2023
Author
Emma Steele
Director, Global Cross Border Investment
WELCOME
Welcome to the first edition of Optimising Offices. As a result of the Covid-19 pandemic, some office workers have found new ways of working – the words ‘flex’ and ‘hybrid’ have become synonymous with the sector and principally because of this, the future of offices has been put in the spotlight.
Layering in the ever-growing focus on all aspects of ESG and the uncertainty of the associated capex required to futureproof, there are understandably a significant number of questions being posed at present.
The demand landscape
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Copyright © 2023 — Savills
welcome
04 value protection & enhancement
In this first edition we aim to address five key questions relating to the UK office market; changes in occupational demand, evolving occupier needs; the impact on pricing; how values can be protected and enhanced, and finally, alternative use options should certain buildings no longer be viable offices.
Through our observations we hope to provide some clarity and also help to alleviate some concerns. We acknowledge that there are undoubtedly challenges at present, but we are firm believers in the future of offices and are on hand to support you with all aspects of your office interactions.
James Evans
Head of National Office Agency
explore this issue
05
What’s the alternative?
If offices aren't viable
01 The demand landscape
03 the investment perspective
02 What occupiers want
05 what's the alternative?
01
Has office demand changed forever?
02
What occupiers want
Five key trends
03
The investment perspective
Down, but not out
04
Value protection & enhancement
GreenFiT - a Savills solution
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NEXT
EXPLORE optimising offices EDITION 02
what occupiers want
Welcome
Clare Bailey
Commercial Research Director, Savills
Innovating Glasgow's real estate involves creating urban spaces that align with the city's vibrant cultural identity.
Events like Mela Festival and LGBTQ+ Pride underline Glasgow's commitment to inclusivity. This inclusive atmosphere entices diverse talent, enriching the city's workforce. With iconic museums, street art and music, Glasgow provides a well-rounded lifestyle for professionals who seek cultural immersion alongside their careers. Institutions like Glasgow School of Art and the Royal Conservatoire foster collaboration and innovation. The intertwining of cultural institutions with academia, exemplified by participation in UNESCO City of Music, creates a hub of knowledge exchange. This cultural richness and emphasis on quality of life distinguishes Glasgow, attracting talent and establishing it as a city where harnessing culture drives economic and social growth.
David Cobban
Business Space Director, Savills Glasgow
Two factors have driven innovation in offices: the Covid-19 pandemic and environmental, social and corporate governance (ESG).
What occupiers need and want has changed, they want spaces that support employee productivity and wellbeing. Spaces they want to work in. In sustainable offices, landlords curate spaces for enhanced social interactions among occupants and the wider community. Unique amenities now include cafes, free meeting spaces, podcast studios, gyms, and more. These innovations stem from smart technology, subdivided into human centric, operational focus, management enterprise, and owner investor applications. Smart tech can ensure employee well-being, efficient operations, data-driven carbon reporting, and increased investment value by diversifying income streams and precise ESG reporting.
Emma McDaid
Business Space Associate, Savills Glasgow
Innovation is driving innovation. As Glasgow continues to attract world-class talent and businesses, we need to deliver the spaces they need.
Whether they need lab spaces, manufacturing space, or office-style ‘write-up’ space to perform desk-based analysis, there is currently next to no supply. We need to embrace the fact that innovative sectors such as technology and life sciences will drive the city forwards, and real estate needs to work hard to deliver the facilities they need to support new and growing businesses. But we also need to understand that employees in these fields want many of the same amenities that office workers are now getting. Therefore, we need to consider innovation sectors and businesses when creating Glasgow’s future mixed-use developments.
Alastair Wood
Planning Director, Savills Glasgow
Glasgow has a lot of strategies in place that seek to create an innovative city.
Faisal Choudhry
Research Director, Savills Glasgow
Placemaking and infrastructure lie at the heart of what I consider as innovating Glasgow’s real estate from a housing market perspective.
Most people aspire to live in a place they are proud to call home and that they can afford to maintain. They want to live in a safe and secure community, close to their friends and families, with easy access to places of work, education, shopping, leisure and green spaces. A robust and widespread transport and telecommunications network is a fundamental requirement for innovation and a consideration for Glasgow’s position within Greater Glasgow and eight competing local authorities. Both are key to making not just this city, but the wider conurbation an attractive place to live and work.
Carole Mackie
New Homes Director, Savills Glasgow
New homes are already more energy efficient: on average buyers enjoy a 27% saving on core energy costs in Scotland compared to second hand properties.
We’re now also seeing a greater expectation of EV charging points, solar panels and air source heat pumps, with buyers often choosing car-free developments with cycle storage. Some of the best developments encompass biophilic design, connecting living space with the natural environment through beautifully landscaped spaces. In line with Scottish Government’s ‘brownfield first’ approach, we’re seeing repurposing of the city’s redundant buildings like New Steiner at Yorkhill, which has breathed new life into a former school, and Cottonyards, a refurbished former redundant factory building at New Gorbals. Meanwhile, the Scottish Government’s twenty-minute neighbourhood policy is becoming a reality, with new homes being built no more than a short walk or cycle from local amenities, reducing car dependency. The demands being placed on the sector are not insubstantial, but the result is a swathe of new beautifully designed, cutting-edge developments, making Scotland’s largest city a greener place where people want to live and work.
