Office obsolescence: change for good
For an investor, the declining value of an asset due to obsolescence is a key concern. In response to a request from the British Council for Offices’ investor committee, Lambert Smith Hampton and IPD have carried out a study into the issue of office obsolescence. LSH says that a full understanding of the process and its drivers is crucial to maintaining the performance of an office portfolio.
Jon Ashcroft, of Aviva Investors and chairman of the BCO investor committee, says there are three drivers of office obsolescence – inaccessible, out-of-town locations; inflexible, inefficiently designed, small or irregular floorplates; and inadequate air-conditioning systems.
The report notes that there is an expectation that offices with a low level of energy efficiency will perform particularly badly over the next 5-10 years. “It is almost certain therefore that sustainability is the most significant emerging driver of obsolescence,” it concludes.
As current valuation models do not accurately measure obsolescence, or provide enough information, the report says it is increasingly important to rely on an “in-house” view of an asset, incorporating an assessment of the building’s energy efficiency.
The report finds that the quality and location of a property are just as important as the income and covenant in terms of mitigating the impact of obsolescence. Factors that affect the long-term value of an asset and its potential for obsolescence include floor-to-ceiling height, whether a building has listed status, and the size and shape of floorplates as well as the location of a property.
As the move to shorter lease lengths continues, the report says tenant retention and building quality will become even more important. With tenants able to move more often, a little and often approach to capital expenditure and agreed “refresh” payments may be a new and more positive approach to maintaining a building’s performance,” it adds. It is also increasingly important for landlords to develop a strong and collaborative relationship with their tenants to ensure that buildings adapt to occupier needs, sustainability targets are met and running costs are managed. The report says there may also be opportunities for tenants and landlords to work together on refurbishment projects, sharing value in return for a share of the risk involved.
You can find out more about the report here and read more about managing change and embedding modern working practices at property level here.
