Redefining office space in a post COVID world
Managing Director of Craigard, David Foster, discusses why the office sector provides a prime opportunity for commercial property investment.
The office sector has had a tough time of it lately. As many know already, Covid-19 and the increasing trend of working from home are key factors in the demand dynamics for office space. The world has shifted, relying less on bricks and mortar and the costs associated with having a specific base for business.
But the sector is beginning to pick up again with the growth of hybrid working, and we are seeing this sector as a real growth opportunity. Businesses are keen to entice workers back into an office, even on a part-time basis. However, there is a shift – companies are more demanding of the environments they occupy. Best-in-class ‘new’ office spaces, with strong green credentials, ESG-compliance, and amenity-rich facilities are seeing strong rental growth due to their attractiveness and limited supply. According to CBRE, office availability has increased by 6% in Q2 2024, standing 15% above the five-year average, however, new supply remains limited, making up only a quarter of total available space. It is these high-quality sustainable buildings that are top of the agendas of most occupier requirements. Furthermore, EPC A buildings only share 3% of the regional office space, with less than 20% meeting the MEES standards of a future minimum B rating.
With the sector currently out of favour from an investment perspective, there is a real opportunity here. The benefits of such acquisitions are clear – strong income returns can be achieved from majority let buildings in good locations. Acquiring ‘statement’, multi-let or part vacant office buildings in strong regional locations at soft pricing, where tenants can be ‘worked with’ is a real opportunity. Current pricing is, arguably, the softest it’s ever been (or possibly ever will be), and the timing is perfect. If carefully selected, offices can be secured that are fully let at mid-teen yields, and in some circumstances, already refurbished. At some point in the next five years, those yields will move back, but possibly not to historic levels.
A good example of this is one of the latest developments Craigard has been working on – the repositioning of an office building in Dartford, situated within the well-established Crossways Business Park. Acquired in 2021 from a UK institution, the decision was taken to transform this well-located office into a high-quality workspace to promote tenant wellbeing and productivity.
Since completing the refurbishment (with a subsequent rebrand to Cotton Lake House), we have now created a future-proofed office that is fully aligned with the market. We are on track to achieve our target Very Good BREEAM rating with an EPC rating of ‘A-6’secured.
It’s worth noting at this stage that securing a strong EPC rating, as a minimum, is critical. Without the minimum rating, landlords cannot charge rent, so it’s a serious issue if not given due care. When looking to acquire, not only is an awareness of the current EPC important, but noting when it is due to expire is vital. Calculation changes introduced in 2022 mean that some ratings may fall below the threshold upon reinspection.
This is a brief overview, but it’s clear that there are many opportunities in this ever-evolving sector, and with the right fundamentals, acquiring office space in the current market could provide fruitful returns.