Why Calgary's betting $450M it can convince owners of empty towers to change

As office tower vacancies in downtown Calgary exceed 30 per cent and the resulting hole in municipal tax revenues increases along with it, the city has formally outlined its vision for renewal and revitalization in the core.

The 10-year, $1-billion plan calls for improvements to everything from cycling and pedestrian infrastructure, to better green-space connections, topreviously announced funding for the Arts Commons expansion, the BMO Centre and maybe even that troublesome and currently on hold arena deal.

Almost half of that money, however, will go toward eliminating hopefully a good chunk of the vacant office space by converting it to residential or other uses. The city hopes its financial carrot will be enough to spur owners and developers to take a leap that almost none of them have taken on their own.

It's a complex gamble.

As the city works to iron out the details of the funding, it's worth asking who owns Calgary's downtown and why public dollars should be used to incentivize a change in corporate business plans?To what end?

The answers, like the sprawling ambition of the downtown plan, are not so easy to come by.

Who owns what

There is no public list of who owns what in Calgary's asset-rich downtown and the information is difficult to track down without the right access or ability to pay for hundreds of title searches. But there's no doubt about the financial heft of most of the owners.

According to CBRE, a commercial real estate firm that also provides research on markets, the owners can be broken down into three categories: institutional, which owns 68 per cent of available office space by square foot,Real Estate Investment Trusts (REITs), which account for 18 per cent, and private owners, who control 14 per cent.

The largest players when it comes to institutional owners are pension funds and insurance companies.

Poring over public financial statements and public disclosures of ownership reveals some of those big owners, including the B.C. Investment Management Corporation (BCI), which handles public pension funds, and its corporate real estate company,Quadreal.

Telus Pension Master Trust became a sole owner of multiple properties downtown after its partner, Strategic Group, went into receivership.

Click on the icons in the map below to see who owns or is thought to own various downtown properties and which ones might be redeveloped first. If you can helphelp determine the ownership of a buildingor notice anything that's wrong, we'd love to hear from you: please email drew.anderson@cbc.ca with the building address and ownership.

There are big property players, including Brookfield and Oxford, and significant local enterprises, including Aspen Properties, which is backed by an undisclosed pension partner. Allied Properties, a REIT with over 200 properties across the country, is also a major player.

BCI alone has $25.5 billion worth of real estate assets under its management across Canada. Brookfield, the parent company of Brookfield Properties, has $210 billion worth of real estate assets under management across the world.

With soaring vacancies and hefty pocket books, why aren't those owners looking to diversify their holdings?

What we're talking about

First, it's important to clarify what it is, exactly, that money will go toward.

Over the course of a decade, the city intends to spend $450 million on incentives to convert office towers for other uses, fill that space or simply tear it down. In all, according to those who advised on the plan, the ultimate goal is to remove six million square feet of downtown office space from the market in order to trim the excess.

Calgary city council recently approved the first $45 million of that expenditure, with $5.5 million earmarked for the first project an affordable housing conversion of Sierra Place on Seventh Avenue S.W. and says the rest of the $450 million would be dependent on funds from other levels of government.

Trent Edwards, the chief operating officer of Brookfield Residential in Alberta and co-chair of Calgary Economic Development's Real Estate Sector Advisory Committee (RESAC), which advised the city, refers to it as a three-legged stool.

"So one is fill. Two is convert or adapt to other uses whether that's a university, student housing, museum, you name it, assisted living, affordable living. And then the third piece is demolition," he said.

A spokesperson for the city said the incentive would only support demolition if it was "tied to the commitment of a new residential development or a neighbourhood amenity such as a park or public space."

Calgary has long boasted the most head offices per capita in Canada, and has office space equivalent to a city of over four million people, according to Calgary Economic Development. With the majority of that based on oil and gas, there is significant space that likely won't be filled anytime soon, or ever again.

"These building owners will just sit there waiting, and what that does obviously is it continues to create a race to the bottom on the rent rates," said Edwards.

The reason why boils down to cost, risk and long-term outlooks.

Why don't the owners do it?

The bottom line, as with most things in business, is the bottom line.

