Insight 6:

Retrofit or

Repurpose?

The polarisation of London’s office market – encompassed by the well-rehearsed phrase ‘flight to quality’ – is shining a light on the challenges to the secondary office market. Demand for such offices is diminishing. Conversely, availability supply is increasing. And a further 70m sq ft of office space will potentially be rendered obsolete by the 2027 Minimum Energy Efficient Standards (MEES). What can be done about secondary and obsolete office stock?

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A growing number of London office owners and investors will be faced with some difficult choices if they are to avoid the performance pitfalls of so-called stranded assets. It is a choice that essential boils down to either retrofitting existing assets to a higher standard or repurposing those assets into alternative use classes.

The scale of the obsolescence challenge

Occupier demand for secondary quality offices has fallen considerably across London amidst the now well-rehearsed ‘flight to quality’. Indeed, since the Covid-19 pandemic, annual take-up for these offices has fallen by 34.2%. Conversely, the availability of these offices has risen by 49.2% to 10.4m sq ft. The leasing challenges of available secondary offices are compounded when we consider the impact of potential MEES legislation which, in its present form, requires the rented office stock to have a minimum EPC rating of C by 2027 and a rating of B by 2030. Our analysis of the latest EPC data held by the government identifies 97.6m sq ft of offices in London with an EPC rating of below C and therefore unlettable from 2027 without capital and works to improve the EPC rating. This equates to 38% of total London office stock. The proportion rises considerably to approx. 168.8m sq ft which does not meet the 2030 EPC B rating threshold.

Retrofitting for Continued Office Use

With the current development pipeline leading to an under-supply of almost 5.5m sq ft of prime office space between 2024 and 2026 and the impact of potential MEES legislation, it is unsurprising there is a push towards retrofitting non-compliant offices in London. Last year, the City of London Corporation reported approving 17 retrofitting applications – a record number, and half of all retrofitting planning applications across London. The costs relating to retrofitting an office can vary significantly. The Knight Frank Project and Building Consultancy team have estimated the costs associated with the key works required to reduce operational energy consumption across six scenarios. Scenario 6 shows the mix of interventions required in order to upgrade an EPC non-compliant office to a B rating and future proof assets beyond the potential 2030 MEES deadline.

Table 1 EPC retrofit scenarios

We estimate the costs associated with the most comprehensive retrofit strategy to be between £70-£110 per sq ft. This means that if every non-compliant office was retrofitted in-line with scenario 6, we project the cost of bringing compliance to the entire London office market to be between £11.8-£18.9bn. It is important to note, improving the EPC compliance of an office will significantly reduce the risk of further future physical obsolescence and avoids the unfortunate classification of becoming ‘stranded’. This market dynamic has arisen because sustainable offices that have a strong environmental accreditation are able to command a rental premium. Our own research from 2021, analysing the average impact of BREEAM certifications on London office rents, shows landlords can command a rental premium of 12.3% for offices with an ‘Outstanding’ certification compared with uncertified offices.

Converting Boardrooms to Bedrooms

There is, of course, an alternative to the retrofitting of secondary assets; repurposing. With embodied carbon being a key consideration, the repurposing of single-use buildings to alternative or a mix of real estate uses is increasingly becoming a template for sustainable redevelopment. Historically, office to residential conversions have been the main route to recycling redundant spaces. However, landlords, developers and planners are now taking a holistic approach to urban planning and development, integrating diverse land uses to create more vibrant, sustainable, and liveable communities. We are seeing repurposing into other uses, such as hotels and student accommodation. Unlike office to residential conversion, which is covered under permitted development rights (PDR), planning consent is required to convert an office to hotel use. If a more streamlined approach to planning was adopted, greater levels of office to hotel conversion could be undertaken and accelerate many repurposing opportunities. By 2026 the UK is likely to experience an undersupply of student accommodation by 621,373 beds, according to StuRents, as demand for higher education continues to strengthen. Similarly, the annual delivery of housing in London continues to fall short of the Mayor of London’s annual target of 53,200 homes. However, recent welcome changes to PDR should provide a catalyst for accelerating repurposing projects.

Stepping Up to the Challenge

Whether the choice is to repurpose or retrofit, a range of benefits emerge that align with wider ambitions to transition to a significantly decarbonised built environment.

By repurposing existing office facilities rather than constructing new ones, landlords and developers can significantly reduce their carbon footprint and avoid assets becoming stranded.

Retrofitting allows for the integration of energy-efficient technologies, such as low energy lighting, smarter heating and cooling systems, and insulation improvements, leading to substantial energy savings and achieving an EPC rating which meets the proposed MEES legislation. Either route presents owners and developers with challenges and costs. The alternative however, is the prevalence of under-performing assets, the continued bottling of demand into a prime market that can’t keep pace, and real risks to the cohesion of many parts of London. In this sense, either repurposing or retrofitting provides an opportunity to enhance asset performance, bring renewed vitality to assets that steal a march on the delivery of completely new office buildings, or contribute to the ongoing competitiveness of London as a sustainable place to live, work and play.