CONVERSION EQUATIONS

ILLUSTRATIONS: BATCH (FOLIO ART)

If post-pandemic changes to work patterns mean an office building is only fully occupied on three days of the working week, does that mean the place concerned only needs three-fifths of an FM? And if occupancy is down like that in the long term, does the lessor need less office space?

In turn, can a local planning authority expect a slump in applications to build office blocks, leading to a fading of the ecosystem of shops, cafés and bars that support a commuter-based office economy as the number of customers falls, followed by a general depression in urban centres?

Many extravagant forecasts were made during the pandemic of emptying offices and cities as working at home became the norm. What has happened might be described as a change more radical than those committed to the traditional office work model wanted – but also less disruptive than the evangelists for homeworking predicted.

For FMs now seeing offices that are less busy than pre-pandemic – at least on some days – this has meant a change in thinking, from servicing places that employees are required to attend to servicing places they can choose to attend or not. What goes on within these offices – who is in them, when, and what they will thus demand from FMs – is in a state of flux. Although demand for office space looks unlikely to return to pre-pandemic levels, the traditional urban centre business district, with the office space it contains, looks to have life in it yet.

Simon Venn, managing director of technical services and chief government and strategy officer at Mitie, says: “With the transition to hybrid working, the use of city centre workspaces is changing. For many people, the biggest barrier is the journey and whether they feel a day in the office is worth the time, effort, and expense it takes to travel in. Therefore, the holy grail for FMs is to create commute-worthy workplaces.”

The pandemic period of 2020 to 2021 saw a noticeable shift in firms initially adopting, or further leaning into, the analysis of space use, with increased public interest in wellbeing sparking new forms of output. The jury is still out on the value of this.

“On modern, data-driven sites, part of this work is in adapting spaces to improve accessibility,” Venn says. “For example, we are able to provide supportive working conditions for neurodiverse colleagues by using technology to monitor and alter the temperature, lighting and humidity to a level that is more comfortable for them.”

Many are turning now lesser-used parts of a building into different ‘zones’ to suit different employee groups: quiet areas for when colleagues need to take time out from a noisy office floor; areas with additional stimuli, such as artwork or music; and larger communal areas for colleagues to come together. Venn adds that a new approach to usage data is key to the decisions organisations take with their space. Should an occupier that is experiencing peak employee demand for working space on a Wednesday let that space lie idle on a Friday, or instead lease only a ‘Friday’ amount of space and just hope everyone can fit in on Wednesdays?

“Naturally, on days that are busier in the office there will be a higher demand for space, which is where technology and data is so key,” Venn says. “The FM industry is continuously introducing technologies [contemporary room and desk booking apps] that are changing the way facilities professionals are managing spaces.”

But for some, the installation of sensors to gather footfall and occupancy data is a novel concept, as is adapting the space in line with what the figures tells them. This can allow a rethink on energy efficiency priorities, for example, through reducing access to some areas on quieter days, or scheduling maintenance works on days with the lowest footfall.

An asynchronous effect

Consultant and IWFM awards judge Mike Packham largely agrees with future projections on city centre office use and its effects on the profession.

He says: “Even before the pandemic there was an increasing trend towards working from home and Covid-19 brought that forward as people discovered they could work from home. Offices now are busy from Tuesdays to Thursdays but not on Mondays and Fridays. What this means for FM is really quite profound; if you were set up for five-day working and its now only really three, you have two spare days.”

The issue of crowded Tuesdays to Thursdays – with over-subscribed desk or meeting room bookings –only to then have Mondays and Fridays in which users can pick and choose at their leisure, creates difficulty for FM,” says Packham.

City Of London Capital Gains

Judging by the City of London Corporation’s demand for offices, it’s as if the pandemic never happened.

Shravan Joshi, chairman of its planning and transportation committee, says: “While clearly the pandemic has changed the world of work, we received more planning applications last year than in the previous two years and we have proposals for 10 tall buildings either at application or pre-application stage.

“The high number of applications shows that demand for City office space is very strong post-Covid. International investors remain confident that the City’s office market will remain resilient in the face of challenging economic headwinds.”

Joshi says Central London quarterly office take-up “has now returned to the pre-pandemic average, sustained by factors including pent-up demand from the Covid period and significant pre-letting of new developments”.

But the City has seen a glut of second-hand space coming on the market, which has led to vacancy at around 11%.

As workers return, “the City has regained its old buzz over the last year [and] we are up to 80% of pre-pandemic levels of footfall”, says Joshi.