Bruce Patrick
director mixed use development
Glasgow now has over 92,000 students in Higher Education, the third highest population in the UK.
This fundamental, basic platform from which innovation can then flourish provides a significant stimulus to Glasgow as it continues the journey from post-industrial to knowledge city. The desire by young people for experience over ownership, coinciding with rapidly changing market dynamics, requires developers to learn a “new language of development”. This is particularly true for the residential component of large-scale mixed-use schemes where development funding is currently available to help deliver purpose-built student accommodation and new residential typologies such as Private Rented Sector Built to Rent (PRS btR), and co-living. The student accommodation market is significantly undersupplied, and thousands of new bedrooms are required to address current demand and future student population growth. The success of Solasta, which created a new residential population of over 400 people in only five months and is one of the best performing PRS BtR schemes in the UK, demonstrates that the large-scale rental model works here. A further c. 2,000 beds are due to be completed in the next 12 months and there is demand from operators and investors for more. Co-living schemes will be next, helping to retain young graduates and attract new talent to the city from across the globe.
The challenge is how to get new development built that delivers on the level of ambition we all share for this great city. Innovation here will require the development industry to work in partnership with the council to overcome technical deficiencies that they are facing in dealing with significant additional tasks imposed by National Planning Framework 4 (NPF4), the Government’s latest national spatial strategy, and present information in easily accessible and interpretable ways. Innovation from the public sector will require better understanding of development viability and implementing public and private funding models to get new development, which would otherwise not be deliverable, built —especially across the housing sector. In doubling the size of the city centre residential population to 400,000 by 2035, Glasgow City Council should be trying to replicate demographics that currently exist across the whole council area. Perhaps not innovation, but more realisation—an innovative city will only be created if regular face-to-face collaboration takes place between all those involved in Glasgow’s development sector.
The great work from home experiment has raised questions for occupiers in terms of understanding their future occupational requirements, how much space they require and how best to utilise it. In addition, there is the overarching challenge for some of how to encourage colleagues back to the office. More sophisticated occupiers have sought to increase productivity for many years through the design of their workplace. This is now a challenge for all occupiers, especially in an environment where some employees have the choice to attend an office or not. The response of businesses to this challenge has been mixed but it appears increasing numbers are mandating employees back to the office. In addition, and as a direct consequence of hybrid working, the design and use of office space and the needs of its occupants have evolved at an unrivalled pace. We consider below how demand has and may continue to evolve.
Occupiers today are increasingly discerning. They recognise that high quality offices can enhance productivity, employee retention and recruitment. Consequently, a general flight to prime has been prevalent in all office markets. Developers are responding by designing a wave of innovative and sustainable office buildings across the UK that seek to satisfy the increasing expectations of almost all businesses. This continued evolution of best-in-class workspace, combined with an increased focus on sustainability, has resulted in an environment where the best gets better and the rest becomes mid-market or, at worst, obsolete.
The quest for prime office space
As the demand for best-in-class offices has increased, those assets that are “blemished” have fallen out of favour. This over supply of lower quality stock in secondary locations represents a significant risk to landlords. Unfortunately, the future of this stock looks bleak as occupiers relocate to better, more sustainable buildings in central locations. A record proportion of demand is now for prime, and in contrast, the supply of this stock is diminishing. This is resulting in a mismatch of what occupiers want versus what is physically available. It must not be forgotten that the Grade B market has always been the engine room for much of the UK. Many occupiers, particularly in the current economic environment, will seek to balance trading up the quality ladder with value. Grade B demand will not disappear, but it will become more selective. Landlords will need to work harder to attract and retain this type of occupier, particularly given the regulatory framework (MEES). We examine what occupiers want from their office space in Section 2.
A structural shift in spatial requirements?
The pandemic resulted in many commentators questioning the long-term purpose of an office. They hasty concluded that the majority of organisations would downsize leading to a long-term reduction in office demand by as much as 50%. Undoubtedly businesses are seeking to work more efficiently and reduce their footprint where possible. However, this is highly nuanced and subject to overall workplace strategy, business sector and future growth. In some instances, occupiers are acquiring more space per employee resulting in upscaling, not downscaling. The picture will only become clear once a full cycle of lease expiries has concluded and pent-up demand from lockdown inertia settled. Though difficult to quantify our own conclusion is that a reduction of 10-15% in overall UK office demand is the likely outcome.
Sustainability to the fore
Businesses across all sectors have, and continue to, recognise the need for their office buildings to play an important role in their own sustainability targets. Developers continue to push the boundaries in terms of sustainable development seeking to match their accreditations with their customers aspirations. Awareness and understanding of specification, energy performance and decarbonisation is mixed within the occupier community. This however will become increasingly sophisticated with an emphasis on landlords being able to illustrate how their buildings can assist occupiers on their journey to Net Zero Carbon. The notion of a “green premium” should erode as sustainability becomes a widely accepted characteristic of prime office space.
