Future Shock: the Coming Wave of Office ObsolescenceWhat Are the Implications? And What Can Be Done?

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The patterns outlined in this report are likely just the start of the process of polarisation and redundancy in the office market. By combining the assessment of “viable” refurbishment and where EPCs fail to meet the 2030 criteria, it is estimated that at least 25%-30% of the UK’s office stock is likely to become permanently obsolete over the next few years.

These are assets where the local economic and market conditions will not support adequate refurbishment. In some of these cases, there will, of course, be obvious and
viable changes of use – but not always. Furthermore, this will not be equally distributed around the country; the figure will be lower in Central London and other major cities, although there may be particular areas with issues, a reflection of earlier office booms and trends.

Other options include hotels, serviced apartments, purpose-built student accommodation, co-living, galleries or cultural facilities, and perhaps, in some locations, some form of flexible space (all of which will require planning consent). It is hard not to come to the conclusion that some offices will not be reusable in any form and will require demolition and rebuilding – despite understandable concerns around embodied carbon.

This will involve significant changes in the commercial property market as investors’ exposure to offices – both equity and debt – will continue to fall from still-significant levels. There is scope in the longer term; however, for investment in certain locations to grow as employment office space, the associated will continue to expand in hubs. Above all, there will be a need for investment in the existing stock (where it is in the right locations). The big question is where this capital will come from.

Overseas investors may find the risks and process too challenging, although there will be local partners with expertise available for partnership. With the winding down of many Defined Benefit pension schemes, domestic capital looks less plausible in the short term, although local authority pension schemes are, in some cases, still looking for stock. The growing Defined Contribution area has perhaps the greatest potential, although it may be some years before property becomes a viable target.

IT IS IMPORTANT TO EMPHASISE THAT THE OFFICE IS NOT DEAD.

There is still a significant investment case for good quality, well-located offices or assets convertible into them. Indeed, the market may be under-pricing this stock given wider global pessimism around the sector, meaning the case for interest will grow as the UK-specific conditions are better understood. For some other locations, as pricing adjusts and concern over embodied carbon continues to mount, adaptive reuse will become easier, although for some buildings, redevelopment may be the only option.