Experiential offices

The main demand is for quality, sustainable, techenabled offices and bespoke ‘experiential’ offices, says Joshi. To the immediate east, Canary Wharf in London’s Docklands was able to let more than 415,000 square feet of office space in 2022 and signed 20 new office leases – pointing to a successful year for office leasing, with further momentum expected in 2023.

Katie Oliphant, Canary Wharf’s managing director for offices, boasts of her organisation having overseen the area’s “transformation… into one of the UK’s most sustainable, mixed-use neighbourhoods, offering an extraordinary environment to all those who work, live and visit the estate.”

More broadly, the footprints of central business districts may well shrink as people decline the longer commute in favour of travelling short distances to suburban office locations, which could grow as a result, Packham says. But as of 2023, this remains theoretical.

Ian Fletcher, director of policy at the British Property Federation, which represents office building owners, says any decline in business in central business districts has not yet happened. Although it might appear obvious at first that fewer people in an office means less space is needed, Fletcher says: “That’s not what seems to be happening so far. What we’re seeing is that people who are downsizing are not necessarily going for 40 to 50% less space than they’ve got at the moment, it’s more like 10 to 20% with the make-up and layout very different. There’s a lot more collaboration space, open space, amenity space.”

A CHANGING LANDSCAPE?

8.4%

Percentage of offices in London that are currently unoccupied, according to CBRE, compared to the long-term average of circa 5%.

15.3%

Reduction in City of London rental values over the past six months

(SOURCE: MSCI)

5 x

Expected increase in science laboratories in London between 2020 and 2023 – mostly the result of office conversions

62%

Workers who either have the full choice over whether to use the office or have that decision made by local team management

(SOURCE: LEESMAN)

Hybrid working “ultimately means that we need less office space than we used to, but the more interesting thing is that it is going to be differently configured”, Fletcher says.

Meanwhile, property consultancy Savills says that, if anything, in some areas the story is about the need for more, not less space. It reports two prime office locations – the City of London and Canary Wharf –currently boasting of expansion (see box).

Savills’ January 2023 Market in Minutes assessment confirms the impact of agile working with the need for offices in the large regional cities last year down 8% on the five-year average, but still up year on year.

In central London, Savills reports office take-up as being 13% up on 2022, which puts it exactly in line with the 10-year average. These were not, however, all new lettings; the company noted a short-term surge in organisations choosing to improve the working environment they offer by upgrading the environmental rating of their building sooner than they might have normally done, so leading to increased use of break clauses and changes of occupant on lease expiry.

According to Savills, there is a “new normal” for office leasing volumes, “but the sector is far from in

Carbon And Capacity Conundrums

Transforming unwanted office space into residential use as a solution to redundant buildings is not without its issues

HSBC’s decision to vacate its London headquarters for a new location using 40% less space is an interesting recent development. Days prior to the story breaking, workplace consultant Tim Oldman – whose organisation Leesman measures and analyses the experiences of employees in their places of work – had warned of a similar 40% reduction in office space demand overall, based on figures from his firm’s ongoing analysis. “Big change is about to happen.” he said, noting that 40% fewer people in offices would mean a equal reduction of office space.

Oldman described the workplace and facilities management profession as being “on the edge of a cliff” because commercial office space is slowly becoming obsolete, and “that means a lot of real estate is sloshing around in the marketplace”.

Workplace consultant Andrew Mawson of Advanced Workplace Associates says the bank’s highprofile move reflects what his organisation has been observing – and that the move is “only just the beginning”.

Mawson explains: “We think supply will eventually double, and demand will halve. That means you’ll have about four times more space than is needed. Governments may need to prime the pump to turn offices into residential units and other uses.”

In New York, according to recent reports in The Economist, America’s biggest-ever office-to-residential conversion is currently taking place. A 1.1 million square foot skyscraper is being transformed into no fewer than 1,300 apartments of varying sizes. Amenities will include a spa, basketball courts, entertainment lounges and – crucially, in our new hybrid world – co-working spaces.

“It will be interesting to see if there’s enough cash for similar office conversions to residential in the UK,” Mawson says. “It will definitely be a buyer’s market. Occupiers with leases expiring over the next two or three years should not be hoodwinked by the agents and landlords into thinking that it’s a tight market because rents must now fall.”

There are, however, many technical challenges involved in these types of conversions more generally, and the cost of doing so with a former office building can outweigh the cost of constructing an entirely new one.

“Some conversion to residential will happen,” believes British Property Federation’ Fletcher. “But it can be quite technically difficult. Also, office to residential conversion has a bit of a bad reputation because of some of the frankly quite poor developments that happened about 10 years or so ago, when permitted development (PD) rights were first introduced.”

