COMMENT The outlook for commercial real estate isn’t the rosiest. Valuations are dropping, recent numbers from Citi predict as much as a 38% fall in office values, leasing activity is slowing, energy prices are putting pressure on service charges, and for new developments inflation has pushed build costs up by around 20% from two years ago.
But it is important to step back and take stock of the opportunity. Consider the short-term outlook against longer-term prospects – where will the short-term market forces push office space?
Offices need to be at the forefront of real estate’s move to a more sustainable future. They account for 20% of non-domestic buildings and are the second-highest energy consumer after factories. The current pressure on energy costs, coupled with tightening legislation for minimum EPC ratings, is likely to accelerate the green premium for more energy efficient buildings. We are seeing this take hold in the capital markets, with real estate lenders increasingly offering loans based on sustainability performance. A similar story will likely play out in the leasing market, with buildings with poor energy efficiency being overlooked due to energy costs having a material impact on the total cost of occupancy.
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COMMENT The outlook for commercial real estate isn’t the rosiest. Valuations are dropping, recent numbers from Citi predict as much as a 38% fall in office values, leasing activity is slowing, energy prices are putting pressure on service charges, and for new developments inflation has pushed build costs up by around 20% from two years ago.
But it is important to step back and take stock of the opportunity. Consider the short-term outlook against longer-term prospects – where will the short-term market forces push office space?
Offices need to be at the forefront of real estate’s move to a more sustainable future. They account for 20% of non-domestic buildings and are the second-highest energy consumer after factories. The current pressure on energy costs, coupled with tightening legislation for minimum EPC ratings, is likely to accelerate the green premium for more energy efficient buildings. We are seeing this take hold in the capital markets, with real estate lenders increasingly offering loans based on sustainability performance. A similar story will likely play out in the leasing market, with buildings with poor energy efficiency being overlooked due to energy costs having a material impact on the total cost of occupancy.
Obsolete assets
High quality buildings have to date remained resilient, and the flight to quality is seeing demand for grade-A office accommodation rise further. At the other end of the spectrum, workspaces that are not modernised risk becoming obsolete – failing to attract occupiers and failing to meet legislative requirements on performance.
The flight to quality is about enhancing performance, whether through creating seamlessly managed, collaborative spaces, providing frictionless experiences or through operational and sustainable efficiency. Technology is crucial to creating and enabling this experience and ensuring companies can operate effectively and efficiently, whether their employees are in the physical office or working from home.
Coming out of the pandemic, we have seen a prolonged period of assessment from companies on the future of work and hybrid working policies – how much space is actually needed and how will it be used are key questions for every company.
The rationalisation of office space, which was already underway, is about to accelerate. Flexible working is here to stay, there is no denying that – and companies will reduce their office requirements in response. While a shift in working patterns is one incentive to reduce office footprints, the industry also has to contend with impending recessionary pressures, and sustainability goals – occupiers see less space as a more efficient use of resources. It is increasingly logical to seek less space on a long lease basis and then have the ability to bolt on flexible office space, all within a grade-A building.
Learn and evolve
It is clear that there is a scarcity of flexible workspace illustrated by high occupancy levels and rental premium growth. Rates are up by as much as 17% in Liverpool and 16% in Central London. It is a straightforward case of supply and demand. The supply of grade-A flexible workspace is not being delivered at the required pace to satisfy demand in prime locations. The flight to quality is only going to exacerbate this issue in the months ahead, but with refurbishments accounting for 84% of construction projects that started in London over the past six months we should start to see more quality workspace quickly enter the market.
Plus, as landlords and operators increasingly look to incorporate an element of flex into their office buildings, including the ever-popular plug and play offering, this will help supply levels. It will, however, add operational complexity as flexible workspaces are rolled out portfolio-wide. Having the technology in place to ensure occupiers have the experience they expect and the experience they are paying for is vital.
Nearly three years after the start of the pandemic, the office market is continuing to learn and evolve, with working behaviours and patterns, the changing application of technology, and workplace culture all having a huge impact on how we approach the traditional nine-to-five – and this positive evolution shows no sign of slowing.
James Lowery is chief executive for UK and Europe at Essensys
