Office economy: the challenges facing landlords

Changing work patterns mean firms are rethinking their need for office space, and how best to use existing spaces.

But what office landlords can do to attract and retain tenants is a balancing act between the cost of modernisation, rent constraints, and the need to keep buildings occupied, said experts at the Creating Offices for Modern Tenants round table, sponsored by fit-out specialists Design Tonic.

“It is still important to invest in your space regularly, because in the last five years the office world has changed,” said Caroline Woolley, partner at architect Bowman Riley and head of its building consultancy. “The people we’re trying to recruit are different. They don’t even want to come in for a face-to-face interview, and our number one draw was always to com to the office, see the office, see the place where you’re going to be working.”

“It’s fascinating that professional services and tenants migrate in packs,” said Pardeep Khela, director at Schofield Sweeney.

“They’re all coming to this end of Leeds,” he added, gesturing to the offices around Wellington Street. “Bridgewater Place and that end of Leeds 15 years ago was a really fashionable, trendy place to be.  But now they all want to be here.”

That tendency for particular areas to become fashionable impacted the rents charged and hence the investment available for refurbishment, said Craig Burrow, group property director at Town Centre Securities. “At our existing building where we’re based we did a refurb a number of years ago on our office, but the journey to get tot hat floor is not a good one. We’re now in part of town that is not going to be on every occupier’s list of locations to go to, so we’re constrained by the rent we can push that building to, even if we did everything that a newbuild does.

“Even if we had the sustainability credentials, the lounges, the gyms, people aren’t going to pay the rents that are going to support an appraisal of what it’s going to cost to put it there.

“It’s back to the size of a building – to be able to sacrifice space to be able to spread what you would have got for rent across a bigger area. But we need to do it. If we don’t the alternative is an empty building.”

William Gaunt, managing director of Sunny Bank Mills, said that landlords could arrange it so that amenities such as gyms and canteens were provided by specialised tenants. “You’re getting rental income and you’ve got someone running that corner who’s passionate about it, and they have the skills. It becomes a symbiotic thing where you’re not moving up the service charges.”

Louise Harris, of finance firm Blackstone Leasing, said there were options that would enable most firms to fit-out their office in a modern style, either part or fully financed. “What we’re l;ooking to do it find a solution for a customer which is competitive, which is as tax efficient as it possibly can be, and unsecured. That in itself is really powerful.”

Burrow said that investment on a property was not necessarily a matter of ensuring a good return on investment. “I look at it a bit differently. If it helps me let that space quicker, then that’s the measure I’ve got, rather than what it’s cost. Yes, we probably want to charge a premium on the rent. We wat to try and recover the cost.

“But empty property costs really hurt landlords. You pay in the rates, you pay in the service charge proportion, you pay in insurance, electric. If you can turn that into somebody paying all those things, and paying your rent as well, the swing is massive.

“I always justify it by whether we can let it any quicker. If we can let it three months quicker, what does three months look like in terms of empty costs?”

Retention rates for tenants also played a big part in landlords’ decision-making, added David Aspland, director at Eshton Group. “Looking at newer schemes, the office market falls into the ‘quite difficult’ category at the moment because of all the changes and the new costs and differentials – and how long anyone’s going to commit to that office term.”

In addition to the costs of void spaces, high interest rates and high labour costs were also a concern for landlords looking to build or refurbish.

Part of the problem with high labour costs is a lack of funding for training, said Amanda Cook, founder of Design Tonic. “There seems to be a lack of ambition or investment into people who want to get a trade,” she said. “We work with an agency that deals with people who can’t fit into mainstream education and we’re taking them through learning on cyber. But we can only get them at 18 and we get no funding for that. It’s a risk for our business.”

This is the second of two articles from the Creating Offices for Modern Tenants round table. The first looked at the benefits and challenges of sustainable offices and refurbishment. 

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