It is, indeed, the case that pre-pandemic PD rights allowed some highly publicised, poorquality retrofits of office blocks for residential purposes. Today there is more caution, with the Home Builders Federation citing space standards, aesthetics and the provision of amenity space as limiting the potential for wholesale conversion of business office districts into residential ones. The residential demand for natural light, higher-quality ventilation and more sophisticated plumbing can be insuperable challenges for some budgets.

All of which means that, for some, the preferred remedy is the bulldozer: knock the unwanted offices down and replace them with homes. However, the costs involved when considering this approach are not what they once were. A crisis”, with office take up having nudged seven and a half million square feet in 2018, falling to just over four million square feet in 2020 and recovering last year towards six million square feet.

War for talent

Fletcher says that the situation varies outside London. “In smaller cities like Oxford and Bristol, they have relatively higher occupancy levels because it’s easier to get into the office. Larger cities like Manchester and Birmingham, where it takes longer to get into the centre, have lower levels of occupation.”

Savills’ research suggests that although the overall total of office space taken in cities varied dramatically between its 2018 peak and 2020 slump, with a period of recovery, the share taken by each major market remained roughly the same. Manchester stayed in second place behind London followed by Birmingham, Leeds and Bristol. Prime yields – the ratio of rent income to the cost of buying a property – was up over the year to January 2023 from 3.25% to 4% in London’s West End, 3.75% to 4.5% in the City of London and 4.75% to 6% for provincial locations, rising to 6.25% in the South East.

Neil Pennell, chair of the technical affairs committee at British Council for Offices, has been thinking about the kinds of city offices in which people would hope to work. As much as business districts may change in character as residential adaptation brings in fresh retail and leisure facilities, employee demands and the war for talent is likely to see existing office-based businesses stay put, internalising some of this demand themselves in the form of gyms and so on.

“To attract and retain top talent, employers need their offices to be a place where people choose to spend time; workplaces that offer a rounded experience combining food, leisure and work with incredible facilities inside the building will become more attractive,” Pennell says.

“Also, office owners and operators are increasingly aware of the importance of providing user-centric FM and the need to work much more closely with customers to ensure the highest environmental credentials are maintained at every stage in the building’s life cycle.” key factor favouring conversion to residential rather than demolition and rebuild is the problem of the amount of embedded carbon involved in demolitions and primary construction, a topic currently rising up corporate agendas as businesses wrestle with their net zero aspirations.

Urban design specialist Chris Brown, managing director of consultancy Climatise, says local authorities are increasingly likely to encourage refit conversions with this in mind.

“I can see local authorities bringing carbon in [demolished buildings] into their carbon offset planning policies, which will favour the economics of building retention and also in having more general anti-demolition and pro-refurbishment policies,” Brown explains. “But a good rule of thumb is that if it isn’t viable to refurbish – at least if you catch the building as soon as it becomes vacant – it won’t be viable to build new, though the obverse isn’t always the case.”

There will be another matter for FMs to deal with, as building owners and the people who work in them pay ever greater attention to environmental issues.

Fletcher says: “This is coming from two or three angles. Firstly, although it’s not in legislation yet, everybody broadly expects that by 2030, commercial property will need EPC rating B if you’re going to let it, so if your property doesn’t meet that you’re not going to be allowed to let it, or not until you fix it.”

There is also pressure from occupiers demanding changes to accommodate hybrid working and companies wanting to meet their sustainability strategies, Fletcher says, while investors want to know they will not be faced with an office they cannot easily let because of sustainability shortcomings.

The business district office may be evolving, but it is not dying. Well built or retrofitted and environmentally sound office buildings are set to see increasing demand from occupiers as they ditch poorer quality space, with many main commercial centres likely to see rising yields and continued planning applications for office space.

One of the first thoughts a typical knowledge worker will wrestle with when asked to join a meeting in 2023 is this: which platform? Teams? Zoom? Google? And only then, perhaps: can I book a room in the office to take it? Workers have become accustomed in recent years to conducting or attending meetings in a mixture of home, office or third space environments. New residential spaces are even being designed with work meetings in mind with the provision of communal remote working lounges for tenants.

What this means is that, for providers of offices and the existing meeting space market, the very purpose and physical make-up of these spaces is changing. Space dedicated to banks of desks is being scaled back in favour of more meeting rooms and collaborative open spaces.

Meeting disorder?

Data from Remit Consulting shows the national weekly average for UK office occupancy has steadily risen, with a pronounced upward curve in the middle of the week. But the great ‘return to the office’