A New Era for The Commercial
A New Era for The Commercial Property Sector
Brexit, Covid-19, fears of a recession, new government legislation, hybrid working, rising interest rates… There seems to be an ever-growing list of fears to spook property investors. These issues have certainly made for an interesting last few years for those in the commercial sector, with many investors divesting their portfolios to offload office assets, while others have taken to repurposing to residential, life science and retail.
When macroscopic events such as Covid-19 occur, it’s natural they are followed by periods of uncertainty. This is what we’ve seen in London’s commercial property sector in recent years: the upheaval of the pandemic acting as a catalyst to developments that contemporary technology and work patterns had previously set in motion. What we shouldn’t do is mistake this development for decline.
News that London is experiencing record volumes of office refurbishments undermines some of the more pessimistic predictions we are witnessing for the future of the ‘office’. Since records began in 2005, there are a record volume of office refurbishment schemes starting, according to Deloitte’s Summer 2023 London Office Crane Survey. “A vote of confidence” for the commercial property sector.
London’s West End is seeing strong demand for high-quality, well-fitted office space, with estimated rental values 8% above last December, according to one of the West End’s main landlords. In a statement issued on June 14th, Shaftesbury Capital Plc notes “confidence for rental growth prospects,” which spreads throughout its portfolio focused in Soho, Covent Garden and Chinatown.
We believe these examples to be more than just anecdotal and point to two factors that are responsible for the office market in central London continuing to defy speculation of its decline.
- The need to upgrade offices to meet new UK Minimum Energy Efficiency Standards (MEES).
Under the UK Minimum Energy Efficiency Standards (MEES), commercial buildings with an Energy Performance Certificate (EPC) rating of less than B by 2030 will be unable to legally lease their buildings. Currently, some 80% of office space in London does not meet this specification. ESG considerations play an important part in a property fund’s credentials and are a vital consideration for investors. In particular, environmental factors are becoming more important, with tenants increasingly considering the carbon footprints of the buildings they occupy.
As a result, property funds are having to look at their existing property portfolio and improve it or divest quickly. The alternative is being left with assets that no one wants to rent or buy.
- A new age for workspaces – spaces with up-to-date tech, collaborative environments and improved onsite services.
Among the factors prolonging uncertainty are the varying desires of working patterns among workers and businesses. As long as employers demand in-person and employees call for homeworking, it’s clear there has to be a compromise. We are seeing a new way of working that demands a new type of flexible office space.
Employers who do not invest in modern, flexible offices will suffer when recruiting new staff as they look to rebalance their work/life dynamics. Chairman of Knight Frank, William Bearmore-Gray, has said about last year: “…for our London leasing agents it was probably one of their busiest years. The majority of the interest we are seeing is from companies which realise very clearly now that the office is a strategic tool to attract the best talent and increase productivity.”
A similar story emanates from agents Cushman and Wakefield, who reported a record number of office moves in 2022. This reflects the move to hybrid working (WFH), with most companies wanting less space in modern and better-located buildings.
While workspaces are changing, this fluctuation by no means signals a decline in the London office sector. When we consider the recent flurry of refurbishments across the capital, it is quite the opposite. Far from constituting a last stand by a fading industry, this wave of redevelopment marks the start of a new era for the commercial property sector and ushers in a more flexible, greener future. Indeed, a recent study showed two-thirds of flex spaces are more than 80% occupied.
Improved environmental credentials and modern flexible spaces will improve demand, and therefore, valuations. Whilst repurposing existing offices for other uses will decrease supply in the sector, it is ultimately raising rental income, as has been seen in the buy-to-let market.
Published: July 6 2023
Author: Ricardo Gato