Office Real Estate Struggles in 2023

Office real estate continues to struggle in markets across the country as employers wrestle with hybrid work models, particularly in the downtown core, according to the RE/MAX 2023 Commercial Real Estate Report. RE/MAX examined 12 commercial real estate markets from coast to coast, and found that reducing their physical footprint to reduce costs is top of mind with some companies, while others are looking to incentivize employees return by creating a more social component within the workplace.

Repurposing of office real estate (Class B and C buildings) to residential is either planned or already underway in major Canadian centres holds key to healthy, vibrant downtown cores, with 50 per cent of markets surveyed (six out of 12), reporting conversion activity in this growing segment. The trend is supported by high demand for residential housing and a critical inventory shortage.

Although not all buildings will be ideally suited for retrofit, some major centres are providing incentives to encourage conversion to residential. Calgary introduced the Downtown Calgary Development Incentive Plan in 2021 which provides a $75-per-square-foot subsidy to developers for converting offices to residential, with 10 buildings approved to date. By way of conversion, more than 1,200 new homes will be created and approximately one million square feet of commercial office space will be eliminated, breathing new life into Calgary’s downtown core. There are a growing number of buildings targeted for conversion in various stages of planning and development in Calgary, Halifax, Ottawa, London, Toronto and Winnipeg.

Commercial office real estate is experiencing a transformational shift in the aftermath of the pandemic. Downtown cores were virtually decimated by Covid restrictions and have yet to come back to life in many Canadian centres. The conversion programs now underway ensure that our city centres remain vibrant in the future, restoring vital foot traffic that is the lifeblood of the country’s core urban areas. The retrofit and renovation activity not only brings desperately needed residential product online, but it also supports the surrounding retail shops and restaurants, transit systems, and the overall health of our downtown neighbourhoods.

The most significant holdback is the red tape that currently exists in regard to zoning amendments, applications and approvals at local and provincial government levels. With housing supply at critical levels and an immigration commitment of at least 800,000 new Canadians over the next two years, governments must be prepared to act quickly. We need partners in our city planning offices to streamline the applications and approvals process in a timely manner – months, not years – to bring these properties to market.

Canadian Homebuilders Association (CHBA) recently completed its Municipal Benchmarking Study (prepared by Altus Group) that identified the estimated average approval timeline by municipality. Toronto ranked last at 32 months, followed by Hamilton (23 months), Burnaby (21 months) and Halifax (21 months), and Vancouver (15) months – Burnaby and Halifax timelines have declined, while the others continue to rise.

And notably, RE/MAX found there’s a growing demand for land with approvals in place.