October 13, 2020

Office politics takes on a whole new meaning

The Prime Minister announced a change in the rules to allow commercial properties, including office blocks, to be converted into residential flats under permitted development rights (PDR). This change was applied from 24 March 2020 and is currently valid until 31 July 2021 in a move to counter the havoc many believe the pandemic will cause to the commercial property sector, particularly in London.

Permitted Development Rights applied from 24 March 2020

Permitted development rights (PDR) is a government scheme that allows certain changes of use to be carried out without applying for planning permission. An example is from B1 (office) to C3 (dwelling), making the planning process simpler and more straightforward.

Under this new guidance we recently saw the site of a vacant office building in the capital sold by Lendlease to Great Marlborough Estates, securing what is thought to be the largest deal since lockdown. Empire House, which sits on one acre of land in West London, is to be redeveloped into 137 new residential homes. Is this a sign of things to come?

A recent Reuters survey, which polled over 2,000 companies, showed that 44% of the country’s employers are looking to reduce physical office space. This lowering demand is the result of agile and remote working in the aftermath of the pandemic, although many industry experts believe the trend was inevitable and has simply been accelerated by the virus.

So we appear to have gone full circle. In the 50’s and 60’s many of the townhouses of the West End were converted from residential to commercial use, followed by the rebuilding of the City of London in the 80’s and the likes of Canary Wharf being constructed in the 90’s. More recently London has needed more accommodation and we are now seeing more office blocks converting back to apartments.

Simon Green, Managing Director of Green Building Design Consultants believes that this trend will undoubtedly be exacerbated by the pandemic, increasing the number of offices changing use to residential dwellings, as well impacting future office location, design and management.

Simon comments: “We are seeing more change of use projects coming through now. There does seem to be an uplift in sustainable design, something we have been promoting for the last 20 years, but we must remember that this on its own is not enough. Changes of use impact more than just the building and its occupants, but rather has an effect on the entire urban form and the communities that live and work there. We have seen horror stories in the past of PDR being unscrupulously used and paying lip service to sustainable design just won’t cut it”.

In response to criticism contained in the Levitt Bernstein report whereupon an end to PDRs for B1 to C3 was called, voicing concerns over ‘Crowding and Space’ hazards due to lack of sufficient space, light and ventilation evident in poor quality housing, the government (whilst remaining steadfast in its decision) have acquiesced and made two major changes. Namely in July this year, it added natural light for all habitable rooms in housing built or converted under permitted development, albeit no official standards were introduced at this time. Last month, however, the government announced that the Nationally Described Space Standard would cover all new homes, whether they were created under planning permission or indeed permitted development.

So, what does this mean for offices in the future? Whilst sentiment toward retail real estate has been the most depressed, the deterioration has been most marked for offices. This is in stark contrast to the sustained low vacancy rates of less than 5% the office market has witnessed pre-Covid.

Simon Rubinsohn, RICS Chief Economist, commented: “The impact of COVID-19 on sentiment in the commercial property sector was always going to make for painful reading. However, the erosion in confidence is stark. What’s even more worrying for investors and occupiers alike is that the full extent of the toll it will take on businesses and the underlying economy is still unclear…”

The deeper and more drawn out the crisis, the greater the risk of existing tenants defaulting, tenancy breaks being taken and re-negotiations happening. Rents are likely to be forced downwards. “A more collaborative approach between landlords and tenants to manage the challenges presented by the current set of circumstances will be needed”, suggests Rubinsohn.

Office environments will undoubtedly need to change. People will demand an amazing space from which to work with more flexibility and improved technology.  Offices of the future will need to be smarter and we will see low energy technology delivering environmental solutions with a larger focus on alternative power sources. With a newfound commitment to employee wellbeing, focus on creating sustainable spaces is expected.

Simon Green concludes: “We collectively have a responsibility to become carbon neutral. We are excited to see the new planning system due to be launched next year and hope this will underpin efforts in sustainable and sympathetic design, maximising great placemaking and ensuring we come out of this crisis with buildings we can be proud of and that add to our newfound sense of community”.

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