CoStar Column: Are developers and landlords addressing the needs of today’s occupiers?

By Rachel Francis-Lang - Tuesday, October 22, 2013 9:06

Rachel Francis-Lang, a real estate partner at City law firm Lewis Silkin LLP, questions whether the UK's developers and landlords are serving their tenants as well as possible.

The range and type of office space available today in the UK, and particularly in London, is enormously varied. Sprawling, maze-like Victorian office buildings often sit alongside vast minimalist spaces containing the very latest technology and the sleekest design, with any number of combinations in between. Occupiers, you might think, have never had it so good - but does the UK’s office market really serve tenants as well as it could?

Whilst flexibility and choice are improving all the time, there are still a number of problems with the UK’s office stock, which tend to complicate negotiations, increase professional fees and even lead to abortive deals.

Take building systems and floor layouts, for instance. A recurring complaint from occupiers relates to the provision and maintenance of building systems where an older building, originally designed for single occupation, is gradually divided to allow for multiple occupancy. The original design may have been tailored to include complex systems designed to feed into a single control unit, linking lighting, air-conditioning and security systems. The subsequent division could significantly affect performance and maintenance costs, in turn having an impact on service charge levels.

A particular example is where the lighting within a building could not be controlled on a floor-by-floor basis: the property in question was largely empty, except for one tenant who was expected to pay for the cost of lighting the whole building, simply because sensor lighting had not been installed by the landlord. Leaving aside the environmental impact of such design faults, this raises the issue of whether the landlord should pay for the upgrading of buildings to allow for multiple occupancy and whether this is a legitimate cost to run through the service charge.

Even modern, purpose-built open-plan offices can present problems. Take, for example, one occupier which had set its sights on “premium” concrete and steel offices in the West End. Negotiations continued apace, but as the fit-out plans were finalised it became apparent that the minimalist open-plan format of the building (though undoubtedly attractive) would not address the tenant’s needs, because it needed more meeting rooms than the landlord’s standard layout allowed.

Unfortunately, the most obvious solution - the installation of partitioning - would have materially damaged the smooth lines and spacious feel of the interior and, more importantly, partitioning would have resulted in the air cooling and heating system falling foul of building regulations. In the end, the parties walked away, but not without having expended considerable time, cost and effort in trying (and failing) to reach a deal.

Getting it right

So the key question, then, is how can developers and landlords work better together to get it right for occupiers? There are a few key facets that almost everyone is concerned about or considering for the future, and just a little time spent thinking about these can reap enormous benefits for everyone:

• Thinking ahead – old or new, a building can perform many functions across its life span, and the importance of space – and its flexibility – must not be underestimated. There are many factors which are extremely popular characteristics in the modern workspace and indeed are becoming prerequisites for occupiers: access to natural light; suitable and sustainable light fittings; wide, expansive open plan layouts with break out areas rather than corridors and walkways; considerable floor to ceiling heights; and large windows, which let in plenty of fresh air. Developers and landlords should consider these commonplace occupier preferences early and often, and take necessary steps to evolve any space to meet these expectations. This will become even more important as the next generation workforce – digitally savvy, globally mobile and significantly less tolerant of shoddy workspaces – continues to emerge within today’s and tomorrow’s businesses.

• Making the old new – new buildings may be easier to modify into contemporary office spaces meeting every occupier need, but the comparative old age of a building certainly does not prevent a modernising fit-out. In fact, many businesses prefer the character of older buildings, whose aesthetics, location or creative impulses can stimulate and inspire. But when tackling a refit, it’s important to consider such aspects as: investing in long-term energy-saving features, such as installing cooling systems which connect easily into the base build systems; making use of the thermal mass inherent in the structure; and ensuring that facades are well insulated to guarantee that any investment of capital into making the old new again isn’t in vain. When refurbishing windows and their frames and fittings, landlords should also consider keeping these within the structure and accepting liability for repair. It is not always practical, or indeed desirable, for several tenants in a building to be separately managing the repairs of their windows, given the dramatic impact that this can have on the energy efficiency of the building as a whole.

• Going green – The march toward ever more sustainable commercial stock continues unabated and detailed analyses of the energy performance of the building can point to relevant improvements which will save energy for both present and future occupiers. It is also becoming ever more important to future-proof buildings against the effects of climate change. Whether it be considerations over adaptability to temperature changes or extreme weather conditions, occupiers are becoming increasingly concerned about how climate change-ready their premises are (particularly those thinking longer-term). Questions about this should come as no surprise.

• Get flexible – fundamentally, the office space needs of a small and medium enterprise (SME) 10 or 20 years ago are quite radically different than those of today, namely because a high proportion of new business start-ups are focused on technology and media. These fast-growing businesses gasp at the concept of a ten-year lease and can somewhat resent inflexibility amongst landlords who appear to be a barrier to their growth ambitions. At the start of a commercial engagement, consider the trajectory of the occupier as a company and think ahead about how their needs will evolve 1, 2 and 10 years down the line. This is particularly important in places like Tech City in London or Media City in Manchester, where wider economic development strategies are contingent on helping these businesses grow, not standing in the way.

Thankfully, there is growing awareness that inflexibility and obsolescence are wasteful in terms of cost, investment and environmental impact. Really understanding ahead of time how these common facets impact the property for developer, landlord and occupier alike can save a heap of time and money down the line. They can also have some significant impact on the attractiveness and profitability of a property, as well as the satisfaction of the occupier. I’d call that a win-win scenario in any sense of the term.

pnorman@costar.co.uk

Rachel Francis-Lang is a partner in the Real Estate & Development team at City law firm Lewis Silkin LLP (www.lewissilkin.com)

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