A new approach to flexibility
Lease flexibility is not a new phenomenon. Nor is the world of flex space. The level of demand for both however is greater than ever before. Traditional leasing models are increasingly under pressure with occupiers seeking greater lease flexibility to allow them to scale up or down at more regular intervals. The cynic might argue this acts as a convenient hedge against getting post pandemic space take wrong. The flight to quality is not only driven by specification and sustainability requirements but the ability to offer overall flexibility. At the smaller end of the market, the provision of turn key, fully fitted space (not simply serviced space) is increasingly in demand. This is as a result of the headaches of procuring and managing a fit out and the associated costs. We anticipate increased levels of demand for flex space.
A mixed conclusion
The evolution of Grade B
Programme bristol
The pandemic has reshaped our relationship with office space. Flight to quality and the sustainability demands of businesses are irreversible. The long-term impact on levels of demand, as businesses seek to right size in a hybrid working world, are likely to have been overstated in core City locations. Away from these locations, we will see vacancy rates increase given a greater reduction in demand combined with viability challenges of future proofing these assets. Alternative uses for these offices may be the way forward and we consider this in Section 5.
The pandemic has reshaped our relationship with office space. Flight to quality and the sustainability demands of businesses are irreversible.
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The Market in Statistics
Explore further data and insights from Savills Research here.
As the Covid-19 pandemic is slowly consigned to a dramatic piece of history, the question of whether office demand has changed forever continues to be debated by developers, landlords, lenders and advisors.
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It’s no surprise that occupiers’ office requirements have evolved since the pandemic. With an ever-growing focus on the employee experience and an increased emphasis on balancing a quality office with efficient utilisation rates, we look at five key trends that have risen to the top of the workplace agenda.
the investment perspective
the demand landscape
Lease term flexibility
Immediately after the pandemic occupiers that were relocating insisted on greater lease term flexibility to act as insurance against making the wrong decision. Businesses anticipating corporate growth and backed by venture capital have either found solutions through the flex market or have in some cases negotiated shorter lease terms with traditional landlords to facilitate upscaling. The growth in the flex part of the market has for some time been forcing traditional landlords to provide greater lease term flexibility and evolve their flex offering. This evolution will need to continue as small medium enterprise (SME) occupiers in particular seek to be nimble for the benefit of their businesses, ensuring they have right accommodation in the right location in order to attract and retain the right talent.
reflections from Cundall
Cundall is a global, independent, multi-disciplinary consultancy delivering sustainable engineering and design solutions across the built environment. Watch the video below to hear how they worked with Savills to identify a new office that met their criteria for quality workspace while allowing them to also achieve their Net Zero Carbon status within a beautiful, reinvented heritage building.
Cost vs size
Occupiers continue to wrestle with the implications of hybrid working and ensuring they acquire the optimum amount of space. Averaging peaks and troughs in office attendance is a major challenge and although some occupiers are concluding that less space can be acquired, the overall impact is not as great as previously predicted. Reducing the amount of space acquired may appeal to a Financial Director but when it results in overcrowding and employees opting to work from home, the cost savings may be counterproductive. As a consequence, many occupiers are recognising the benefits of flex space as a bolt-on to a traditional leasehold acquisition. Whilst still in the minority, we are seeing an increasing number of businesses stipulating they will only acquire space in offices where a flex operator is present. This provides an ability to then “flex up” at peak times or allow short term growth should their core business require this. In some more extreme instances larger occupiers are stating that, away from their headquarters, all other offices will be situated in flex space. It is worth noting that in addition to occupiers negotiating right sizing lease provisions (option floors) within their principal building, this theme although not new, remains prevalent.
The carbon conundrum
Forward-thinking occupiers are focussed on the carbon impact of their real estate as they race to satisfy their green commitments. 52% of London office take-up in 2022 and 2023 was of buildings rated BREEAM Excellent or Outstanding. Net zero is the ultimate goal, both in terms of construction and operation. It should be noted however that many occupiers today do not understand how occupying and operating an office impacts their sustainability agenda; the sophistication of knowledge varies dramatically. Some occupiers question building accreditation without fully understanding its implication or having any real method of comparing building performance. It is important to note that the pendulum is swinging towards energy performance hence the rise in NABERS as an increasingly important measure of performance. However, occupier demands are polarised in respect of sustainability and, although most will claim it is a vital driver, there remains a proportion who are paying lip service.
Location - meet in the middle
Though not a new phenomenon, centralisation is continuing to be a prevalent trend. With ease of commute being a primary consideration in attracting talent to an office or indeed employees back to the office, a centralised location is high on the list of criteria for occupiers. GSK’s move from Brentford to Central London and Bosch’s move from the suburbs into Manchester’s city centre are examples of how we are seeing this trend unfold.
Quality comes first
Much has been made of the ongoing occupier flight to quality. This trend is prevalent across the UK, but quality means different things to different occupiers. Traditional physical attributes such as natural light, air quality, ventilation and heating and cooling remain of great importance. However, increasingly occupiers see office space as a service and a vital ingredient to both productivity and organisational culture. The best performing buildings respond to the ever-increasing employee wellness agenda. Whereas facilities like cycle storage, showers and changing rooms were once seen as new initiatives, these are now basic specification requirements, without which buildings are disadvantaged. Office relocations are no longer driven by financial directors and property directors; HR teams are now an increasingly influential stakeholder in the property decision-making process and their focus is principally on the wellness agenda.
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Previous
Office investment transaction volumes are down across the world and the UK market isn’t immune from this. But, are offices ‘out’? We don’t think so…and importantly neither do our clients.
