May 18, 2024

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Skyrocketing costs bring Barron Building office conversion to a halt

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One of the contractors hired for the conversion meanwhile hasn’t been paid in months, with Strategic owing them $327,000, the contractor said.

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It’s been several months since Greg Kwong has seen signs of life at the historic Barron Building, visible from his office in downtown Calgary.

So it didn’t come as a surprise when he learned construction on the building’s office-to-residential conversion had been paused, with the company overseeing the development citing unexpectedly high costs.

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“It’s just a sign of the times — it’s not just unique to them,” said Kwong, Alberta region managing director at CBRE.

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Strategic Group, the developer overseeing the conversion of the Barron Building, has put construction of the building on hold amid higher-than-anticipated costs, it confirmed in a statement to Postmedia. The developer is now reassessing its costs over the next 45 to 60 days and will resume construction after that, it said.

“As we began construction to convert the historic Barron Building from office space to modern residential apartments, we learned that costs were much higher than we had anticipated,” the company said.

The decision puts a damper on the highly publicized project, which broke ground in March 2023 — one of the first office-to-residential conversions Calgary elected to fund, promising $8.5 million to Strategic should the development come to fruition.

One of the contractors hired for the conversion hasn’t been paid in months, with Strategic owing them $327,000. In an interview with Postmedia, Kyle Lucas, Con-Forte’s vice-president of operations, said the concrete company wasn’t paid between late November and early March, at which point Strategic paid the company $55,000. He estimates his company will be owed more than $400,000 within months if they aren’t paid.

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The company has since taken its equipment out of the building. “We’re stuck holding the bag,” Lucas said.

Strategic said in its statement that as construction resumes, all its construction partners will be fully compensated for the delay.

Skyrocketing construction costs, particularly for materials such as concrete and steel, which are critical to highrise construction projects, could hold back conversion developers from crossing the finish line on time and on budget, said Kwong.

While office conversions are notoriously expensive, Kwong said construction costs alone have risen to levels high enough to have drastically changed developers’ calculations.

“Construction costs have gone through the roof, whereby it’s killing a lot of projects that financially made sense two, three years ago,” he said. The city has incentivized developers by providing funding at $75 per square foot.

“That 75 bucks a foot — you’d probably have to double it to make sense,” Kwong said.

Bill Black, president and COO of the Calgary Construction Association, said a host of problems may have contributed to Strategic’s delay.

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“These are the kinds of things that are risky in existing buildings because you are literally inheriting the sins of your predecessors,” said Black, who has been involved in office conversions in the United Kingdom.

“There wasn’t a single building we got involved in that didn’t have some ugly surprise somewhere,” he said. “I’ve been sitting watching and I’m like, sooner or later the reality of how difficult that stuff is is going to come to light.”

Planning for future costs has become a challenge for developers already operating on razor-thin margins, he added. Despite the recent snag, he said he hopes the Barron Building conversion will get over the finish line.

Representatives from Strategic Group were not available for interview on Friday. Ken Toews, senior vice-president of development at Strategic, in October called the Barron Building conversion “one of the most challenging projects of my career.”

When all 17 conversions are complete, the city will have provided developers $153 million. However, that money will only be provided to developers once their conversions are complete and the city issues an occupancy permit. The city’s agreement, inked 2021, to provide funding for the Barron Building conversion is separate from its downtown conversion program.

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“This protocol ensures accountability and adherence to program guidelines, ensures project completion and delivery of housing,” Thom Mahler, director of downtown strategy at the city, wrote in a statement to Postmedia.

In a Friday interview with Postmedia, Mayor Jyoti Gondek said she’s keeping an eye on the Barron Building construction, but said the incentive program’s structure mitigates the city’s risk.

“Any time there’s a slowdown on a project, it’s disappointing . . . However, when it comes to the city’s funding, the way we’ve structured our conversion incentive is that any funds we’ve agreed to are not paid out until the project is completed in the way it was indicated it would be completed,” she said.

The City of Calgary said in a statement that nine projects are currently under construction with planned openings starting in 2025.

The city said it’s planning to reopen the program to new submissions later this year.

“We are preparing to reopen our program for new submissions in the coming months and have no intention of pausing until the city’s housing needs are met, and downtown Calgary is a vibrant and thriving neighbourhood,” it said in a statement.

But the city shouldn’t be blowing up balloons until the full slate of conversions have residents living in them, Kwong said.

“That first program, still, you can’t call it a success today,” he said.

— With files from Scott Strasser, Postmedia

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X: @mattscace67

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