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With the high rate of office vacancy in downtown Calgary, could there be an opportunity to convert some of Calgary's office space into alternate uses such as residential, hotel, or education? This question has recently surfaced in our Forum and around town.
It's well known that Calgary's downtown office vacancy rate has been rising, and recently broke the 20 percent mark. This is the highest it's been since the early 1980s, and another 2.4 million square feet of office space is still under construction, so the rate could go higher still. A recent report from real estate firm Cushman and Wakefield predicts that the downtown Class A vacancy rate will rise as high as 27 percent.
Class C office space, the lowest grade available, actually has a lower vacancy rate than Class A and Class B, but it's the Class C space that we'll consider today. If the vacancy rate stays high for an extended period of time, companies will usually take advantage of lower lease rates and move into higher class buildings, thus leaving the Class C buildings highly vacant or empty.
A recent sale of an older building at 622 5th Avenue SW shows the cost of the sale at $178 per square foot.
At this price, could it be cost effective to sell the space as base building, loft-style space? Cost-wise, perhaps not right now, but it may not be far off.
Another question is whether there is a market for people wanting base building spaces for residential uses? If someone could purchase say, a 1,200-square-foot unfinished space for around $250,000 right in the downtown core, there may be a niche market for that.
Another recent sale of an older building was at 505 2nd Street SW, which sold for $188.00 per square foot.
Here are a couple more examples of older buildings in Calgary that might be worth less than $200.00 per square foot, using recent city tax assessments and building square footage to get an approximation of cost.
The question then becomes, what is the magic number that makes a conversion viable? There are a few factors. The cost per square foot is obvious and foremost, but there is also a speculative factor bout how long, and how much of the owner's office space will sit empty? There are also construction costs, as there would have to be the gutting and clearing of the space back to base building, before walls delineating the interior properties could be built. Other costs would include electrical and plumbing for each unit.
The conditions have to be right, and it varies from city to city. Pittsburgh, for example, has seen a number of office to residential conversions even though their office vacancy rate is much lower than Calgary's. In Pittsburgh's case it's the fact that Class C space just isn't leasing well, which is something that could very easily happen in Calgary.
The cost per square foot on the former Government Services Building pictured above was very low, at $16.00 per square foot. While this is far lower than buildings in Calgary, the building was in bad need of repair and the cost per square foot of housing in Pittsburgh is cheaper than Calgary. Calgary's opportunity probably lies somewhere in the middle of today's Calgary costs and the costs we see in a city like Pittsburgh.
Stay tuned for more discussion on this topic as we follow the Calgary office space market, also check our forum related thread on this topic.
