Future Shock: the Coming Wave of Office Obsolescence
What is the Market Evidence?
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These problems are already evident in office market metrics. Offices typically accounted for 40-50% of UK investment volumes between 2001 and 2015/16. This figure has been in consistent decline for almost a decade now and has recently been closer to 25-30%. The increasing attractiveness of sectors such as residential and industrial may also be factors against the backdrop of tight pricing.
However, more recently, it is likely to be related to Global concerns over the future of offices driven Primarily by the us experience. And while the UK’s office market appears stronger than in many other geographies, investor demand has fallen back. Between 2001 and around 2015/16, offices almost Always accounted for 40-50% of UK investment Volumes. This figure has been in consistent decline For the past few years and has recently been closer To 25-30%.
Leasing has not been as badly hit as investment, with volumes across the whole of the UK 36% below the 10-year average as of the year to Q2 2024. But what is perhaps more telling is how different markets have performed. The City Core was only 5% below the long-term average, while Outer London was 37% below. And while the major city cores outside London have seen a 38% fall, their hinterlands are some 50% below long-term trends.
What Are the Implications? And What Can Be Done?
Challenge Three – Hybrid and Remote Working
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For some time – since widespread high-speed broadband, at least – it has not been necessary to be in an office to carry out productive office-type work. The emergence of networking and video conferencing has made this even more feasible. However, it took the enforced conditions of the Covid-19 pandemic lockdowns to introduce it en masse to the workforce. Initially, many employers found this satisfactory and did not note any productivity losses, with some executives arguing that the “office was dead” and that firms could cut costs by jettisoning office space.
With the end of Covid-19 restrictions, remote work has continued to be more popular than before, although many senior managers began to express concerns over effectiveness some time ago and have tried to bring staff back to the office. The most popular route has been towards a ‘hybrid model’ where 2-3 days in an office are combined with 2-3 days at home.
However, more recently, some leaders have called for a greater return to the office against the background of more general issues around national productivity. There is extensive academic evidence showing the benefit of physical agglomeration, face-to-face contact and informal information exchange to innovation and productivity. On the other hand, the US, with perhaps the highest WFH tendency, has seen very fast productivity growth since the pandemic.
Challenge One – The Urbanisation of the Economy
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What happened to jobs? Over the past decade, office job growth has become more concentrated in a handful of locations, to an extent that has not been particularly appreciated by business or policymakers, let alone the general public. Over the 10 years leading up to the financial crisis – 1998 to 2008 – 50% of new jobs were created in some 48 Local Authority areas and 75% in 121. In contrast, over the 10 years leading up to the end for 2022, half of additional jobs were created in just 23 Local Authority areas, and the figure only rises to 77 at the 75% level.
Rewind to 1998-2008, and the picture is somewhat different. The top 20 features out-of-town locations such as West Northamptonshire, South Gloucestershire, Milton Keynes, Swindon and North Yorkshire.
Challenge Two – Environmental and Design Obsolescence
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The single biggest quantifiable threat to many offices is their poor environmental performance. Part of this is driven directly by legislation.
Under Minimum Energy Efficiency Standards (MEES) legislation, The UK Government has already made it unlawful to let or sell buildings with an Environmental Performance Certificate (EPC) rating of F or G. It is consulting on making B the minimum permissible rating by 2030, with a possible intermediate step of C in 2027. Given some of the issues around EPCs – namely, their lack of reliability and questions around their relationship with actual building performance – the Government has also previously considered introducing an alternative measurement system. This would likely be along similar lines to the Australian NABERS certification, which involves measuring actual operational carbon emissions and energy efficiency. This would be unlikely to make the problem less significant.
At the same time, businesses’ own requirements are becoming more stringent. Many have their own plans to reduce carbon emissions based around either net zero or science-based targets, which mean it will be hard for them to own, stay or move to poorly performing buildings. Even if the rate of change slows or government goalposts are shifted, the direction of travel is apparent – which means that the poorer the environmental rating of an asset, the less attractive it is as an investment. Furthermore, occupiers know that younger employees are increasingly environmentally aware and prefer to work (and stay) at companies that demonstrate their sustainability credentials – and what is more public and obvious than their premises? This is part of a wider trend in which offices and workplace design support corporate branding as well as recruitment and retention. Investors, who must take a longer-term view, are also critically aware of these factors and increasingly see poor environmental performance as a major risk, whatever the regulatory system.
Until more reliable measurement systems are in place, EPCs remain both the only real comprehensive source of data, and as they are legally binding, they are of great importance to the office market. There is a huge geographic variation, which is partly a result of the underlying distribution of offices (which are highly concentrated in London and a few other centres) but also the longer history of where these buildings have been constructed and how.
It is also difficult to generalise about how much it will cost to retrofit office buildings, as it varies significantly. However, there are tools emerging such as our own ME:EStimate, which provide rapid, reasonable indicative estimates of retrofit costs. Such estimates can help inform early-stage thinking on refurbishment versus change of use.
Introduction
Executive Summary
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The purpose-built office has only been a major feature of our cities for less than two centuries. It has become central to our working lives, to pension fund portfolios, and to city centre economies. But the sector is being challenged as never before in its relatively short history. Long-term structural shifts are fundamentally changing the patterns of occupation, investment and development within the sector. There are huge consequences which reach beyond the property industry to the wider business and local communities and both local and central government. The office will remain a major feature of our cities. But, the overall stock is likely to be smaller and more concentrated in a handful of locations.
Biodiversity Net Gain: Everything You Need to Know
With the mandatory 10% biodiversity net gain (BNG) recently turning six months old, we thought it might be helpful to collate a few FAQs and share them with our clients and followers.
Thanks go to our collaborators, Dr Martin Brammah at Sweco and Matthew Stimson at Bevan Brittan, for their input on the technical ecology and legal bits.
Any questions, please don’t hesitate to reach out to Oli Pye, Mathilde Francois-Downey or Jon Bradburn. Hope it helps!
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Our Retail Market Update (2024)
Our 2024 Retail Market Update is here…
The Retail sector is prospering, with improving sales figures and annual volume growth, driven by increased consumer spending and falling inflation. These positive trends are expected to intensify through 2024. The bumper profits announced by M&S announced this week, hot on the heels of the recent positive results from Currys, provides evidence of how quickly the market is already improving.
Read our annual Retail outlook to discover the key trends shaping the future of retail and what they mean for the industry 👇
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