Nowadays, tenants want more amenities, and long-term leases are becoming less common. Plus, energy efficiency and sustainability are becoming major concerns for landlords and tenants alike. This means that building owners and management teams need to get creative and think outside the box to create sustainable and flexible spaces that meet the needs of today's tenants.
We recently hosted a roundtable of UK commercial property leaders for our ChangeMakers in CRE Breakfast Briefing in London to discuss the dynamic landscape of commercial property management. Much of the discussion focused on the office market but other challenges addressed, particularly around current EPC regulations, were relevant in looking at the wider landscape.
Sam Caulton, CFO of Re-Leased led the discussion, with further insights provided by our guest speakers:
Samantha Sherrard, Head of Commercial Estates Management at The William Pears Group
Rob Stark, Senior Executive Director at MAPP
Harvin Chohan, Senior Surveyor at CBRE
Rebeca Guzman Vidal, Principal at Bridgemont
Flexibility & managed fit-outs are here to stay
The nature of the office has undoubtedly changed, with hybrid work now the norm rather than the exception. As a result of this shift, tenants are looking for more flexibility in their space and a higher quality offering, more akin to occupying space in a flex offering.
As Samantha Sherrard notes, occupier needs for amenities are increasing in order to attract workers to office spaces. This means that landlords and property managers are increasingly focused on providing first-rate amenities and services to tenants to create a more attractive and welcoming environment.
“Gone are the days of long leases. There is now an increase in the flexibility. They want to come in with the space furnished now as well." - Samantha Sherrard
These service-oriented “Plug & Play” and Cat-A spaces are becoming increasingly popular and are commanding prime rents as a result.
Harvin Chohan echoed this sentiment noting that tenants are no longer just looking for office space, but also for a system of management.
"Companies that are looking at flex – they don’t want a space operated by the big flex companies, but they do want a system of management. They do not have the funds to support the prime rates of full flex and don’t want to invest heavily in long leases and a full fit-out." - Harvin Chohan
Tenants are interested in a managed fit-out approach, where selected partners fit out the office space to their needs, whether that be a Bronze, Silver, Gold, or fully bespoke fit-out.
Furthermore, as Rob Stark notes, the younger generation of employees is looking for more than just a basic office space. They want comfort and necessary amenities to support their work-life balance. This has led to a focus on expanding the use of space and providing higher-quality space for employees.
“Even though you’ve got people coming in on Wednesday and Thursday, it's still the same headcount. You can't reduce your space on that basis. We’re actually taking up more space than we used to because we want to do different things with our space.” - Rob Stark
The need for operational efficiency
The trend towards hybrid working models is also leading to a greater focus on operational efficiency and cost savings for tenants. With many spaces remaining unchanged to accommodate the same headcount there is a need for systems and procedures to conserve energy, costs and space utilisation when areas are dormant.
"It is all very well that the space is energy efficient whilst we are using it, but with massive capacity fluctuations, as a result of this new hybrid work model, tenants are asking, 'What is my space doing when I am not there? How can make sure that I'm being more efficient with my space?'" - Rebeca Guzman Vidal
This spotlight on efficiency has seen some building owners and managers equip tenants with access to their energy consumption reads to help them monitor usage.
“Energy costs have become a big challenge and we’re now providing tenants with data. Most of our metres are on AMR's or Automated Metre Reading devices, which feeds into portals where people can then check their consumption. That’s now become an extra question every time somebody takes a space, ‘How much will it cost us to run the property?” - Samantha Sherrard
The compliance conundrum of EPC ratings
Energy efficiency was a hot topic for the roundtable, especially with regard to the UK’s Energy Performance Certificate (EPC) ratings. In April, a new regulation came into effect stipulating that commercial buildings must have a minimum energy performance rating of E and must achieve a B by 2030.
This will prove to be a costly undertaking considering roughly 75% of the UK’s office buildings are rated below a B, according to research from Savills.
The investment required to upgrade buildings to meet increasingly stringent EPC standards can be significant, and the return on this may not be clear or immediate. In some cases, the cost of upgrading the building to meet the required EPC rating may be higher than the value of the property itself. As a result, landlords and property owners must carefully evaluate whether it is worth the investment to upgrade their buildings, or if it would be more financially prudent to let go of those assets.
"I think there is a gradual realisation that the benchmark of Grade A energy efficiency is not entirely achievable and landlords are asking themselves what is good enough and how do we get there," says Samantha Sherrard.
"Soon, buying a property that is E grade will not even be a consideration for most as the subsequent investment requirements thereafter are huge and of no interest for most, especially if you are not in the business of holding these assets for the long-term."
In the face of these new regulations, Rebeca Guzman Vidal believes there must be some input from the public sector on the way forward, rather than implementing it and leaving companies to navigate their own way.
"It is time for the public sector to realise it is a joint effort too. It is all very well putting these standards and regulations into place but it is as if the government has said, 'Here you go private sector, sort this out or you will be penalised.' They need to provide support in achieving these very large projects in a very short time."
- Rebeca Guzman Vidal
Unlocking the potential of technology
Another point of discussion was the use of technology among those in the room. The commercial real estate industry has seen a surge in technology adoption in recent years, but one major challenge remains; the lack of integration between various solutions.
Rebeca Guzman-Vidal acknowledges the significant investment in proptech but emphasizes the need for consolidation in the sector.
"There's a lot out there, but there's very poor integration between all these services. I appreciate there's a lot of money that's gone into proptech but I don't think we've seen enough consolidation in the sector to say, ‘OK, here’s an industry standard of say 10 different things that you can use and everyone is going to adopt one of those 10."
"The biggest challenge is that you feel like, 'Right we'll sign up to this, but we won't be able to integrate it with anything else that our teams are currently using.' I think that's the challenge." - Rebeca Guzman Vidal
Addressing the need for consolidation, Tom Wallace, Founder and CEO of Re-Leased, identifies an opportunity for the company to play a central role in the ecosystem. With the market currently inundated with so many solutions, Re-Leased aims to bring together these disparate offerings.
“We see a really good opportunity to do that consolidation. There's an increasingly fragmented market of point solutions out there and we see ourselves at the centre of that ecosystem
We've got some good partners, but we also think there are some great opportunities to bring them into Re-Leased over the next year." - Tom Wallace