Redundant offices

Citation

(1998), "Redundant offices", Property Management, Vol. 16 No. 1. https://doi.org/10.1108/pm.1998.11316aab.007

Redundant offices

Redundant offices

Britain's major cities now have more than 17 million sq ft of empty 1960s and 1970s office space, a figure which could treble as leases expire over the next three years.

Research by property consultancy Chesterton plc shows that, of the 180 million sq ft of offices built during the construction boom in the 1960s and 1970s, an estimated 17.1 million sq ft (almost 10 per cent) now lie empty. The greatest proportion of vacant 1960s and 1970s offices are in London which, at 9.9 million sq ft, represents around 5 per cent of the total office stock in the capital.

Most of the buildings constructed in the 1960s and 1970s were let on 25-year, or occasionally longer, leases which have now expired or are close to expiring, or have been re-let on short-term leases of five years or less. Consequently, the amount of older space on the market is set to rise sharply. Research by the RICS indicated that 23 per cent of leases on 1960s and 1970s office properties were due to expire between 1996 and 2000 which could theoretically add a further 37 million sq ft.

Chesterton points out that, while the recovery in office take-up is well under way, particularly in London and around the M25, the amount of space becoming available nationwide far exceeds any estimate of take-up over the next three years. The situation is more acute in the 20 regional office centres surveyed by Chesterton which last year saw an increase in total space available of 5.1 per cent against an overall decrease in take-up of 8 per cent.

Take-up in the regional centres last year totalled 4.6 million sq ft of new and second-hand floorspace. This contrasts with the 7.2 million sq ft of vacant 1960s and 1970s space available in these centres at the beginning of 1997. Sharp variations exist between cities, ranging from just 22,240 sq ft of empty 1960s/1970s offices in Edinburgh to 1.12 million sq ft in Birmingham and 1.16 million sq ft in Manchester. However, these totals mask differences in marketing activity: only 124,000 sq ft (11 per cent) of older vacant space in Manchester is not being marketed in some form, while 188,000 sq ft (17 per cent)lies dormant in Birmingham.

Although London has a significantly higher level of second-hand office space, it has benefited from a falling vacancy rate and a large number of conversions of 1960s and 1970s office buildings. London Residential Research calculates that more than 4 million sq ft of second-hand offices have been converted to residential use, and forecasts that such conversions will account for another 7-14 million sq ft over the next ten years, even if the office market picks up further.

According to Chesterton's research, residential conversions of 1960s and 1970s office buildings are almost unknown in the rest of the UK. Exceptions include a 59,000 sq ft scheme in Birmingham by Sherbourne Loft Company that features 68 flats, and the proposed conversion of the 26,000 sq ft CMA House in Nottingham to 35 flats, with partial funding from English Partnerships.

In secondary areas, where the economics of office refurbishment are hard to justify, social housing and student accommodation have proven to be profitable. All four office conversions in Bristol have gone to student accommodation, totalling 130,000 sq ft. In central locations, limited opportunities exist for hotels, such as the conversion of the Charing Cross Tower in Glasgow to a 280-room budget hotel.

A management-intensive solution to redundant office space is in the provision of serviced offices, of which there are estimated to be more than 800 such properties in the UK. For example, developer Bruntwood has converted and let 320,000 sq ft of serviced office accommodation in Manchester.

Demand in the serviced office sector looks set to increase further against a background of growth among smaller organisations. However, serviced offices are unlikely to provide the capital growth and long-term security typical of the long leaseholds favoured by institutions. As an income-generating business, they may be more suited to property company portfolios.

Tony Burdett, Chesterton research manager, believes that property companies, entrepreneurial service companies and joint ventures will increasingly take control of redundant office space. He comments:

The supply of vacant '60s and '70s office blocks in the UK has reached an all-time high, and it now appears unlikely that many buildings outside prime locations will be re-let as traditional offices on long-term leases. If ownership is retained by long-term institutions, then partnerships with service companies are set to rise. Considerable doubts remain about the feasibility of conversion to alternative uses outside of the capital, but good market research can act as a counterweight. The success of conversion will depend on understanding the property and its immediate environment.

Single-ownership and multi-tenanted '60s and '70s properties both create their own unique problems. Many buildings from this period were constructed for single large tenants and, while this enables refurbishment to proceed without other leases being bought in, the disposal of a large block of second-hand space can prove extremely difficult. For multi-let properties, the timing of a refurbishment or redevelopment, with the loss of existing income, has to be balanced against the potential enhancement of income value.

Given the sheer weight of leases reaching expiry, competition to re-let is going to be intense, and anomalies may exist in assessing the probability and speed of re-letting. If owners and valuers become persuaded that values are too high, then the market for conversions will rise significantly.

Burdett believes that the hangover of the 1960s and 1970s building boom should be viewed constructively. He concludes:

Redundant offices represent an opportunity to re-invent the way business and residential accommodation is provided in the centres of Britain's cities. Today's uncertainties should not prevent us from taking researched risks to provide what the emerging markets of the next century need.