COMMENT London is a global city by anyone’s standards. A population of 9m and growing. Finance, technology, hedge funds, public equity, fashion and tourism are all up there in terms of scale and global competitiveness.
London also has one of the largest office markets in the world, and in 2022 this sector has changed to now present one of the greatest real estate opportunities of the past quarter of a century: transitioning to sustainable, post-Covid, grade A+ offices.
Within the first two days of the initial lockdown in March 2020, Londoners were working from home and adapting bedrooms, studio flats, suburban semis and, for the lucky few, rooms above detached garage blocks into office and home schooling spaces. In a matter of days, occupancy of London office premises went from 90% to 10%. The London office sector experienced 20 years’ worth of obsolescence in a 20-month period of hard and soft lockdowns.
Home-working staff now have a very different view of what they want out of their office experience, and this has not been lost on companies. In many sectors in London, a war for talent has emerged over attracting and retaining our most valuable resources.
Decisions and demand
When exploring the types of spaces that companies and employees demand today, a top priority is hygiene, with a higher amount of space per employee being only part of the answer. A healthy environment, both physical and mental, is key.
Collaboration is also crucial to team productivity and idea generation, while mental health remains one of the top three criteria for global companies. In short, generations Y and Z, and many in my vintage (Gen X) now demand energy-efficient and sustainable office space. Through the Covid years we have become more conscious of our carbon footprint, and we are not going back on our promises.
The “new demand” for sustainable grade A+ office space is here to stay, and good companies know it. If anything, it will get a lot worse for companies that will need, with great shame, to disclose their carbon footprint to investors, stakeholders and employees. Or companies can choose to change. New regulations mean that offices with an EPC rating of F or G will become obsolete by 2023, when the new regulations kick in. Some 20m sq ft of London offices, or 10% of the total stock, will then be obsolete. But the stakes are being raised further. The market is moving towards only the highest EPC ratings of A and B being legal by 2030. Caveat emptor.
In the old days, the owner or chief executive of a business would make the office decisions, perhaps at best delegating this to their number two or internal real estate team. But now, the HR director has become the most influential person and the one to convince.
The war for talent is intrinsic to the company’s success, and real estate is a key part of that equation. For the HR director, collaboration space, huddle corners, warm and welcoming receptions and even wellness amenities and adaptable breakout rooms have become the key factors for success. Above all, hygienic spaces with comfortable ambient temperatures are paramount. Research now shows that an average of 21-22ºC increases productivity by 10-12%. Sensors can now also monitor temperature, humidity, energy efficiency and usage.
Office space must be strong on sustainability standards, with metrics that can prove it. Space must be well designed, with glowing natural light. In short, office space must get your team excited about coming back to the workplace.
Great migration
Today, three factors have collided to create the perfect storm of opportunity: sheer scale (poorer-quality grade B space represents around 85% of the market); the lockdown-driven swiftness of the change; and the lack of grade A coming through by way of supply pipeline. As a result, where we have seen sustainable and collaborative offices come to the market, occupiers are paying a 10-12% premium.
We are living through uncertain and challenging times, and the London office sector is just further proof of that. But if we, as real estate owners and investors, listen to the new demands of occupiers, what lies ahead of us will become increasingly certain and predictable.
As ever, conservative underwriting is a must, but there is undoubtedly huge potential for us all to be part of the great migration from grade B to sustainable, post-Covid grade A+ offices. Watch this space.
Derek Williams is head of UK commercial fund management at Edmond de Rothschild