Value protection & Enhancement
We asked nine clients one question ‘Why offices today?’, and this is how they responded…
Dominic Williamson
Our clients touch on many of the principal issues affecting the sector today; flight to quality, market bifurcation between the best and the rest, new demands from an ESG perspective and the macro headwinds including cost inflation and the increasing cost of debt. Given this extent of uncertainty, it is no real surprise that we have witnessed reduced trade levels.
Tom Gaynor
Dan Nicholson
Gerald Kaye
Ross Blair
Layla Diab
Tom Reeves
Charlie Arden
Matt Doyle
The result of this has been increased bifurcation, particularly in global gateway markets. At Brookfield, we continue to see strong demand for the premium assets we own, which represent 95% of our global office portfolio. Quality segments of the market have continued to perform well, despite broader challenges, and are benefiting from the flight to quality, resulting in record rents being secured.
The office real estate sector is undergoing a fundamental evolution driven by demand from top global companies for the highest quality and most sustainable buildings with modern amenities and wellness attributes in prime locations – trends that have been accelerated by the pandemic, as companies focus on creating the best experiences for their employees.
We believe businesses need culture to thrive and that culture is forged in the office. If we continue to create the right environments in the right locations, businesses have shown they will continue to lease office space. They have also shown that they are prepared to pay substantially more for the right product. People remain at the heart of businesses and we see the right office as an integral part of culture creation and therefore business success.
Whilst the advent of hybrid working has undoubtedly led to a reduction in many office space requirements, we are seeing very few give up an office entirely.
As working practices have evolved, the office remains the most important component of successful hybrid working. A good office needs to provide an experience which is ‘better than home’, acting as a magnet to draw people in, enhancing collaboration, creativity and productivity. Businesses are looking to take the highest-quality space with the best amenities, however, there is currently a scarcity of new prime space in London. In fact, it is estimated that central London needs an 80% uptake in development of new office space by 2030 to meet future customer needs. It’s also clear from our recent leasing experience that high quality offices remain in high demand – our recent pre-let of 320,000 sq ft to Clifford Chance underlines the attractiveness of the high-end GPE offer. As a result, there is a huge gap between the best and the rest, and it’s widening. This plays to our strengths. We have a deep development pipeline which will deliver high quality, sustainable spaces into this supply-constrained market, which, combined with our Customer First approach, will enable us to continue to create spaces that London businesses need and their employees want to work in. So, in summary, GPE shares, anyone?
London remains a dominant global city and has bounced back quickly from the pandemic, with London business activity and optimism continuing to outperform the wider UK.
This quote is from Eric Yuan, a US tech business founder. It makes clear why a real debate in the office is so much more effective than being online. Indeed recent research from Savills analysing 200 transactions in the City from January 2021 reveal that there was positive net absorption of 1.5m sq ft. This is down to an increase of over 100,000 new office based jobs in Central London and also because more occupiers seek best in class office space so they provide the optimal working environment to attract and retain staff. We are seeing bifurcation in the office market as demand is aimed at the best in class – those buildings, newly built or refurbished, which offer high quality amenity and are EPC A or B and BREEAM Outstanding or Excellent. Rents will rise strongly for these buildings and fall correspondingly for the older, poorer quality and less sustainable buildings. As some of you will know Eric Yuan founded Zoom.
“Quite often you come up with great ideas, but when we are all on Zoom, it’s really hard. We cannot have a great conversation”.
In many cases their requirements are becoming more demanding than ever before, resulting from determined CSR policies, and their real estate can be a primary tool for achieving those goals. Utilising our development expertise we want to continue creating those spaces, through a combination of ground-up development, refurbishment or creative asset management, and will continue investing in London on that basis. We believe global investors will continue to view London in a positive light for all the reasons its attracted so much capital in recent decades. Liquidity is obviously impacted by increased borrowing costs right now, but once those costs ease-off or a degree of confidence returns over what a ‘new-norm’ looks like, we believe liquidity will return for prime centres like London. In a hybrid working world, the office remains an important part of the live-work-play equation. Rules of engagement have changed for many businesses, but in bustling city centres like London the office hub is so important for things like culture and we want to continue investing to create those focal points of activity.
We see strong demand from occupiers wanting the very best space for their employees.
One of our key investment themes revolves around office buildings that incorporate top ESG credentials with excellent EPC and BREEAM ratings, modern amenity spaces, located centrally with strong commuter access; all characteristics that cater to the “flight to quality” theme which has been well documented. It is apparent that there is a shortage in supply of these office types; a key driver for our continued positive outlook on the sector. Additionally, the increasing cost of debt and longer-than anticipated inflationary pressures have resulted in a significant decrease in office construction pipelines. This compounds further the existing and upcoming shortage in supply of high-quality office buildings which we believe will ultimately drive performance in this sector going forward. Despite all the negative rhetoric it is evident that the need for office space is permanent. Kamco Invest continues to monitor the latest market trends and maintains a positive long-term outlook on the office market.
The office market continues to present attractive yields and appealing entry price points, providing long-term potential for capital appreciation.
