The UK office market faces a number of challenges around the current and upcoming statutory sustainability requirements as well as changing occupier requirements. These are collectively impacting the demand for the repositioning demands of offices. In this article, we will discuss the challenges and implications for the market and present how alternative uses can emerge as a sustainable solution to address office obsolescence.
Proposed changes to Minimum Energy Efficiency Standards (MEES), which will require commercial properties to meet a minimum Energy Performance Certificate (EPC) of C by 2027 and B by 2030, will need significant investment for many office buildings to mitigate potential obsolescence. We are also continuing to see tenants and investors apply increasing scrutiny and discounts to secondary and tertiary offices, creating a polarised market and a flight to quality. This is expected only to increase as the changes to MEES and wider voluntary net zero carbon requirements (e.g. NABERS UK and the UK Net Zero Carbon Building Standard) come forward.
The capital expenditure required to improve buildings may make existing uses in the long term unviable. So it’s important to consider how both repositioning within existing use and alternative use, plays a part in an effective asset management strategy for offices. Location is key, in terms of assessing short and long-term demand for the existing use as well as for alternative uses. When evaluating the existing use, a key consideration is whether the asset (sustainability, facilities, technology) and location (place, amenity, connectivity) can be attractive enough to occupiers in a post-Covid world where rationalised but better-quality space is desired.
THE IMPLICATIONS FOR THE MARKET
Secondary offices have seen some of the greatest falls in value across the entire property market, with ESG requirements being a key factor of concern for asset owners and lenders. Occupiers and investors continuously seek higher quality office space, so prime offices have typically fared better in terms of tenant attraction and retention, with the market becoming subsequently polarised. With greater falls in value occurring in the US office market, there is a chance to see even further pressure on pricing in the UK, particularly for offices where there is a greater risk of obsolescence. Valuers are increasingly accounting for capex and the requirement to meet regulatory standards – a factor worsened by the increased cost of debt. This means that for a greater proportion of assets, heavy repositioning and sometimes repurposing needs to be considered.
ALTERNATIVE USES AS A SOLUTION
Over the past 18-24 months, the two most common alternative uses we have seen have been residential and logistics. However, with recent outward shifts in yield, as well as build cost pressure, logistics land values have fallen, and it has, in many cases, become a less viable option. For some sites, there may be opportunities to explore alternative residential and bed-based uses such as senior living, Build to Rent (BTR), student accommodation and hotels, which have been highly resilient sectors. But, for each of these alternatives, whilst location remains critical, Local Authorities are increasingly in line with the sustainability trends on placing ‘retrofit first’ in an attempt to optimise whole-life carbon through minimisation of upfront embodied carbon.
A one-size-fits-all approach is unlikely to work, with a variety of different considerations that will impact alternative/existing use demand. Alternative uses need to be considered to ensure the most appropriate option is pursued, both in terms of economic returns and with respect to wider placemaking. A sector-agnostic approach is critical to ensure that all alternatives are considered, and a sustainable long-term solution that is progressive to value is considered.
Our latest offering, RetroFix, is tailored to guide clients through the ever-shifting office market, enabling them to adeptly address issues of obsolescence. In a landscape transformed by economic, social, technological, and environmental forces, RetroFix provides a strategic approach to meet these evolving challenges head-on.