A new JLL report asserts office-to-residential conversions in the Greater Toronto Area could be a boon for both sectors of the city’s real estate market - and calls on the city to remove one impediment to these types of projects.

According to the Less Office, More Housing report, converting vacant or under-tenanted class-B and C office space into residential units would lower the ongoing high vacancy rate in the office sector — thereby bolstering its fundamentals as a desirable asset class for property owners — and boost chronically low inventory in the housing sector.

JLL’s used its database of over 1,500 office buildings in Toronto and overlaid it upon the City of Toronto’s public database of proposed infill sites. This identified 73 buildings, spanning over nine million square feet of office space, that could offer potential for office-to-residential conversions.

“It’s a very safe assumption to say that when office vacancy is over 18 per cent, and will probably keep growing, at least in the short term, developers probably don’t want to build new office because market conditions aren’t ripe,” Scott Figler, JLL’s national research director for Canada, told RENX Homes.

“We’re not seeing any new ground-breaking or anyone actively trying to build new office.”

By JLL’s analysis, those 73 buildings could, if converted, yield 51,000 new residential units in a rapidly growing city beset by a cost of living crisis.

“We’re seeing this bifurcation in the office market, where quality (class-A) buildings are performing well and there’s a lot of leasing, but underperforming, lower-grade buildings . . . (face) a very hard future,” Figler continued.

Toronto to review restrictive office bylaw

The City of Toronto is also reviewing an existing bylaw requiring office space at infill sites be replaced. Figler credits the city’s willingness to review the bylaw, which he called an impediment to conversions.

That’s why JLL chose to release its report now, he added: with the bylaw under review, JLL’s hard numbers could influence the outcome.

“We’re offering a policy solution that allows the city to get in front of this,” he said. “What holds up redevelopment is, if you want to demolish an office building with 100,000 square feet of office and build 500 residential units, you’re forced by the city to add 100,000 square feet of office and that is probably going to make it value-negative right now."

Challenging building economics are another major factor - perhaps an even more significant hurdle than the bylaw. Toronto-area developers have long protested the amount of red tape and long approval and permitting delays their projects are subjected to — which includes everything from a bevy of impact studies to costly municipal taxes and fees.

But Toronto’s city council has also been proactive in rectifying some of those procedural delays, most notably through as-of-right zoning on major avenues. Fidler asserted the same prioritization should apply to conversions.

It could, moreover, entice the long-circumspect developer community to enter the fold as stakeholders alongside the city.

“Developers are dealing with more expensive construction loans than they were a few years ago; there’s a labour shortage and the cost of materials has gone up, so there are other factors at play,” Figler said. “The city can’t control things like that and interest rates, but it can make zoning more flexible so, on some of these conversions, developers can just build, say, rental units.

“That’s certainly enough to move forward with.”

Housing crisis projected to worsen

JLL’s report determined the purpose-built rental market will peak next year with 6,006 completed units, while condos will top out in 2026 at 24,080 units. However, 2027 will mark the beginning of a steep decline — a consequence of delayed and aborted launches going back a couple of years, when interest rates began rising.

“Over 60 per cent of units under construction are condominium units,” JLL’s report states. “These units are marketed to sellers and therefore are highly dependent on mortgage financing costs. If a critical mass of purchasers do not purchase units, the projects will not move forward.

"We are already seeing a sharp drop in new condo listings.”

The report also noted the issuance of housing permits declined by 18 per cent this year from 2023, and economic headwinds have “undermined the economic feasibility of many new projects.”

According to the latest data from the Canada Mortgage and Housing Corporation. housing starts in the GTA declined by 64 per cent year-over-year in September to 1,733 from 4,875.

That means home prices and rental rates could rise dramatically, worsening the crisis.

Conversions could bolster rental supply

Converting surplus office space into residential units would best serve the primary rental market, although not exclusively.

“What the city really needs is rental, but I don’t want to say they should all be rentals, because the biggest source of rental housing in Toronto comes from the secondary rental market, which are condos people purchase,” Figler said.

Entitlement inducements for developers aren’t enough to break ground at any of the 73 sites JLL identified, though — and that’s if the city eases strictures. 

But according to Mark Cohen, managing partner at TCS Marketing Systems, developers are indeed raring to go. In light of recent tailwinds, namely Bank of Canada rate cuts with more seemingly in the offing, he expects developers will soon resume launches.

“Ultimately, there’s a shortage of housing, especially affordable housing,” Cohen said. “If commercial properties can be converted into residential at a lower cost base, it’s an opportunity for developers to create new rental housing, missing middle housing, and affordable options for people to not only rent, but to buy.”