A crisis in commercial real estate, a crisis in housing: two problems, one solution

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David Clement is the North American affairs manager with the Consumer Choice Center.

While for many Canadians the pandemic is behind us, one of its enduring effects is the lack of demand for commercial office space. During the pandemic, many people reasonably thought that as life returned to normal, so would the need to be back in the office full-time. This never panned out, and the office vacancy rate in almost every major Canadian city is a perfect indicator of that. In the second quarter of this year, arguably the most the pandemic has ever been behind us, the office vacancy rate in Canada actually increased to 18.1 per cent.

This new reality is horrific for the firms that own office towers. It means they’re left with empty space and exorbitant costs.

This reflects trends around the world and has potential ripple effects. The financial health of the building owners affects their ability to service loans, in turn affecting banks. It also affects the investors who put money in the sector. Observers fear this could spark a new financial crisis.

There is a way to help solve this and make the overall real estate market more dynamic – which would also help solve another problem, the housing crisis.

At present, hundreds of zoning restrictions prevent firms from converting commercial offices into mixed-use facilities or residential units, despite the urgent demand for such spaces. Unzoning, or rezoning, these swaths of commercial space could be one way local governments help the industry survive. Cities could also grant tax breaks to offset the costs of conversion, which can be high owing to inherent technical challenges.

Relaxing zoning for most of these commercial spaces would also significantly benefit the housing market, as mixed-use or residential units would increase the housing stock. Given that housing is the top political issue of the day, it’s time to give this some serious consideration.

For cities such as Vancouver or Toronto, it is well known that the supply of housing has never kept up with the demand, which is why residential vacancy rates in these major cities are at or below 1 per cent. It’s also in large part why rental prices in Toronto jumped 16 per cent from July, 2022, to July, 2023, with the average rent for a one-bedroom now a whopping $2,572. In Toronto specifically, the Toronto Regional Real Estate Board says the average price of a home has more than tripled since 2005.

Rather than leaving commercial holdings to sit empty, rezoning would give them flexibility in terms of occupancy while quickly increasing the housing stock to better keep up with demand. If done properly, this could put some downward pressure on home prices and rental prices citywide.

What makes this solution even more attractive is that it would be quite difficult to oppose. New developments in major cities such as Toronto undergo years of review and community consultation. At every turn, the NIMBY activists will attempt to block housing developments for nonsensical reasons such as the proposed building’s height, shadow or footprint. Luckily for housing realists – those who understand that major Canadian cities need to increase supply – rezoning existing buildings would be largely immune from such roadblocks.

Simply put, the pandemic created a new reality, one that has shown Canada’s work force the viability of working from home or at least working from the office less often. As most white-collar jobs moved from the office to the home office, employers soon realized that productivity could be maintained.

With this new reality, it is likely that other corporate entities will follow Shopify’s lead and forgo the expensive overhead of downtown office space. Even for those companies that keep a hybrid model, the need to have office space for every single employee is over. Hybrid workweeks reduce the amount of time required in the office, which ultimately reduces the amount of total space needed for day-to-day operations.

Giving rezoning a serious look would allow local governments to potentially avoid a commercial real estate disaster, while also making housing more affordable. This is a win-win scenario if city councils have the courage to make it happen.