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A real estate project that was slated to be office space in downtown Montreal will instead be built as rental apartments, Cadillac Fairview Corp. Ltd. said on Monday.

The developer says 750 Peel will have 510 rental units that it expects to finish building in 2026.

Cadillac Fairview had previously said the building at 750 Peel St. would consist of two towers offering 1.2 million square feet of office space, but now only says that it will have some co-working and meeting spaces along with the rental units.

The project is part of its much larger Quad Windsor development that includes the existing Deloitte Tower, three condominium towers of at least fifty stories and three others planned as a mix of townhouses, condos and retail, all centred around the historic Windsor Station.

The company did not respond to a request for further information about the switch from office to rentals, but the announcement comes as office vacancy rates are about double where they were in 2020 while housing options are critically short.

The national downtown office vacancy rate was 18.9 per cent in the third quarter, according to CBRE, which said there were virtually no new meaningful office construction starts in the quarter.

The decision to go ahead with a rental building also comes after the federal government removed the federal sales tax on new rental construction to help spur more supply.

Wayne Barwise, executive vice-president of development at Cadillac Fairview, said in a news release that the move was “timely, significant, and more than welcomed.”

Dream Unlimited Corp. said in September that the GST exemption, along with anticipated provincial tax waivers like Ontario has done to match the federal plan, would allow it to move ahead with plans to build 5,000 new purpose-built rental units.

High interest rates and cost inflation have however made it difficult for some developers to move ahead with projects.

RioCan Real Estate Investment Trust, which has put an increasing focus on building homes in recent years, said on Friday it was holding off on starting any new big construction projects.

RioCan chief executive Jonathan Gitlin said the tax waiver and other government moves were helpful, but not necessarily enough on their own.

“It’s well received by both RioCan and the rest of the development community, but it is one of a few factors.”

Cadillac Fairview is moving ahead on rentals as part of a $4.7-billion residential construction plan it announced last November that it says could deliver 7,000 rental units across 20 buildings.

The developer, owned by the Ontario Teachers’ Pension Plan, recently started construction on its first rental building in CF Rideau Centre in Ottawa. It will have 288 units.

Developers are also increasingly looking to convert existing office space into residences, with CBRE saying that since 2021, about 2.8 million square feet of office space has been removed from inventory, with much of it slated to be converted into homes.

CBRE, however, cautioned that the complexity of the projects make them a challenge financially, and feasible projects are limited.

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