Confident trend to reduce office space will continue

Good internet connectivity ranks overtaking proximity to city centres and location, says David Horne

The commercial property sector has faced a plethora of challenges as a result of the pandemic. From the abrupt enforcement of remote working leaving bustling city centres unrecognisable, to the accelerated digital transformation of the high street, real estate has been reimagined.

The transition to remote working has generally been successful, with many firms now looking to implement hybrid working. Some organisations have decided to shift to a wholly remote model, with no requirement for physical office accommodation.

Of those who do want to get back to the office, many firms are looking to downsize their footprint and are instead prioritising high-quality space designed with flexibility in mind. Importantly, organisations want workspaces which promote better health and wellbeing. Similarly, as the high street rapidly moves online, longstanding retail leases are being terminated, leaving a glut of units no longer fit for purpose.

The most recent Addleshaw Goddard Scottish Business Monitor, in partnership with the Fraser of Allander Institute, confirmed this, with more than a quarter of businesses expecting to permanently reduce their office foot print by two-thirds. It also highlighted the shift in priorities for firms when it comes to choosing new office space. Good internet connectivity ranks as most important, overtaking close proximity to city centres and location. However, with change comes opportunity.

Whilst build-to-rent (BTR) opportunities are becoming commonplace

across city centres, we’re also starting to see an increase in convert-to-rent opportunities.

With a steady level of investment in the market, particularly from PE funders, developers are purchasing vacant office blocks with a view to converting them into high-quality and affordable housing options across city centres. This is part of a move towards more properties being rented rather than purchased in city centres, as young people are priced out of the market by soaring costs.

With a shortage of housing in Scotland, convert-to-rent is a clever strategy which will help revitalise existing building structures and encourage more people to live in city centres. It also creates a domino effect on supporting the wider economy through encouraging increased foot fall outside traditional office hours and supporting the night-time economy as restrictions ease.

From an investment perspective, costs associated with convert-to-rent developments are significantly lower in comparison to BTR schemes. They also carry better sustainability credentials as refurbishment projects create less emissions than a project built from the ground up. as green credentials are now paramount for firms across the board, this could be a big factor in why convert-to-rent schemes become so popular. We are also seeing more forward-funding agreements. Planning authorities view this ‘change of use’ positively and are encouraging flexibility within these spaces. add le shaw goddard has been advising a number of clients as they delve into the convert-to-rent sphere. I’m confident this trend will continue.

David Horne, Corporate Partner, Addleshaw Goddard