Smart, sustainable offices drive productivity and prevent obsolescence
Last month’s UK mini budget resulted in the type of market volatility usually only seen after a black swan event. What has already faded from memories was the underlying objective of the fiscal measures announced – to boost UK productivity.
This brings us neatly onto the role of the office in a post-Covid world. A recent Microsoft survey found that 85% of bosses say hybrid work makes it hard to be confident that employees are being productive.
Employer space requirements have been evolving for a number of years, tracking the shift from the office no longer being purely regarded as a cost centre but a revenue generator. The pandemic has crystallised the intertwining of space and talent and productivity, with a resulting knock-on effect for investors.
The market polarisation in favour of smart Grade A green offices is widening every month, with high quality services and flexible environments adapted to new working trends.
Recognising this, our green office strategy is about creating new or refurbished resilient offices focused on “4Ss” – meaning buildings which need to be strategically important to occupiers, safe, sustainable and smart assets with building management systems. These intercorrelated pillars are essential as employers and employees demand more productive and more inspiring places to work from.
It starts with smart. Smart building technologies can deliver the above in many ways, from enabling transparent, data-driven building management to creating a compelling, frictionless experience for employees, as well as visitors. And smarter buildings are safer buildings, better capturing who is in them, how they are used, with healthy air management systems and how well they are functioning.
For cities to remain relevant, mobility will be key. Employers across the knowledge economy will have to work hard to persuade in-demand employees to endure a daily commute to and from the office. A building is strategically important if it provides an environment and the ease of access for employees, counterparties and customers to come together in a way which boosts productivity and the culture. Only offices with the right accommodation near to good or newly proposed infrastructure will stack up from an underwriting perspective. Thus, our first asset, White Rose Park near Leeds, UK, will benefit from a new railway station.
The effects of climate change – or rather, climate crisis – now underpin every investment decision. How people can live more sustainably and in harmony with the world's eco-system is a priority. The office sector sits at the very heart of this.
The link between smarter and sustainable buildings is clear – using technology to maximise energy efficiency and allow buildings to work more harmoniously with the environment in which they are situated.
We are heading for an unprecedented wave of obsolescence across the European office sector. Local regulatory pressure and increasing demand for green offices implies a significant portion of European office stock may soon be obsolete, resulting in a growing need to create futureproof office assets in winning cities.
The evidence is clear. The supply demand imbalance and regulatory pressure is driving rental premiums for green office space, ranging from an average of 5.4% in Europe, 10% in the UK and rising to 22.2% in Germany’s Big 7 cities. The investment market is witnessing average sales premiums generated by a green certification of 11.5%.
As the Fed, BOE and ECB hike rates, so financing costs are set to define the office investment market in the near term. Available data shows that green assets can command a cost of debt approximately 25 basis points lower than brown assets, with an expectation that this will only increase. As yields move out, so smart financing – using sustainable debt at lower cost of capital – will also be a key cog in generating returns.
Despite the recessionary backdrop, there remains a war for talent, and the benefits of office working will only become more apparent as the pandemic recedes. This paradigm offers a unique opportunity for those owners and managers with the value creation expertise, to deliver the new generation of green offices in winning Western European cities, transforming assets from brown to green.
Duncan Owen is CEO of Immobel Capital Partners