Accelerating building obsolescence is becoming the single biggest issue according to Jones Lang LaSalle’s latest research report. The industry is facing a problem with depreciation and obsolescence, but there is an opportunity for savvy investors and proactive occupiers to gain value through strategic refurbishment and proactive asset management.
Jones Lang LaSalle has identified three critical factors (1. Legislation, 2. Corporate requirements and 3. Workplace technology) which will fundamentally increase the obsolescence risk and accelerate asset depreciation. Investors and developers will be forced to adapt quickly to these risks if they want to maintain solid asset performance.
In terms of legislation, the UK Energy Act 2011 will drive increased obsolescence, making it unlawful for landlords to lease space, and for occupiers to assign or sublet buildings rated F & G from April 2018.
Simon Nichiolls, Director of Project and Development Services at Jones Lang LaSalle’s Southampton office, said: “These three factors stack-up to deliver systematic risk for the industry. There will be value depreciation on obsolete stock as the 2018 Energy Act deadline approaches, with poorer quality product likely to display longer void periods, reduced rental growth and higher rent frees. Now more than ever, sustainable refurbishment and proactive asset management will be required, with an opportunity for the investment savvy to mitigate these risks.”
Meanwhile, corporate occupiers are becoming stronger and more sophisticated in their requirements, increasingly viewing good quality office real estate as fundamental for recruitment, staff retention, productivity and branding. Buildings which fail to enable corporate preferences will become obsolete for the larger user.
New technologies will have the ability to change building spec and alter configuration. Office real estate should be flexible enough to incorporate evolving technological requirements and must have floor plates capable of adapting to changing and more collaborative configurations. Office product that cannot meet these requirements will trend towards obsolescence.
Karen Williamson, Senior Analyst for UK Research at Jones Lang LaSalle, added: “Office building replacement rates across Europe are just 1-2% per year – nowhere near enough to keep obsolescence at bay. With replacement rates so low and spec finance likely to remain limited in the medium term there is great potential for investors to access challenging, but appropriate stock and refurbish, provided it is economical to upgrade. Innovative funding partnerships with occupiers could open up funding for refurbishment while product which reaches full obsolescence may provide a compelling opportunity for alternative uses.
Alex Edds, Director of Upstream Sustainability Services at Jones Lang LaSalle, concluded: “Occupiers are not immune from these changes. Occupiers looking for an exit strategy may struggle to assign or sublet obsolete stock. Total occupancy costs will rise up the agenda as obsolescence drives the industry to think more about running costs. New or refurbished buildings which offer lower running costs and enable more flexible occupation will be to cheaper to use and offer a more attractive proposition for occupiers while delivering a more sustainable income for the landlord.”
