The SectorScope considers some recent reports on the UK office market and highlights the growing importance of refurbishment for this sector.
In its report, specialists JHB Refurbishments notes that between 2021 and 2022, the availability of second-hand office space increased 50% year-on-year “to its highest level in more than a decade”. That increase in available space has created a market in which tenants can demand – and get – more from their office space.
The SectorScope has already noted the ‘flight to quality’ as potential tenants turn down so-so office space in favour of workspace with a wow factor. The result, as JHB notes, is that what used to be considered perfectly good office stock is now classed as “tired, outdated and poor quality”.
What does this mean for office building owners? Demolition and rebuild are increasingly frowned upon by local planning authorities. For example, in the City of London, developers must prove that refurbishing an existing building would produce more carbon than starting from scratch. Even Marks and Spencer came up against some tough questions when it wanted to demolish its Marble Arch store for a rebuild.
Partly due to these policies, older office buildings have changed hands as landlords who don’t want devaluing assets release them from their portfolios. As far back as December 2021, The Financial Times* (6th December 2021) spotted that some buyers were specifically targeting office buildings in need of some TLC as suitable investments for the future.
And this looks like a savvy financial move if we look at the Savills Regional Office Spotlight from March 2023.
This notes that tenants are looking for high-spec office space even beyond London. The top six regional office markets in the UK, which include Bristol, Birmingham, Edinburgh, Glasgow, Leeds, and Manchester, are experiencing a limited supply of Grade A office spaces, leading to an all-time high in rental prices – including some . Savills notes that this shortage of quality office space looks set to last another five years, making an investment in refurbishment and upgrades an attractive opportunity.
But isn’t everyone WFH these days? Despite significant changes in working practices, many organisations still look for office space. It’s just that they’re probably not following the traditional Mon-Fri, 9-to-5.
Savills notes that although some companies take less office space, others have increased their requirements as businesses expand. Use patterns continue to differ, with some days of the week seeing higher occupancy than others. City centre office space also retains attention; beyond London, cities such as Manchester and Birmingham are still attracting business.
But with workers’ changing relationship with the office in mind, potential tenants are often looking for new features and facilities in their office space – factors which may once have been ‘extras’ are now considered must-haves.
Sought-after facilities include flexible spaces which can be open for meetings and then transformed to quiet, private offices. Access to outdoor space is also a premium feature, with roof gardens proving attractive. Offering staff access to fitness areas, healthy food, and low-carbon transport (bicycle parking and showers) is also important.
Refurbishments have therefore focused on providing a very different type of office that’s not focused on desks per m2 but on creating innovative, best-in-class spaces.
Sustainable goals – government and tenants The great refurbishment is not only driven by pickier tenants. Legislation on energy use in buildings is also driving change. The Minimum Energy Efficiency Standards (MEES) will require all office buildings to meet ever-higher standards on energy use, with tightening certification just around the corner.
In addition, tenants’ companies are highly likely to have their own ESG goals, and they will seek out office premises that support those strategies. Refurbishments are going beyond the aesthetic and will encompass changes to HVAC systems, such as switching away from gas boilers or updating air conditioning and ventilation systems for more energy-efficient approaches.
Savills highlights some recent examples of refurbishments, including Brindley Place in Birmingham. Wilmott Dixon Interiors delivered this substantial redevelopment project, and it saw two neighbouring buildings stripped back to concrete shell and combined.
The upgrade included a complete M&E replacement with full electrification, lighting upgrades, improved thermal efficiency and solar control. The work gained the building an EPC of A and BREEAM Excellent. It also achieved Fitwell accreditation, which signifies a building that supports occupant wellbeing. In addition, it offers a roof garden, fitness areas and a bouldering wall.
The project is substantial, but it exemplifies the level of refurbishment which building owners are now prepared to undertake to retain and enhance the value of an asset. Savills predicts that refurbishment will be a crucial focus of the UK regional office market in the coming years as the market addresses the limited new supply of Grade A office spaces in some of the Big 6 cities and meets the demand for best-in-class space.
A critical target market As the UK moves towards more challenging targets on building energy use and embodied and operational carbon emissions, refurbishment will become an ever-greater market for construction companies – from major contractors to architects, engineers, specialist sub-contractors, and manufacturers.
Being aware of opportunities in refurbishment and redevelopment means understanding the drivers from customers (tenants) and the government (in the form of energy and carbon legislation). The SectorScope will continue to cover these issues and analyse their impacts, so don’t forget to subscribe to our newsletter to stay ahead of what’s coming up.
* Financial Times: London developers target old offices at risk of becoming stranded assets, 6th December 2021, by George Hammond
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