Up to 24,000 offices in England have yet to meet the new energy performance standards coming into effect next year

Tough energy performance rules mean landlords must rebuild their sites or leave them empty. From next year, offices will need to hold a minimum “E” rated energy performance certificate (EPC). In 2027, the bar rises to “C” — and it goes up to “B” in 2030, when more than 63,000 offices that have more than 400 millions q ft of space will have to slash consumption. Peter Bill discusses the situation in an article on the Sunday Times website.

Office owners brace for a chill as WFH empties city centres

Achill is coming to the City — and it is not just from the nights drawing in. From April 1, 2023, landlords will be forbidden from striking new leases with commercial tenants unless their buildings meet tough new energy standards. The move threatens to further grind down a sector that has already been battered by the working-from-home revolution.

Up to 24,000 offices in England have yet to meet the new energy standards, according to Estates Gazette, the news and analysis provider for the commercial property sector. From next year, offices will need to hold a minimum “E” rated energy performance certificate (EPC). In 2027, the bar rises to “C” — and it goes up to “B” in 2030, when more than 63,000 offices that have more than 400 millions q ft of space — about 800 Gherkins — will have to slash consumption.

London is the worst hit by the new regulations: enough space to fill 48 Gherkins currently fails to meet the “E” grade, while a survey by the Swedish bank Handelsbanken found that a quarter of landlords were unaware of the timetable, which many feel is horribly tight.

To make matters worse, the WFH migration is killing demand for office space. According to Sir Stuart Lipton, one of Britain’s most prominent developers, “landlords are bleeding” in New York, where the vacancy rate has doubled to 20 per cent since 2019 — and that trend could be replicated across the Atlantic. In London, vacancy rates stand at 8 per cent — but that figure will almost certainly double, Lipton warned.

Meanwhile, shockwaves from the mini budget are reverberating through the sector, with the biggest impact coming from spiralling interest rates. Property companies face the same mortgage issues as homeowners, except magnified from thousands into millions. “The hike in rates has dramatically altered the pricing of real estate,” said Nick Axford, global head of research at real estate firm Avison Young. “We are likely to see further 10-15 per cent price corrections. “There will be a material drop in transactions as sellers wait for life to go back to normal. That expectation is misplaced.”

However, economist Savvas Savouri of asset manager Toscafund downplayed suggestions of a crash. “This is no way close to being 2008 for commercial property,” he said. “Commercial property is, for the most part, comparatively lowly geared and owned by those who are in no way distressed.”

But even before the mini budget, the stock market had grown wary of the sector. Shares in Land Securities and British Land are trading at a 50 per cent discount to the net value of their assets, against a 27 per cent discount in March.

“We are set for a re-run of the early 2000s, when public real estate companies traded on deep discounts … and 43 were privatised,” said Mike Prew, an analyst at Jefferies. “Cyclical downturns precipitate consolidation.”

The government could still delay the EPC time-bomb. Ministers have yet to respond to a March 2021 consultation exercise, leaving wriggle room for new business secretary, Jacob Rees-Mogg, to relax the timetable. “I would be shocked if the feedback received fails to push out the unreasonably short EPC timeline,” said Savouri.

Meanwhile, developers are embracing “zero-carbon” methods, adopting techniques such as reusing steel. “Developers understand the need to cut carbon,” said Melanie Leech, head of the British Property Federation. “The market is driving action ahead of any legislation. The smart ones have figured out that there are massive opportunities for early adopters.”

Some believe that developers will have to overhaul existing buildings rather than replacing them outright. Marks & Spencer, for example, faces a public inquiry next month over plans to tear down its flagship store on Oxford Street, replacing it with a smaller one with £400 million worth of offices above. “There is definitely a change in attitude afoot, with much more emphasis on repositioning existing assets,” said Digby Flower, UK chairman of the real estate services firm Cushman & Wakefield. “Building new buildings will become more difficult.”

Lipton, though, is not sure that green strategies should win out over desirable developments.

“You have to focus on the real question: is the property world of a mindset to do this? No. The sector has become financially driven, not developer driven. Dehumanised offices are the result.

“To attract people back to the office, the quality of life at work has to change. By and large, developers are still being too conservative. If you want social change, start doing stuff for the occupants. For instance, how do we provide a cup of coffee for 50p as part of the service charge? The mindset of most developers is more on zero-carbon.”

Lipton’s most recent development is 22 Bishopsgate — at 900ft, it is the newest, tallest tower in the City. In the process, the 79-year-old perfectionist admitted he drove his architect crazy in pursuit of the ideal “vertical village” for workers. The plans, which include whole floors to eat, rest and play, were changed at least 35 times.

With his latest tower, Lipton upheld a long tradition in property development of making sure that what you build is significantly bigger than what came before: 22 Bishopsgate is at least ten times the size of what was on the site. How have things worked out? Very well, it seems: the tower is 90 per cent leased. The office is not quite dead, after all.

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