The challenges of converting commercial real estate properties into residential

To address Canada’s ongoing housing crisis, the notion of converting commercial real estate properties into residential often emerges as a potential solution. The reality is that rezoning from commercial to residential use is a complex process involving municipal approvals and public consultations.

In this article, STAY Magazine explores the primary reasons why such conversions are not as simple as they might appear, with acknowledgements to Brian Flood, EVP and practice leader of hospitality and gaming at Cushman & Wakefield for his insights and assistance.

Zoning and regulatory hurdles

One of the most significant obstacles is zoning. Commercial properties are often located in areas zoned for business activities, not residential living. Changing the zoning designation of a property requires navigating through complex municipal regulations and often involves lengthy public consultations and hearings. According to the Canada Mortgage and Housing Corporation (CMHC), ​“Zoning by-laws regulate the use, size, height, density, and location of buildings on properties.”

Another major challenge occurs when the municipal infrastructure is not in place for residential such as city services, schools and parks etc.

Residential buildings must comply with a different set of building codes than commercial properties. These include requirements for fire safety, ventilation, insulation, and other health and safety standards that may necessitate substantial modifications to the structure. The Government of Canada notes that ​“The National Building Code of Canada sets out technical provisions for the design and construction of new buildings.”

Structural and design constraints

Commercial buildings are typically designed with different purposes in mind. Office buildings, for example, have open floor plans and large spaces that do not easily convert into the smaller, segmented spaces required for residential units. Retrofitting these spaces to include kitchens, bathrooms, and other essential amenities can be expensive and complex.

Residential buildings require a different configuration of plumbing and electrical systems. Commercial buildings may not have the infrastructure to support the needs of multiple residential units, necessitating extensive rewiring, new plumbing, and potentially even structural reinforcement to support these changes.

Economic considerations

The costs associated with converting a commercial property to residential use can be substantial. This includes not only the physical renovation costs but also potential legal fees, the expense of navigating regulatory requirements, and the cost of potentially prolonged vacancy during the conversion process. The financial burden often outweighs the potential returns on investment, making such projects economically unfeasible. As highlighted in RBC’s Building Blocks: Addressing Canada’s Housing Crisis with Innovation and Prefabricated Construction report: While there is growing interest in repurposing commercial spaces, the financial challenges remain a significant barrier. The cost of conversion often exceeds the economic benefits, particularly in areas with low residential demand.

The location of many commercial properties may not align with residential demand. For instance, office buildings in central business districts may not attract families looking for homes with access to schools, parks, and other residential amenities. This mismatch can affect the desirability and, consequently, the financial success of such conversions.

Environmental and community impact

Older commercial buildings may contain hazardous materials such as asbestos or lead paint, which pose environmental and health risks during renovation. Properly managing these materials adds another layer of complexity and cost.

Local communities may resist the conversion of commercial spaces into residential units. Concerns about increased traffic, changes in neighbourhood character, and the strain on local infrastructure and services can lead to opposition, complicating and delaying projects.

Legal and insurance issues

Liability and Insurance: Converting a commercial property to residential use can raise new liability and insurance issues. Residential properties have different insurance requirements, and the transition can complicate matters, particularly if there are structural changes involved that might impact the building’s safety and integrity.

Tenant Rights and Leasing Laws: The legal landscape governing residential properties is markedly different from that of commercial properties. Ensuring compliance with residential tenancy laws, including issues like rent control and tenant protections.

While the conversion of commercial properties into residential units offers a potential avenue for addressing housing shortages, the myriad of challenges involved make it a far from straightforward solution. From regulatory and structural hurdles to economic and environmental considerations, the process is fraught with difficulties that must be carefully navigated. For stakeholders in the hotel and broader commercial real estate industry, understanding these challenges is crucial for assessing the feasibility and potential success of such ventures.

Examples of conversions:

Canada has seen numerous conversions of commercial properties into residential spaces, including hotels. Following are some notable examples.

Calgary conversions: Calgary has been at the forefront of office-to-residential conversions, driven by its downtown revitalization efforts, including:

• Dominion Centre: This project by Alston Properties and Slate Asset Management will convert nearly 100,000 square feet of office space into 132 homes, with a quarter of the units offered at affordable rates.

• Palliser One: Aspen Properties’ project will more than double its housing capacity, adding 395 homes to downtown Calgary. Palliser One is a 27-storey, Class B office building located on 9^th Avenue SW at 1^st Street SE, at the foot of the Calgary Tower.

• Hotel Conversion at 8334 Avenue S.W.: Originally planned as an office-to-residential conversion, this project has been revised to convert the building into a long-stay Element Hotel by Westin with 226 suites (Construct Connect) (LiveWire Calgary).