That doesn’t mean that the office is redundant, instead businesses have been given an opportunity to think about the role their workspace plays, and optimise their office space as a competitive advantage; both in terms of recruitment and retention of staff, but also employee wellbeing and ultimately productivity. With businesses looking to create innovative spaces that best serve the needs of their people, there is strong demand for the right type of space, in the right location. This means demand for high quality, environmentally efficient, socially sensitive office space will continue to increase, with a commensurate increase in rent psf, whilst obsolescent office buildings will be have to be repositioned or repurposed. We’ll also see more consideration given to amenities both in the surrounding area and within the building itself, with shared lounges, meeting rooms and events spaces becoming crucial to attracting customers. The shift in how people use offices going forward provides numerous opportunities, not least for landlords and customers to work in partnership to create value. Our continued investment in offices is driven by the clear demand we see across our portfolio for best-in-class space with occupiers recognising that offices play a crucial role in driving business success and are willing to pay higher rents for the best buildings.
‘The workplace is dead’, a headline grabbing sentiment that has been proven wrong. But the post-pandemic landscape has created a structural shift in how the office is being used.
Fundamentally, we don’t believe that three hundred years of industrial development has come to a screeching halt in two years over as a result of the pandemic. Offices have long represented the largest asset class for the domestic institutions and whilst the allocation may be rebalanced over time, our conviction is strong that offices will continue to form a key component of most property investment portfolios. The issue is that much of the UK office stock is functionally obsolete, and if COVID has done nothing else, it has opened both landlord’s and tenant’s eyes to that fact.
Offices as a nexus of commercial activity are here to stay.
The question is no longer “Will businesses need offices?” but rather “What type of offices will businesses need?” The current negativity around the sector is an opportunity to for us to acquire fundamentally good assets at below their long term fair value.
The past three years have shown the office sector is changing but here to stay.
In summary, the investment market today can best be described as erratic. It is exceptionally hard for both existing owners and new investors alike to read, but this is where we, as advisors, come in to try and shed light on the 'why'. During the final few weeks of 2023 and moving into 2024 there will undoubtedly be further trades where pricing will surprise on both the upside and the downside. Please contact us if you would like any further insights.
19-22 Rathbone Place, London
One of a series deals that happened around the same period to US capital who were seeing an opportunity in the market to buy high quality product at a discount. All these groups have belief in future yield compression and the rental growth prospects of the London market and are therefore willing to take on lease-up or in this case re-leasing risk.
Price Change:
-9%
So what?
125 Shaftesbury Avenue, London
This sale generated an exceptional market reaction – over 100 individual parties inspected, and 15 written bids were received. This talks to both the demand when offering something rare (a large site in a core West End location, in close proximity to Crossrail), and also the demand for assets where you can ‘create the best’.
confidential
33 Foley Street, London
This sale is demonstrative of the opportunity for pricing outperformance when selling something truly rare – in this case long income in a building which has been ‘future-proofed’. It also shows how seasoned investors are looking to use this moment to secure generational assets which look sensibly priced on a long term basis.
+2.5%
Fountain Precinct, Sheffield
The principal concern from investors here was in relation to the void and capex risk in particular given the poor EPC ratings throughout the building.
-70%
3 Arlington Square, Bracknell
This is an example of a motivated fund seller trading an asset in a sub-market currently challenged by a reduction in active capital. The building itself was short let with 32% vacancy, it is over 20 years old and will therefore require capex in the short term.
-54%
The Pavilion, Thames Ditton
This sale generated good investor demand due to the strength of the alternative use prospects.
+13%
It is also no surprise that, in reaction, we have witnessed re-pricing (a motivator for many).
Below we provide a series of example transactions that we have been involved in this year. These transactions span differing geographies and risk profiles and help to show the variance in prices being achieved. It is impossible to make broad brush remarks on percentage change in value because there are so many different factors at play including; owner pressure to trade (e.g. end of fund, refinancing), asset nuances (e.g. micro-location, condition / quality of the real estate, tenure, tenancy profile), and buyer motivations (e.g. diversification, pressure to spend, reduced competition) but what we can say is that we have seen everything from 0% to 70% on the downside, as well as up to 15% on the upside. The percentage change shown below relates to the difference between the quoting price and the achieved price.’
Atlas House, London
This sale generated significant interest and the price change from quote is demonstrative of both the demand for assets in the best locations as well as the specific current positivity in the City of London in relation to the conversion of some offices to hotel use - the buyer in this case has exchanged without any conditions relating to planning.
+15%
Every building has its own idiosyncrasies and characteristics that will dictate a likely strategy, here we consider some typical interventions that can assist in maintaining the long term attractiveness of an office asset. GreenFiT is a strategic consultancy service that helps create value for single office assets or wider portfolios through all stages of operation, maintenance, refurbishment and retrofit.
