With a critical shortage of new build office accommodation, there are positive arguments for enhancing the traditional assets we have

The flight to quality. It’s not just the direction taken by migratory birds but the route that’s continually cited as the major direction of travel in Scotland’s office market. It’s also one that has had to weather several crises in recent years, including another great departure – that of thousands of staff from our city centres during the Covid-19 pandemic.

And we’re still dealing with the repercussions of that, assessing how the ‘new’ workplace is evolving as occupier demand has been driven by firms ‘right-sizing’ as their employees returned (or didn’t) to the office.

According to Craig Watson, director – national office agency at JLL that evolution will see more traditional offices increasingly become spaces for collaboration as much as places to work in, with mixed-use becoming more important. “There’s a need a for a high-quality environment that means people enjoy being there,” he says.

According to CBRE’s Q2 report for Scotland: “Occupiers understand the importance of having not only high-quality office space – but space that offers everyone the focus on ESG (environmental, social, and governance) that is being demanded at board level.”

Where is that space? With a large portion of new-build Grade A space due to complete in 2023 already pre-let and rising build costs placing upward pressure on new-build rents, will retrofitting and refurbishing become increasingly important to fulfil the demand for quality space that is clearly still there?

There are some impressive developments that would suggest older, revitalised buildings can at least partially fill the gap. In June, Munich-based real estate investment firm AM Alpha launched 200 Broomielaw on to the Glasgow market following an extensive refurbishment that resulted in 80,000 sq ft of Grade A office space over nine levels opposite Drum Property’s Buchanan Wharf.

The company says 200 Broomielaw is Glasgow’s greenest office refurbishment with EPC (energy performance certificate) ‘A’ and BREEAM ‘Excellent’ ratings and is fully electric from renewable sources.

In June, multinational law firm Pinsent Masons announced the move of its 300-strong Glasgow operation to the Lucent Building at 50 Bothwell Street. It will be will be first tenant of the £50 million office space developed by Orion Capital Managers and the redevelopment, which preserves the original sandstone façade has almost 80 per cent less embodied carbon than a new-build office development.

While in the capital, the range of prestige refurbishment projects in the pipeline include Edinburgh One at Morrison Street, the Jenners building and The Tun.

There are challenges. In July, Siemens Financial Services published ‘Urgent Upgrade’, reporting that £28 billion worth in offices buildings across England, Scotland and Wales could be at risk in the UK government’s approach to achieve net zero goals, with plans to raise the EPC threshold to a C-rating by 2027 and to B by 2030 adding further pressure to building owners and facilities management.

A Knight Frank report recently found 29 per cent of Scotland’s office stock has an EPC rating of E or below so the investment and effort to upgrade older properties to meet stringent environmental targets is likely in many cases to be eye-wateringly large.

One significant advantage of refurbishment is that embodied carbon – the carbon associated with the production of existing buildings – is largely saved when buildings are refurbished as opposed to redeveloped as new.

One project focusing on both embodied and operational carbon is Aurora, again on Bothwell Street,  where Forma Fund and HFD Property Group are delivering not only an energy efficient retrofit but saving substantial embodied carbon with the retention of the existing building structure and façade.  

As an office agent, JLL’s Watson sees a growing demand for premises that demonstrate a commitment to ESG and sustainability – and says that many landlords and building owners must still do quite significant work to improve the energy credentials of their buildings.

There is a plus factor in making extensive and forward-looking improvements. “We now have statistics that prove there is added value in having an improved EPC or BREEAM rating on the building and there is a premium being paid,” says Watson. 

A BREEAM (sustainability) rating, he adds, is likely to result in an increase of some 20.6 per cent in rental value and for each band of EPC achieved there’s an average of 3.7 per cent increase in rent with much of the demand coming from the younger generation: 33 per cent of 18 to 24-year-olds have rejected a job offer based upon an employer’s ESG performance. 

Essentially, there is evidence that that a more sustainable building will command a higher rent. 

Chris Dougray, head of development Scotland at CBRE says there is a “structural change” in the office market, which has been accelerated by Covid.  “That includes a strong requirement from many end users for energy efficient, net zero carbon buildings with strong ESG credentials,” he says. 

Fulfilling that requirement has its hurdles. “Take a building in Edinburgh with six months left in the lease. The landlord faces an impending void and knows money must be spent to create the type of product which many or most occupiers want.

“Then the costs come back – which are considerable – and the landlord looks again at an appraisal which has suddenly become more challenging in a market with negative sentiment. And while in Edinburgh there is strong potential for alternative use – such as student residences and hotels – that’s not the case in other locations,” he says.

What happens in other cities and towns then becomes not only concerning but a matter of national significance. “Every local authority we speak to says: “We want our town and city centres to be places where people can live, work and play.’ And that’s something that is materially impacted if you have a large structural void in the office stock.”

Away from the flagship projects then, the number of buildings that require improvements that must meet demanding EPC ratings and other sustainability requirements is daunting.  

There’s also the ‘placemaking’ factor.  Occupiers are willing to pay extra rent for a location that includes ‘softer’ items, such as collaboration space, dedicated catering services, natural lighting and exterior landscaping and they will invest in getting these things right.

Colin Mackenzie, a partner at Knight Frank in Glasgow acknowledges the challenges can be complex: “EPC ratings for example are determined on several factors – depending on whether a building is being refurbished, being built or completed. We’ve recently had significant improvement in our EPCs because it could be determined that a lot of the electricity going into a building is from renewable sources.”

There are several buildings, he says, including Onyx in Glasgow (which heavily emphasises ‘wellbeing’ in its marketing) where the EPC has been significantly improved by the change in the way that it’s scored.  

Neither are office developments in city centres moving toward green electric power as panacea – as Mackenzie points out, if every gas boiler in an industrial or office building were to be taken out in favour of electricity, it would ask serious questions of the existing supply infrastructure. 

With changing expectations and the mixed-use reinvention of city centres where offices, retail space, restaurants and apartments share the same streets, refurbished workspaces are clearly attractive on several levels, including retaining a sense of history and civic pride.

Plus, an existing building involves a lower level of risk. A refurbishment programme can be much shorter than the potential five years to market that new build can take.

Not every business needs an arresting new Grade A, black glass tower however. “The rentals in some offices now are £40 per square foot and not all occupiers can afford that. There’s still a need for space from which SMEs and small businesses can start, perhaps incubator space,” says Mackenzie.

He cites Templeton on the Green in Glasgow, which opened in 1892 as a carpet factory and is now home mainly to SMEs  as a successful example of a cluster of young entrepreneurs paying a moderate rent in a retrofitted property.   

As Chris Dougray points out: “There’s a fundamental change coming with the retrofitting of existing stock so that we’re not losing the embedded carbon. That now is the unstoppable direction of travel.