The debate about the future of the office rolls on.
Several major employers from tech firms to banks have rolled out flexible working and signalled their intentions to reduce space. Meanwhile, the growing focus on reducing carbon emissions has the potential to make a vast swathe of offices obsolete.
Amongst all this TikTok have agreed to lease the whole of the Kaleidoscope building in Farringdon. And property firm JLL is agreed to take a new 100,000 sq ft+ office in the City of London. Both are committing to 15-year leases.
Businesses continue to see offices as attributes that can increase employees’ productivity and wellbeing and be a competitive advantage in the ‘war for talent’.
Investors, too, are targeting opportunities to invest in central London offices. At the time of writing there is a bidding war for a one-acre, London Stock Exchange-owned plot in Shoreditch. Offers are reported to have spun from £120 million to more than £150 million—and bidders are betting on the future of the city’s office market.
Momentum is, however, more difficult to find in the secondary office market.
Around 3.5m sq ft of office space, much of which is small and concentrated in older buildings, has come on to the subletting market over the past year and, despite the offer of discounted rents, many buildings are failing to attract occupiers.
The availability rate in the London office market has increased to around 10% from around 7% in Q1 last year. And this could mean the ‘emptying out’ of secondary offices. Many of which will need to be refitted or repurposed.
Those that cannot be retrofitted for lower emissions risk eventual obsolescence.
The built environment accounts for about 40% of the UK’s carbon footprint. Sustainability has reached the top of many tenants’ requirement lists—and several large property owners and investors rolled out more ambitious environmental commitments during the pandemic.
It is likely that much development funding will be designated to new net zero projects which attempt to reduce emissions.
Paradoxically, the obsolescence of offices with poor environmental credentials could mean a greater amount of carbon being emitted. After all, the best way to deliver low emissions offices is to gut and redevelop them—and that involves a significant carbon outlay.
In a recent article in the national press, the chief executive of a major UK REIT, which owns around 60 buildings in London, compared businesses searching for new offices to consumers deciding whether to trade in petrol powered cars, “Using a car to the end of its life is better than buying an electric vehicle to make yourself feel better.”
The road to sustainability is filled with contradictions.
Attainment of the UK’s 2050 net zero targets depends on reducing the energy use intensity of operational buildings by more than 60% - and government regulations set out a B EPC rating requirement for buildings by 2030.
For now, many developers will rely on carbon offsetting to push down the net emissions, with initiatives including enhanced capital allowances for “green installation” making associated costs more achievable. But continued uncertainty around future office use, and potential value erosion of assets not considered to be environmentally friendly, weighs heavy. As businesses make decisions about which kind of buildings they want to occupy, we are likely to see an increasing value gap between the best, and the rest.