what's the alternative
01. Roof
Improve thermal performance – add additional insulation
Biodiversity net gain – installation of a green roof
Enhance renewable energy generation – installation of PV panels / allocate plant area for air source heat pumps to replace gas fired equipment
Drive rental tone / improve wellness credentials – installation of roof garden / terrace areas
02. Windows
Improve thermal and solar gain performance – replace glass / add protective film / add solar shades (fins)
Better control energy use – integrate openable windows into the BMS for natural ventilation during appropriate months
03. Façade
Improve thermal performance – increase the solid to glazed ratio / replace façade (vacant possession required)
Protect / enhance value – improve aesthetic appeal through replacement or repainting
Biodiversity net gain – installation of green walls
Drive rental tone / improve wellness credentials – installation of terrace areas
04. Building Management System (BMS)
Optimise energy usage – check functionality of existing BMS, ensure it is working as it should (e.g. limit energy usage at night when the building is vacant) /make improvements to energy performance through effective data collection – meter and measure / replace BMS
Use space more efficiently – right size building equipment by making adjustments to temperature set points and time clocks based on usage
05. Modelling
Enhance building operations - create a modelling / simulation digital twin to allow actual building operation to be compared with optimal operation and to test potential interventions for effectiveness
06. HVAC (Heating, Ventilation, Air Conditioning)
Improve sustainability credentials – replace gas boilers with electric only systems
Reduce energy use – install air, ground or water source heat pumps, ensure fans are variable
Run systems efficiently – ensure systems include heat recovery / the recycling of heat
07. Lighting
Improve environmental impact – change to LEDs / improve controls (presence detection and day light dimming)
Improve customer experience – ensure lux levels, uniformity and glare are appropriate
08. Water
Improve system efficiencies – install water saving taps and showers / install rainwater harvesting infrastructure
Control / prevent drainage issues – attenuation, blue roof installation to slow rain water and prevent system overload
09. Waste
Effective recycling – provide sufficient space for the separation of waste (e.g. redundant storage areas or car parking bays)
10. Refurbish / Extend
Support customer wellness initiatives – repurpose underutilised areas to add amenity, improve staircases to promote greater use
Improve financial performance – infill / extend to improve layout and increase NIA
Prevent unnecessary waste during a tenant fit out – retrofit to shell and floor specification or retrofit to plug and play / Cat A+
11. Reception
Improve customer experience and social connectivity – carefully design arrival experience, ‘hotelification’ through servicing and amenity
12. End of Trip
Improve attractiveness of offering and drive rental performance – improve shower / cycle store for active commuters, provide additional amenity where possible (e.g. gyms, yoga studios, entertainment spaces, relaxation and quiet areas etc.)
13. External areas
Improve wellness credentials and social impact – where possible add spaces for external working, spaces for exercise, spaces for wider community use
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Solstice House
Ropemaker
Havelock
Savills GreenFiT Case Studies
The client wanted to future proof this 72,000 sq ft prime office asset, built in 2001, which had an EPC D rating and dated 1990’s appearance with a large atrium and inefficient core. The client wanted to maximise the value of the asset whilst also meeting their own environmental and social performance aspirations.
Challenge
Manchester, UK
We carried out extensive project feasibility, Net Zero Carbon advisory, Whole Life Carbon Assessment and NABERS UK Design for Performance verification and project managed the building redevelopment. The chosen solution was for a back to frame retrofit which included an additional two floors, partially infilled atrium, reconfigured core and re clad, resulting in the NIA being increased from 72,000 sqft to 105,000 sqft. The re-cladding of the façade has visually repositioned the building in the market place whilst also ensuring reduced solar gain and improved air tightness.
Solution
The works have resulted in a 4 million kg CO2e saving of embodied carbon compared to a new build version over the lifetime of the asset and an estimated 70% reduction in operational energy. The target EPC is A and the NABERS DfP process is targeting 5 stars. It achieved an ‘Outstanding’ BREEAM Design Stage rating, being ranked in the top 1% of buildings and one of first retrofits in Manchester to achieve this. The building meets the needs of the modern occupier with a focus on flexibility, staff wellness and comfort and is designed to meet the ESG requirements of institutional investors, maximising value.
Results
Services provided:
Project Management, Employers Agent, Carbon Consultancy, Office Agency, Planning
Savills project team:
Building & Project Consultancy, Savills Earth, Office Agency, Planning
Date:
Completion due Q1 2024
Client:
Credit Suisse
We’re here to help you navigate changing ESG regulations, empowering you to protect both your investment and the planet.
In light of an upcoming lease break, the client was keen to retain the main tenant within this 595,000 sq ft multi-let office building, constructed in 2009. The tenants ESG aspirations were driven by net zero carbon, EPC, BREEAM and building amenities.
London, UK
We carried out an net zero pathway and EPC analysis of the building to plan interventions which would enhance the asset and align with both the tenants and market requirements. We subsequently provided full project management and workplace consultancy of the energy improvements and end of journey facilitates. Enhancing the high quality nature of the asset.
Following the completion of the interventions, EPC rating was improved from a D to a B and the building achieved a BREEAM In Use ‘Excellent’ rating. This enabled us to engage and successfully negotiate the removal of the 2025 lease break and retain the main tenant within the building.
Net Zero pathway, EPC Modelling, Engineering Design Consultancy, Carbon Consultancy, Project Management
Building & Project Consultancy, Engineering Design Consultancy, Savills KKS, Savills Earth, Property Management
June 2022
Client industry:
Commercial Property Investors
The tenant’s lease was due to expire in 2025 and the client was keen to both retain the tenant and maintain value on this 31,000 sq ft office building, constructed in 1989. Our client wanted to understand how they could keep the building competitive in the leasing market and ensure the building continues to performs at a good specification. To understand this the client needed to be informed of the technical performance of the building and where improvements and specification upgrades would be recommended.