Converting a building to another use is a complicated and expensive undertaking with no guarantee of returns at the end of the process. In places like New York or London or even Toronto, the high cost of housing incentivizes owners to convert, but those market forces aren't at play in downtown Calgary.

"It would be very, very difficult to do if there wasn't some sort of, you know, funding from somewhere, it'd be very tough to do," said Brett Koroluk, who oversees the Calgary portfolio for Slate Asset Management.

He says you have to spend two or three times the amount you would spend to build out an office space in order to convert a tower to residential use and require a return on investment to match.

The day council approved the downtown plan and initial spending of $200 million to kickstart it, Scott Hutcheson, the executive chair of Aspen Properties, told councillors that downtown was a "no fly zone" for that previously mentioned institutional capital.

"The pension funds, and the large real estate investors in that community that has typically owned the assets in the downtown, is neither interested in investing in our city core with new equity, nor is new debt available to our market."

In other words, any push to bring more life and more people to downtown isn't going to happen if the city waits for the owners to take the leap.

To that end, the city is jumping in and surveying what's possible, even before it brings owners on board.

What could happen

The city has touted an undisclosed list of 28 buildings representing about three million square feet of space that it says are good candidates for conversion, but in reality only 25 per cent of those were actually well suited after an analysis conducted for the city by design firm Gensler.

"They represent approximately the first five years of construction and will impact 3,000 to 4,000 people who'll be able to call the downtown home," said Tamarisk Saunders-Davies, marketing and communications director for Gensler in an email.

Gensler says it is adding more buildings to its study, but that initial batch was largely focused on '70s-era towers in the west end.

A list of some of the ideal candidates obtained by CBC News includes three properties owned by Slate Asset Management.

"It was interesting, because I'm sure there was some thought and detail put into that list, but those wouldn't be the prime candidates that we would choose to convert," said Slate's Koroluk.

"But, you know, that doesn't mean there's not a good business case from whoever put this list together to do that."

Returning to his previous comments on the cost and complexity of these projects, he says they'd be open to looking at the possibilities once public funding options are finalized.

Edwards, who helped advise the city through RESAC, says the exercise was merely to see what could be possible, and didn't even consider the cost structure of converting the buildings.

The process to change a tower involves poring over myriad factors like the floor plate size, the form of the structure, the location and whether there are amenities nearby. Gensler also looked at buildings that had vacancy rates higher than 50 per cent.

"These weren't conversations with the land owners of those buildings," said Edwards. "This was just our assessment of what's the art of the possible."

In order to turn around downtown's fortunes, and the city's with it, it's going to take a lot of possibles becoming realities.

Risks and rewards

It's not just the money being spent on possible conversions that's required to reverse downtown's downturn. Transit, bike lanes, public spaces and public improvements all play a role in the city's plan.

So does planning and policy and nudges in the right direction to ensure the area doesn't deteriorate. Many say leveraging the city's investment to get federal and provincial dollars flowing will be key.

Trying to get more people living downtown and providing amenities in order to attract and retain them, however, is a chicken and egg paradox.

"What's happening normally in downtown areas is that people are willing to pay a premium to live in downtown areas, and to trade living space in order to live in the downtown area, because of all the activities that take place in the downtown area. So this is a trade off that takes place," said Pierre Fillion, professor emeritus in the University of Waterloo's school of planning.

Once you take away one or more of the elements that make a downtown worth living in, the dominoes can start to topple.

So if you build it, will the people come? Or will Calgary continue to sprawl outward with little incentive for people to fill the void in the city's downtown?

Almost everyone agrees that doing nothing is not an option. The city has a hole in its tax base that stretches into the hundreds of millions money that has to come from businesses outside of the core.

Not to mention the prospect of a downtown left to rot, losing amenities, people, safety and more. Public dollars would help retrofit buildings for better environmental efficiency and prevent more demolitions clogging up landfills benefits that go beyond the corporate bottom line.

"I don't think anyone, or very few people, will argue the fact that there is a problem with downtown Calgary," said Koroluk.

"I think a lot of people will, you know, butt heads on what the solution is. But I think I'd be hard pressed to find anyone that disagrees with the fact that that would be money well spent. Most people acknowledge that great cities have to have great downtowns. And we don't have one of those right now, in my opinion."