Unlike the fresh faced Research team at Jones Lang LaSalle, much of the UK’s office stock is old and worn out. As much as 22% of the commercial building stock in the UK dates from before 1960. As highlighted in our latest report From Obsolescence to Resilience , the current rate of building replacement across Europe has been estimated at just 1-2% per year. We would argue this is nowhere near enough to keep obsolescence at bay.
While obsolescence is not a new phenomenon, we believe there are three fundamental drivers that will accelerate this risk going forward. Where a building is no longer desirable or fit for purpose, we will see obsolescence accelerate due to the combined forces of changing legislation, evolving corporate requirements and new workplace technology.
Buildings which fail to meet the evolving preferences of corporate occupiers or incorporate new workplace technologies will trend towards obsolescence. Legislation in the form of sustainability obligations will also drive change. From 2018 the Energy Act will make it unlawful to lease a property below a minimum energy rating, expected to be EPC “E”. Although the onus will be primarily on landlords to refurbish or upgrade properties, occupiers are not immune from these changes as they will impact on sub-lettings, assignments and future exit strategies.
All this creates substantial risk for the industry, but there is also an opportunity for the savvy to get ahead of the game. Outperformance will undoubtedly derive from high quality sustainable product, but there are potential gains to be made from the proactive refurbishment and asset management of suitable stock. With many investors priced out of prime Central London offices, there are gains to be made elsewhere. There is great potential for investors to access challenging, but appropriate stock and refurbish, provided the building works in terms of location and future demand. Where a building has reached full obsolescence, it may provide a compelling opportunity for alternative uses.