Milton Keynes, UK
We produced a Net Zero Carbon Audit report to provide them insight into the EPC improvement potential and associated costs, the current carbon performance and reduction potential along with advice on engineering plant replacement works, building upgrades, refurbishments, and the like.
Our team successfully managed the delivery of a complex multidisciplinary instruction of varying interlinking services to meet the client’s objectives. The EPC rating was improved from a D to a C on the new baseline certificate, along with us giving various interventions to improve this further to an A rating. This was presented to the tenant as part of the current new lease negotiations, both creating a more efficient office building and increasing return on investment for the client.
Net Zero Audit, EPC modelling
Building & Project Consultancy, Engineering Design Consultancy, Savills Earth, Business Space Investment
Real Estate
Ever changing occupier tastes and evolving environmental legislation has meant landlords must continually consider future proofing their office buildings. In order to protect or enhance value, a strategic plan for incremental improvement or potentially major refurbishment is likely to be required.
Circular Economy – minimise carbon and waste by retaining and reusing materials on site or specifying low embodied carbon products where possible
Development Manager:
Simten Developments
explore greenfit
what’s the alternative?
We’ve referenced how some offices, troubled by location or quality, will no longer be able to attract tenant demand. But before we consider how alternative uses might provide a solution for these stranded assets, we first need to understand the planning landscape.
value protection & enhancement
A large proportion of office buildings are located in sustainable town centre locations that have benefited from significant investment in infrastructure and where there is often a presumption in favour of alternative town centre uses, including leisure, retail, residential, student accommodation and hotels. There is therefore a strong planning case for alternative use provision in obsolete office stock. However, the main barrier is that local policies often protect employment space, usually requiring between 12 – 36 months marketing evidence to support the loss of office space under a planning application. Use Class E, which was introduced in September 2020, amalgamated a number of former commercial, service and business use classes including offices. Therefore, providing there are no planning restrictions limiting the use of a building to only an office, that floorspace can be used for alternative Class E uses without a planning application, including for R&D purposes (i.e. ‘life sciences’), retail, leisure, restaurant space, medical and health services and gyms.
From residential to education, we hear our industry experts’ views on some of the alternative uses for offices below.
Is demand from education providers increasing?
We’ve experienced a notable increase in the level of enquiries from
Examining education
education providers. These range from traditional, well-known public universities to specialised, privately-run colleges and academies. For context, 35% of the Greater London take-up so far in 2023 has been education deals. The majority has centered around expansion into London; Teesside University for example taking 27,000 sq ft at Here East. We’re also seeing relocation within the capital, as occupiers try to attract students with better quality buildings – as seen with the Elizabeth School of London taking 32,000 sq ft in Harbour Exchange.”
What type of spaces are these occupiers looking for?
In some instances, they are taking brand-new office accommodation.
In London, we have seen several non-London universities take high-end offices for new London-based campuses. For example, Sheffield Hallam at Brent Cross Town. However, the majority of educational demand concentrates on existing office buildings, giving landlords an opportunity to repurpose. To be education-ready, landlords are likely to need to provide more cycle facilities and self-contained spaces. Other attractions to consider include speculative dual E/F1 Use Class consent, being VAT-exempt and providing for a high-density occupation. The AMP by Trilogy is a fantastic example of this.
Is this just a London phenomenon?
There’s no doubt the draw of a London address is a major driver for
many institutions, as they look to attract international students. However, we are seeing similar demand across our whole network. As an example, in Birmingham 29% of take up of office buildings originated from the education sector.
What does demand currently look like in the science sector?
The fundamental drivers of demand for science-related space remains
strong and unchanged. These centre around factors such as ageing global populations, increased government and personal spending on healthcare, and the rapid pace of scientific discovery and new technologies. While there may have been a short-term impact on small and medium-sized enterprises and their occupational demand, due to restricted venture capital investment, mature markets like Cambridge have been less affected. Looking forward, we’re confident demand will continue for the right product in the right locations.
Could obsolete office spaces turn into labs to tap into the life science sector?
There is certainly potential for this, but it’s important to note a few key
challenges when considering this option. The life science sector is still relatively small compared to conventional offices. Repurposing may not always be feasible due to specification requirements, such as flooring and servicing. While the buildings themselves may not be economically viable for conversion, if the location is right, the value may simply lie in the land itself.
Are there genuine opportunities outside the ‘Golden Triangle’?
As the headlines suggest, the Golden Triangle (London, Cambridge and
Oxford) does indeed dominate both occupational and investor demand compared to other regions. While many regional centres have strong academic and clinical expertise, the number of small and medium-sized enterprises and venture capital investment is generally lower – leading to that lower demand. However, we do anticipate gradual growth and momentum across other regions, likely taking around 10 to 15 years. Before investing in this sector, it’s crucial to thoroughly understand the academic strengths of a region and its ability to leverage these.
Space for science?
Head of Savills Science
Tom Mellows
Have the drivers of demand for hotels changed since the pandemic?
Tourism is responsible for 7–8% of UK GDP. Operator demand is very strong,
supported by the robust hotel performance recovery, with the average daily growth rate exceeding that in 2019. We continue to see interest from both experienced operators and new entrants across all product types, which is providing landlords with interesting conversion opportunities. Ultimately, the fundamental drivers for demand in UK hotels remain unchanged or even accelerated post pandemic.
