Offices: repurpose or retrofit – where are we today?
The office market was thrown into turmoil in the post-pandemic shift towards flexible working. Businesses battled with uncertainty over the future of the workplace and whether big glossy office spaces would become obsolete in the new 'WFH' world. In mid-2024 Knight Frank reported that annual take-up for secondary quality offices had fallen by 34.2%, while availability rose by 49.2%. On top of socio-economic factors, with the introduction of new regulations such as Minimum Energy Efficient Standards (MEES), many existing offices risk falling foul of the minimum EPC ratings of 'C' by 2027 and 'B' by 2030. Investors are being forced to consider the options for their buildings to avoid them becoming stranded assets.
Two clear trends have emerged in the last few years: repurposing office blocks into new asset classes; and retrofitting existing office space to Grade A, best-in-class offices. This choice is led by current and prospective demand for office floorspace, although there are other factors at play.
When office demand is down, property owners look at repurposing their assets. According to data from the International Energy Agency, the built environment is responsible for 40% of all carbon emissions. The drive to reduce embodied carbon by converting single-use buildings to alternative or mixed-use assets has become a popular tool for sustainable redevelopment. In central London, repurposing iconic buildings as hotels is a growing trend. In 2023, luxury hotel Raffles opened at the Old War Office, while in 2024 US-based hotelier MCR acquired the grade II-listed BT Tower for £275m to repurpose into a hotel.
This type of repurposing is not without challenges. Unlike office to residential repurposing, which is covered under permitted development rights (PDR), planning consent is required to convert offices into hotels, and this can be a lengthy (and sometimes unsuccessful) process. In March 2024, Westminster Council rejected hotel plans at Globe House (the former Passport Office) due to 'insufficient information submitted to demonstrate no interest in continued use of building […] as offices'. In addition, many existing office blocks are not suitable for hotel use, as they do not have the flexible floor plates necessary for different hotel brand configurations.
Unlike hotels, traditionally repurposing offices for residential or purpose-built student accommodation (PBSA) has primarily taken place outside central London. However, in recent years several Midtown and Square Mile offices have been acquired for PBSA schemes. In 2022, developer Scape acquired King's College's former offices at 22 Kingsway for £104m. According to Savills, this was a 27% increase on the original price, showing the strong demand for value-add opportunities among the alternatives sectors within London. More recently, joint venture developers Dominus and Cheyne Capital have secured permission to convert Freshfields' former offices at 65 Fleet Street into a large student accommodation building.
Although we have seen recent examples of repurposing assets in London and its surrounds, this avenue is often not feasible due to planning restrictions or because use conversion does not stack up structurally or financially. Instead, as businesses shift their focus back to the office, the importance of meeting MEES requirements, reducing operational costs and attracting modern tenants means office space is increasingly being upgraded for sustainability and relevance. Enter the retrofit revolution.
As companies continue to increase their requirements for employees to come into the office, the demand for high-quality office space continues to rise. Citigroup, Dell, Deutsche Bank, McKinsey, and Tesco are all introducing return-to-office mandates, while in January this year, Amazon implemented a new five days a week office policy. Not only does retrofitting enhance office space, making 'WFO' more attractive to employees, reusing the original structure to upgrade existing office buildings allows compliance with modern standards of energy efficiency, functionality, and sustainability, without the expense of a full demolition and reconstruction.
Reduced costs and minimised environmental impact – what's not to love? Retrofitting is, however, not without its challenges. Capital expenditure is a critical factor in assessing viability, and the costs relating to office retrofits can vary significantly. In Knight Frank's Q4 2024 report, the estimated average cost of raising an EPC D-rated office building in London to a B rating is £113 per square foot (psf) and when combined with a high level of amenity, this rises to £268 psf. In addition, most retrofit strategies require vacant possession or proactive management of existing tenants, and any unforeseen expenditure can undermine viability. Balancing the costs and benefits of upgrading office space while considering occupier need and EPC compliance is key.
In London, due to high prime rents, the cost of retrofitting offices is more palatable because of the long-term value enhancement and potential rental uplifts. Knight Frank report that in London, offices renovated between 2020 and mid-2024 with a BREEAM Outstanding or Excellent certification or an EPC A-rating, had an average pre-let period of nearly six months pre-completion whereas BREEAM Very Good or EPC B-rated offices averaged just over two months pre-completion. There is also evidence that amenity and higher sustainability credentials increase lease lengths, reduce void periods and lead to compressed yields.
There are several planned developments in the City where existing office space is being upgraded to best-in-class. In January and February this year, the City of London granted approval for two large retrofit projects. Brookfield Properties have the greenlight for their redevelopment of 99 Bishopsgate into 1 million square foot of best-in-class office accommodation. The scheme is set to focus on an enhanced experience for workers while demonstrating a strong sustainability commitment by retaining the existing foundations (almost 50% of the building's mass) to reduce embodied carbon. Canadian investor Cadillac Fairview and Stanhope’s plans to build a 33-storey tower at 70 Gracechurch Street have also been approved. The revised plans seek to retain 60% of the existing building structure by mass. Stanhope describe their proposal as focussing on 'creatively reusing and retrofitting the existing building to deliver a fresh and sensitively designed office building'.
New figures show a 50% fall in the construction pipeline in the Square Mile in a decade. This is linked to higher borrowing costs, skills shortages, and complex building requirements (including the new biodiversity net gain requirements and the building safety regulation gateway delays). The Government's plans to address the planning system is a positive first step but many potential challenges remain. Retrofitting and repurposing are therefore likely to remain important options for property owners.
Both strategies offer benefits that fit with the push to a significantly decarbonised built environment. Repurposing allows landlords and developers to reduce their carbon footprint and mitigate obsolescence risk, whereas retrofitting allows for the integration of energy-efficient technologies, such as low energy LED lighting and smarter heating and cooling systems, leading to substantial energy savings and MEES compliant EPC ratings. Watch this space.