Toronto conversions: As of 2024, several historic buildings in Toronto are being converted into mixed-use residential and hotel developments that preserve heritage elements while incorporating modern amenities and affordable housing options.

• The Waterworks Building: This historic building in Toronto’s King West neighbourhood was converted from a former utility building into a mixed-use development, including residential units. Waterworks is a hybrid, mixed-use space that rehabilitates, conserves, and expands an industrial heritage site through the integration of diverse programs – not only supporting the life of its residents, but the greater community and urban experience. The design combines food-focused retail, a fully serviced YMCA with extensive social facilities dedicated to health and wellness, a mid-rise condominium with family-oriented dwellings, including affordable housing, and an existing youth shelter. The combination of these diverse programmatic elements breaks down socioeconomic barriers, catalyzing and activating the St. Andrew’s Playground neighbourhood, according to architects Diamond Schmitt. Waterworks received the 2024 CHBA National Award for Housing Excellence.

• Palace Arms Hotel: One of Toronto’s oldest landmarks is being redeveloped into a mixed-use residential development. The redevelopment plans include a 14-storey tower with 219 rental units, including a mix of one‑, two‑, and three-bedroom suites, as well as live/​work suites and affordable studio units. The developers intend to conserve the building’s original heritage elements, such as the brick masonry, window openings, and roof lines, maintaining the architectural integrity of the structure. The project also features modern amenities like a fitness facility, co-working space, social room, yoga studio, and a rooftop patio.

• The Bond Place Hotel: According to ConstructConnect, the City of Toronto purchased the Bond Hotel property, located at 65 Dundas St. E. in September 2022. The existing building is being renovated and will include homes for a range of incomes, including some deeply affordable homes with supports and studio and one-bedroom apartments with a private bathroom and kitchenette. At least 15 per cent of the apartments will be accessible, with washrooms that have a roll-in shower, vanity, toilet area and grab bars and barrier-free paths throughout the suite.

Montréal conversions: Montréal has also seen significant conversions, particularly in the hotel sector:

• Former Delta Centre-Ville Hotel Conversion: In 2013, this project transformed the former 711-room, 33-story Delta Centre-Ville Hotel in downtown Montréal into the Evo Student Residence, an upscale student housing tower.

• Former Hotel de La Montagne: Located near downtown Montréal, the hotel has been repurposed as part of a mixed-use development that includes residential apartments, a hotel, retail spaces, and other amenities. The development, built on the former site of the Hotel de La Montagne, features the Four Seasons Hotel Montréal, which includes 166 hotel rooms, a restaurant, a bar, a spa, and 18 luxury residences. This mixed-use complex is located at the corner of Rue De La Montagne and Rue Sainte-Catherine Ouest, next to the expanded Ogilvy Store in downtown Montréal. The development also includes a high-rise condominium, and additional retail and office spaces, is serviced by seven levels of underground parking. It represents a collaboration between Holt Renfrew, Whittington Properties, and CarbonLeo, forming a significant redevelopment project in downtown Montréal.

• Former Manoir LaFontaine: The former Manoir Lafontaine, located in the Plateau-Mont-Royal area of Montréal, has been transformed into affordable housing units. This project was led by the non-profit organization Interloge, which specializes in acquiring and converting buildings into social housing to keep rents below market rates. The building, which consists of 93 units, is located across from Lafontaine Park. The project is supported by a collaboration of various partners, including funding from the Quebec government, Desjardins, and the City of Montréal. The Quebec government contributed $16.8 million, while Desjardins provided $13.5 million in financing and $1.9 million in patient capital. Additionally, the City of Montréal’s executive committee granted $5.6 million for the project. The initiative is also part of the Chantier Montréal Abordable pilot projects, which aim to increase affordable housing availability in Montréal through partnerships and community engagement.

Vancouver projects: Vancouver and its surrounding areas contain many hotel-to-supportive-housing conversions, including:

• Ramada Inn Hotel at 435 West Pender St: The province, through BC Housing, purchased the 80-room Ramada Inn Hotel at 435 West Pender in 2021 as part of a long-term plan to provide safe homes with supports as BC Housing and the City of Vancouver take collective action to address the critical needs of people experiencing homelessness in Vancouver. The Government of Canada is providing funding for this project through the Rapid Housing Initiative (RHI), an initiative of the National Housing Strategy.

• Buchan Hotel, 1906 Haro St: The province, through BC Housing, purchased the 63-room Buchan Hotel at 1906 Haro St. in 2020 to provide housing with supports for women in need.

• Howard Johnson Hotel, 1176 Granville St: The province, through BC Housing, purchased the 110-room Howard Johnson Hotel in 2020. The building has since been transformed into the ​“Lugaat” supportive housing facility, offering temporary accommodations with access to support services for individuals experiencing homelessness or at risk of homelessness. The long-term plan involves developing a mix of affordable homes on the site.