How does location come into play?
Appetite remains high for London and key regional cities that benefit from
strong corporate and leisure demand. You could argue that if corporations are not acquiring offices in certain cities, the hotel demand will consequently be weaker, meaning hotel conversion strategies may not work in those locations. Bolstered by the return of international travel, London and Edinburgh have been the strongest city performers so far in 2023, with the expectation for them to retain that status over the next 18 months as travel continues to rapidly recover.
What are the physical aspects to consider when converting from office to hotel?
Physical constraints are a major consideration. Deep floorplates
are a barrier, compromising natural light – although this may be less of an issue for budget operators, it will still affect the residual value. However, there are many live examples of potential office to hotel conversions, an example being Atlas House a 65,000 sq ft office building in the City of London where the majority of interest is from hoteliers.
How about hospitality?
Associate Director, Hotels
Phoenix Chow
Is the residential market sufficiently robust given the macroeconomic picture?
There is a national housing shortage. There is also a shortage of land supply
in most areas of the UK particularly in those core towns and cities which have historically had a significant level of offices. While the current macro-economic picture is challenging, the need for housing, particularly in sustainable brownfield locations, will not change. This robustness is also reinforced by the wide range of residential tenures focused on urban living. Market sale is one approach but build to rent, retirement/later living, student and affordable housing can also be considered. There is therefore a multi tenure approach to the opportunity depending on the site, location, viability and demand.
Do we believe conversion of office stock responds to this?
Yes. This has been done before successfully. Pre pandemic, Bristol
for example, had one of the highest rates of office to residential conversion outside of London following changes to national planning guidance in 2013. This provided much needed housing but resulted in a shortage of office space. One of the consequences was increased office rents which delivered new Grade A office space. Potential now exists given the macro changes to the market post pandemic where demand for offices is focused on the ‘flight to quality’ and ESG credentials. This leaves behind office space which can be repurposed for a range of residential tenures and increasing the vibrancy of town and city centres.
What are the limitations to this alternative use?
There are challenges when it comes to the conversion of office buildings.
Some do not have the structure, floorplate or location to deliver a viable alternative use. There is clearly a need to assess the cost and consequence of residual value/return in any refurbishment but the practicality of the building itself needs to be taken into account. Successful residential conversations also need to focus on quality and the level of amenity offered.
Navigating new homes
Director, Development
Jonathan Lambert
Landlords with problematic office spaces may then find success in repurposing projects, with housing, hotels, life sciences and education providing examples of alternatives. This, however, is not an exhaustive list and other opportunities may present themselves. The Savills team is well placed to provide advice from both a planning and alternative use perspective.
Holly Purvis
Director, South-East Offices
CONTACT
Permitted development rights do still exist for office to residential conversions so there is help there to support the conversion of offices into new homes. An application for ‘prior approval’ of certain technical matters is required and there are certain limitations including a 1,500 sq. m limit on the amount that can be converted and that the building must have been vacant for three months. However, a recent appeal decision has indicated that the 1,500 sq. m is not a finite cap on a building, but essentially a cap per application meaning multiple applications could be used to convert larger buildings. Furthermore, the Government has recently consulted on whether to expand the permitted development right to remove the floorspace cap completely or to increase the limit to 3,000 sq. m and to remove the three-month vacancy requirement. It therefore recognises the potential for obsolete office stock to meet housing need and a previous incarnation of the permitted development right proved successful in delivering approximately 75,000 new homes from office buildings over the period 2015 - 2022.
residential
Life Sciences
Hotels
Education
Matt Sobic
NATIONAL PLANNING
Yes. This has been done before successfully. Pre pandemic, Bristol for example, had one of the highest
rates of office to residential conversion outside of London following changes to national planning guidance in 2013. This provided much needed housing but resulted in a shortage of office space. One of the consequences was increased office rents which delivered new Grade A office space. Potential now exists given the macro changes to the market post pandemic where demand for offices is focused on the ‘flight to quality’ and ESG credentials. This leaves behind office space which can be repurposed for a range of residential tenures and increasing the vibrancy of town and city centres.
There is a national housing shortage. There is also a shortage of land supply in most areas of the UK
particularly in those core towns and cities which have historically had a significant level of offices. While the current macro-economic picture is challenging, the need for housing, particularly in sustainable brownfield locations, will not change. This robustness is also reinforced by the wide range of residential tenures focused on urban living. Market sale is one approach but build to rent, retirement/later living, student and affordable housing can also be considered. There is therefore a multi tenure approach to the opportunity depending on the site, location, viability and demand.
There are challenges when it comes to the conversion of office buildings. Some do not have the structure,
floorplate or location to deliver a viable alternative use. There is clearly a need to assess the cost and consequence of residual value/return in any refurbishment but the practicality of the building itself needs to be taken into account. Successful residential conversations also need to focus on quality and the level of amenity offered.
WHAT'S THE ALTERNATIVE?
Global Cross Border Investment
Mark Porter
National Investment
Ed Nicholson
Central London Investment
Marylis Ramos
Savills Earth
Steve Page
GreenFit
National planning
National development
hotels
Science
Matt Nagle
recoveries
Mat Oakley
Research
Andrew McMurdo
Debt advisory
Nick Harris
Valuation
