The following article is featured in our Thames Valley Office Market report 2013, which can be downloaded above, or by clicking here.

Space requirements to reduce by up to 50% in the next five years

Demand for office space in the UK is undergoing a major structural change. The implementation of modern workplace practices means that it is perfectly possible for a company currently occupying a 200,000 sq ft building to simultaneously upgrade their space while reducing their occupational footprint by at least 20-40%.

The mantra for large corporate occupiers and forward looking public sector occupiers is now “better quality space, but less of it”. In the last 20 years, the amount of allocated space per person in an average UK office has halved and occupiers expect this reduction to continue. Indeed, public sector occupiers surveyed for the 2012 British Council of Offices report “Change for the Good – Identifying Opportunities from Obsolescence” (co-authored by LSH), said that their space requirements would reduce by as much as 50% in the next five years.

There’s too much low quality space

These structural changes have coincided with a downturn in the market since the peak in 2007-08. Availability rates are already well above average in the UK, and the vast majority of this space (73%) is secondary or tertiary. In the Thames Valley, more than 1.76m sq ft of available space is grade C, for which there is very little market. Much of it will never be let again.

The implications for the office market are clear: we have too much low quality, obsolete office space in the UK. This means offices that are either:
•  Locationally obsolete - the building is in, for example, an inaccessible out of town location where there is no occupier demand.
•  Functionally obsolete - the building is not fit for purpose due to changing technology, new regulation or changing occupier demand, i.e. small, irregular-shaped floorplates or cellular design.
•  Physically obsolete - the building’s fabric and/or M&E specification has deteriorated to the point where the cost of occupation outweighs the benefits accrued by the occupier.

12% of available Thames Valley office stock is obsolete

Nationally, our findings suggest that there is approximately 11.7m sq ft of obsolete regional stock currently on the market, which is more than 27% of the total regional availability. In the Thames Valley, 12% of available office stock (1.4m sq ft) is obsolete as office space and, of this stock, 1.06m sq ft (76%) is deemed suitable for residential conversion. This obsolete space is a drag on the market by artificially inflating availability figures. In turn, this is discouraging new development in locations which have high levels of secondary and tertiary availability but low levels of the type of office space that occupiers are increasingly targeting.

Obsolescence is not restricted to vacant stock either. Many companies occupy buildings which do not meet their requirements and that they plan to vacate at the earliest opportunity. Survey data from the BCO report on obsolescence indicated that some occupiers have portfolios where they consider up to 60% of space to be sub-optimal. Unless measures are taken to return this space to marketable condition when it becomes available, the likelihood is that it will remain on the market.

Refurbishment or conversion?

For some landlords refurbishment is a viable option – if the building is in the right location and the physical condition and layout allows it. However, there are other options available to the owner. Chief among these is the conversion from offices to another use class, whether that is residential, student accommodation, hotel or even place of worship.

The conversion of offices to another higher value use class is not a new phenomenon. Even at the height of the boom there was a trend in some oversupplied South East markets for office to residential conversions. But, in recognition of the growing problem of obsolescence, the government has recently announced new rules, applicable in England only, that will allow office space to be converted to residential without need for planning permission.

Time to convert

With above average levels of availability in almost all markets, an accelerating process of obsolescence, changes in the pattern of office demand and a sympathetic planning system, now is the time for landlords and developers to look for opportunities to take obsolete buildings off the market and convert them to an alternate use. Not only will this benefit the office market, it will help with the current shortage of residential development, which is one of the government’s key priorities, and has the potential to drive much-needed economic growth via the construction industry.

To download a copy of the Thames Valley Office Market report 2013, click here.