces. In addition, building owners may lease units in converted complexes as vacation rentals or corporate housing, providing them with a steadier stream of income.


5. Sustainable Development


Office to residential conversions can also be beneficial from a sustainable development perspective. By reusing existing buildings, developers avoid the need to build new structures, which can have a negative environmental impact. Ontario Home Builders Association (OBHA) noted that on average 15,000 tons of wastage is saved from landfill for every building re-used. In addition, structures are often made more energy-efficient through conversion with the addition of features such as smart controls, green areas and optimized HVAC systems, which can help to reduce an existing building's carbon footprint.


How do you know if an office to residential conversion is the right choice for your building?


When it comes to office-to-residential conversions, there are a few key factors that need to be taken into account in order to assess the feasibility of such a project. The following three are the most critical factors:


1. Layout of the Building


When looking at office space to convert into residential, you will want to consider the layout of the building. This includes things like window placement and utilities. If the windows are placed in a way that would make it difficult to meet residential building codes, it may not be worth pursuing this option. Additionally, if the utilities are not up to par with what is required for a residential space, it may not be worth the investment to convert. Plumbing, electrical and mechanical aspects all have to be weighed up to determine whether the conversion will yield the desired return.


2. Price of Building and Conversion


Of course, you will want to consider the price of the office building itself as well as the cost of conversion on a new investment. If the building cannot be purchased reasonably in the first place, it may not be a wise investment. The same goes for the conversion – it may be unrealistic to progress this kind of project if the conversion costs are prohibitive and this will require careful consideration and professional opinion from an experienced commercial realtor.


3. Location


As with any property purchase or development project, location is key. You will want to consider things like the surrounding neighborhood, public transportation and other amenities both existing and planned, that would make the space attractive to potential tenants or purchasers. If the location is not ideal, it may be better to pursue other strategies.

Ultimately, you will want to weigh all of these factors – layout, price, and location, before deciding whether or not an office-to-residential conversion is the right choice for your property.


Things to assess prior to any conversion


All cities are constantly growing and changing and as any real estate developer knows, with change comes opportunity. One such opportunity is converting an old office building into residential units. But is this always the best course of action? Here are a few things to consider before making the decision to convert office space into a residential unit:

  • The first thing you need to consider is the current state of the office market. If office buildings are in high demand and there are low vacancy rates, then it doesn't make sense to convert an office building to residential use.

  • You also need to consider the price of the office building. If you can purchase the building at a reasonable price, then conversion may be a good option.

  • The layout of the office building is also important. The building needs to meet all the requirements for residential use according to building codes. If it cannot without significant expense, then conversion may not be possible or practical.

  • Another thing to keep in mind is the amount of work that would be required to convert the office building to residential use. If the building needs extensive renovations and massive structural changes, then it may not be worth the effort and expense. Often, the elements that add most cost to a conversion project are not entirely visible by designers upfront.

  • Finally, you need to consider the locality of the office building. If there are already many residential buildings in the area, then conversion may not be necessary. However, if the area is mostly commercial or industrial, then conversion could be a good way to add more housing options.

The process of converting an office into a residence


The process of converting an office into a residence is not as difficult as it may seem so long as the three key feasibility factors are working in your favor. The first step is to contact your local zoning department and find out if there are any restrictions on changing its usage from commercial to residential or mixed.


Once you have confirmed that you can proceed with the conversion, the next step would be to consult experienced local professionals, most notably, a designer and architect who are well versed in these types of adaptive reuse projects and have someone equally experienced with the city and planning regulations to put together a strong case for redevelopment.


Once you’ve got the necessary finance in place, it’s on with the reconstruction and there are some things specific to office conversion that need to be top of mind when designing these units…

  • Try to rely on existing features; particularly in older type offices, leaving some of the ‘industrial’ like features exposed might not necessarily be a bad thing, it can add interest and save costs on concealing them;

  • Residential properties generally need to have more natural light than an old office would supply so you’ll need to be clever with the use of windows and skylights to maximize the space;

  • Parking will be a consideration so offices with dedicated underground space will be better candidates for conversion, otherwise, some thought will need to go into how tenants or prospective buyers’ parking needs may be accommodated;

  • Ceiling heights in an older office building could be a challenge given they’re generally lower than would be required for residential units although there are some creative ways to address this.

  • The layout is key with many offices only having available habitable space around the perimeter of the building with service elements in the center.

So although there are challenges with these types of conversions, others have proved it’s indeed possible and potentially extremely lucrative. New York achieved its largest ever office to residential conversion with a 51-storey tower at One Wall Street, completed early this year and in Canada, it’s fair to say, Calgary have been leading the way with three high-profile office to residential conversions downtown.





Although Toronto is so far lagging behind in applications, we would expect to see more and more popping up as the city settles into hybrid working and starts to welcome more and more international workers who prefer to settle downtown.


How does a residential conversion impact surrounding businesses?


A residential conversion can have a number of impacts on business operations and employees, both positive and negative. On the plus side, employee morale may improve if they are able to live closer to their workplace. This could lead to reduced absenteeism and improved productivity. In addition, businesses may see reduced operating costs as a result of a decrease in the need for transportation and child care.


On the downside, however, businesses may experience an increase in noise complaints and traffic congestion. Additionally, businesses will need to be mindful of potential zoning changes that could restrict hours of operation or limit customer parking. Employees may also find themselves competing for housing with residents, which could drive up rents and make it difficult to find affordable housing close to work.


Conclusion


The bottom line is that office-to-residential conversion can be a very lucrative endeavor, but it's not without its risks. The rewards are high however with the average project costing half as much as a new build plus taking half the time to be occupied. Doing your homework and understanding the market are essential to ensuring a successful project. And, as always, talk to a professional before making any big decisions. With the right team in your corner, you can maximize your chances of turning a profit on your investment. Reach out to Private Capital Group with any questions on a conversion project and its viability in the GTA.


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