Key Considerations when Repurposing your Commercial Office Space

While many people have already started transitioning back to their downtown office, it is clear through my commute that many offices remain closed, or like us, are only using the office for occasional use. There will be a time when we get back to normal – whatever that normal may be, but for anyone who owns commercial real estate assets and are looking to repurpose their office spaces there are several factors to be considered before proceeding with the renovation project. An Avison Young Q4 2020 Report put downtown office vacancy at a little less than 27%. This report was no doubt at the height of the shutdown, and vacancy rates have likely increased due to business casualties from COVID and its economic impact as a result of 2nd and 3rd waves of the pandemic. Unemployment in the province is at 9.1% in an already battered economy still trying to recover from stagnant energy prices. [1]

Over the last couple of years, I have read many comments and seen press articles around the viability of repurposing vacant office buildings into other uses, most commonly residential. There appeared to be a general unwillingness in owners wanting to repurpose as we saw vacancy rates initially drop, but what we did see was owners and managers investing in office upgrades to common areas and amenities. Although we will return to our offices, the vacancy rate will no doubt be higher despite attempts to improve asset classes. COVID has likely set us back and the recovery will be long and challenging.

In my experience, not every office renovation is physically or financially feasible, but there are a number of key factors owners may consider to make this a viable option.

Feasibility Study. Engage in an early design and cost review of the project to ensure that the building is suitable for conversion to the desired use and that estimated cost is within budget. Should the building be unsuitable for the planned use or the conversion be cost prohibitive, then at this early stage alternatives can be considered. Prepare a realistic project budget that acknowledges the value of the existing structure, demolition and renovation costs. Ensure a healthy contingency is included for those ‘unknowns’.

Existing condition. It is imperative owners invest in professional advice around the existing structure. Have a firm undertake an intrusive investigation and establish the buildings condition. Attempting to save a few dollars here may result in the costly replacement of an element part of the way through construction. Choose architects and engineers based on their experience of this type of work, not because they are the lowest fee.

Design. Assemble a design team with experience. An efficient design is key to the success of the project and an architects experience from previous renovations is vital in avoiding pitfalls. Planning suite and maximizing leasable space layouts while constrained by an existing structure is a challenge.

Cost Control/Budgeting. Early on, create and implement a cost management framework utilizing a firm of professional Quantity Surveyors that will provide regular updates on cost and risk through the design and engineering process. A cost consultant can help establish a budget before any work is undertaken and then work with the design team through all stages of design to ensure the projects remains viable. Value engineering exercises aim to recommend alternative design solutions that keep the budget and project on track. Contingency is an essential part of this budget. Depending on the age of the building you are about to deal with every building permit and works ever issued or undertaken on this building. There will be many unknowns before and during design and during construction. Contingency isn’t as simple as just applying a percentage to a budget. There are many factors to be considered and a QS will help with this.

Contracts. There are countless benefits and risks associated with different types and forms of contracts. The important thing is to ensure you use a good form of contract. Poor procurement and lack of robust contract terms does not go well with a complicated renovation.

Schedule. Invest some time and money in a professionally prepared schedule and monitor it through the build. A renovation is a complicated project with many moving parts. A scheduler will need to understand the project including the complexity of dealing with an existing structure.

The City of Calgary recently announced their $200MM budget that will primarily focus on reinvigorating the downtown core. Of this, $45MM is being made available to convert unused offices into alternative uses such as affordable residential apartments. No city in Canada needs this form of investment more than Calgary. How this will be distributed will no doubt follow. The City has identified 28 properties suitable for conversion with a $10MM cap per project. Clearly not all properties will qualify though this assistance could be the difference in making a project viable.

BTY has been involved with the Calgary market for over 40 years, delivering a full range of services tailored to suit individual projects and developers including cost estimates, construction loan monitoring and project management. For property owners and designers who are seeking advice, we also offer a broad range of services to fulfill your needs.

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With nearly 20 years of industry experience, Alistair Dearie has considerable experience in advising Banks and Lenders on construction risks. Based out of our Calgary office, Alistair has monitored and advised on over $1BM worth of construction loans and can help you with any stage of your renovation project. Please reach out to Alistair for more information.

[1] https://economicdashboard.alberta.ca/Unemployment