COMMENT We are optimistic that we will soon see the introduction of energy efficiency regulation that aligns with our climate commitments. Owners of portfolios heavy with second-tier-location commercial space are aware they need sensible strategies for the next few years. Once a good option, many of these buildings are burdened by short leases, high vacancy levels and subpar energy ratings. Bristol, according to EG’s Sustainable Cities Index, has more than 86% of its office stock operating at EPC C or worse; Manchester is nudging 82%. Post-Covid tenant rationalisation and the desire to commute to the office less have added to downward price pressures across the UK.
But a bit like the divest-invest conundrum, there is little analysis of whether to sell or hold, and, if holding, which assets could have another life – perhaps as the new housing we desperately need.
In the remarkably recent past, we might have seen “unfit” assets as pure opportunity – the chance to start from scratch on well-located brownfield. But demolition is (as it should be) problematic: arguments that new buildings will “pay back” the carbon spent on their construction through better energy efficiency ignore the immediacy of planetary systems collapse. Day-one carbon savings achieved through reuse match the timescale of the crisis that we are in – it’s today, not in 60 years’ time. While not every single building can be reused, many have the structural integrity and flexibility to be converted; so we need to understand which ones have a strong enough financial story to attract investment – and to suggest with confidence what these new uses should be.
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COMMENT We are optimistic that we will soon see the introduction of energy efficiency regulation that aligns with our climate commitments. Owners of portfolios heavy with second-tier-location commercial space are aware they need sensible strategies for the next few years. Once a good option, many of these buildings are burdened by short leases, high vacancy levels and subpar energy ratings. Bristol, according to EG’s Sustainable Cities Index, has more than 86% of its office stock operating at EPC C or worse; Manchester is nudging 82%. Post-Covid tenant rationalisation and the desire to commute to the office less have added to downward price pressures across the UK.
But a bit like the divest-invest conundrum, there is little analysis of whether to sell or hold, and, if holding, which assets could have another life – perhaps as the new housing we desperately need.
In the remarkably recent past, we might have seen “unfit” assets as pure opportunity – the chance to start from scratch on well-located brownfield. But demolition is (as it should be) problematic: arguments that new buildings will “pay back” the carbon spent on their construction through better energy efficiency ignore the immediacy of planetary systems collapse. Day-one carbon savings achieved through reuse match the timescale of the crisis that we are in – it’s today, not in 60 years’ time. While not every single building can be reused, many have the structural integrity and flexibility to be converted; so we need to understand which ones have a strong enough financial story to attract investment – and to suggest with confidence what these new uses should be.
Use-agnostic
Common Projects has been interrogating the “office repositioning” model to help asset owners – funds, councils and property companies – understand the parameters for redevelopment and unlock opportunities to retain buildings and give them a new lease of life as housing. We looked at the main viability parameters – land values, exit prices, build costs and policy differences (in respect of affordable housing and planning) – and modelled a retention-first strategy across 11 UK cities.
The findings underscore, firstly, the importance of location: in some places, such as Liverpool and Leeds, the construction costs are high enough in relation to expected revenues that the chance of a conversion premium is often reduced. In higher-value cities such as Brighton, Cambridge and London, where sales values or rents are substantial, there are significant premiums above existing use values realisable for well-chosen assets. We therefore anticipate the most readily deliverable opportunities being available in the South East and outer London – happily, where we expect secondary office space to be most severely impacted by the adverse factors mentioned above. Our research finds that 17 London boroughs are ripe for large amounts of repurposing: according to Statista, more than 75% of the total quantum of 41m sq ft of office space has an EPC of C or lower (meaning non-compliant by 2030, based on expected new legislation).
There is a significant advantage of being “use-agnostic” in initial reuse assessments, using intelligence gathered on market appetite, community needs and structural characteristics: open-market housing will work in some areas and with some buildings, build-to-rent in others – co-living and senior living can definitely also work in the right situations. This flexibility is particularly important in the assessment of buildings in locations where resi values make the viability of conversion a marginal prospect.
Secondly, build costs continue to support conversion prospects. In many cases, refurbishment proves significantly more economically viable than demolition and rebuild schemes.
Tip of the iceberg
Thirdly, the policy landscape is currently favourable. Permitted development rights absolutely need tight guardrails, particularly with respect to the quality of the homes that are proposed, but they absolutely can be instrumental in unlocking repurposing by giving certainty (versus the traditional planning route, which is quagmirish at best and full of delays). It’s an essential “carrot” to incentivise the industry to avoid demolition and new-build. The panacea in development is to acquire sites at existing use value, not needing to factor in any “hope value” for planning value uplift; in a market, though, where it is difficult to establish an existing use value for an unwanted office, the certainty of the PDR planning route allows for the clear establishment of an existing asset value on acquisition.
We are well on our way with our mission to get to grips with the challenges and opportunities for investors and society presented by judicious repositioning of redundant office assets on a much larger scale – open-sourcing projects to share learnings and find best-practice shortcuts. Collaborating with ethically-motivated asset owners – local authorities, charities, and financial institutions seeking to green their portfolios – means developers can bring their energy and problem-solving skills to bear on the iceberg of distressed buildings.
Steve Sanham is co-founder of Common Projects
