Uncovering the Potential of Commercial Office Space in 2024

In a world that has been fundamentally altered by the COVID-19 pandemic, the fate of commercial office space has seemed somewhat uncertain at times. The rise of remote work had many speculating about the obsolescence of traditional office environments; however, new data trends and changing preferences are reshaping the narrative. Despite the surge in remote working, demand for office space remains not just resilient, but in some aspects, stronger than ever. In this blog, we'll explore the factors behind the enduring appeal of commercial office space, as well as the role that Acorn is playing, in seizing these opportunities.

Acorn’s Vision

“We are building a portfolio of distressed commercial investments and asset management opportunities to a value of  £200 million, at a substantial discount to value, which will provide a sustainable income of 10% plus, with projected value growth of between 40-50% plus in the next three to five years. We are taking advantage of the market disruption caused by changing work practices, interest rate changes and new energy performance restrictions making the majority of current offices redundant, to buy distressed commercial assets. We are targeting sustainable sites in prime locations with multiple alternative uses,  which also meet today's energy requirements and social and technological work practices.”

- Melanie Omirou – Managing Director, Acorn Property Group 

The Surprising Resilience of Office Space

Despite a surge in remote working, data from Rightmove and property intelligence supplier Estates Gazette shows that demand for office space remains higher than pre-pandemic levels. In the first four months of 2023, interest in leasing office space soared by 9% compared to 2019 levels, according to a report by The Times. This unexpected resurgence highlights a compelling shift in the landscape of workspaces.

While some larger blue-chip corporations have reduced their office footprints, mid-cap and smaller firms have shown a significant uptick in demand for office spaces ranging from 3,000 to 7,000 square feet. Savills, a leading real estate services provider, reported that despite economic uncertainties in late 2022, the regional office market remained robust, with Q4 take-up surpassing the five-year average by 3%.

Savills also noted a continued return of employees to offices, placing greater pressure on businesses to create employee-centric workspaces. This has led to an unprecedented need for wellness-oriented office environments. Simultaneously, sustainability goals are driving demand for 'super prime' office spaces that align with eco-friendly objectives.

The Flight to Quality

The desire for high-quality fitted space in the right locations with good transport links and local amenity offering has created, what agents such as JLL have coined, “a flight to quality”. The difference in market rents achieved for such space has increased enormously and the gap between CAT A to CAT A+ (white label plug and play) rents has increased to as much as 25%.

According to the Financial Times in July of this year, analysts say the commercial real estate market has split, with strong demand for high-quality buildings in desirable locations that meet environmental requirements while there is a lack of interest for others. “A great space is an asset to a business… if they pick the right one, they want to commit to it.” Long-term contracts, therefore, remain a favoured option for the very best office buildings, which are in high demand.

The Youthful Urge for Office Environments

Young people in particular want to be in an office environment.r Steve Warnham, senior content manager at Totaljobs (via Raconteur) group has said “This young workforce is really ambitious. They want to improve their skills, build their experience and to learn from their peers and mentors. And there is a recognition that by returning to the office, they can advance in their careers more quickly”.

Why Acorn: Capitalising on Opportunities

In the evolving landscape of commercial office space, Acorn stands as a strategic player with a strong presence in key regions including South-West England, London, and the M4 corridor. With nearly 30 years of experience as a property developer and regeneration specialist, Acorn is well-equipped to navigate market shifts and economic conditions effectively.

One of Acorn's key strengths lies in its ability to undertake the refurbishment and mechanical and electrical improvements needed in office spaces. These tasks are often considered management-intensive and high-risk by institutional investors and funds, leading them to prefer selling assets at a discount. Acorn's team excels in proactive asset management, obtaining planning permissions efficiently, and seamlessly renovating and repurposing assets. This positions Acorn with a competitive edge in the market.

The Commercial Opportunity 

Head of Commercial at Acorn Property Group, Dane Cummings, states how “Uncertainty in the office sector has led to a flat investment market, which along with interest rate rises and forthcoming energy requirements has led to several high-quality sustainable assets becoming available at discounted prices. Acorn has been able to agree and acquire these highly discounted prime commercial assets with the potential for higher ERV’s upon repositioning and refurbishment. These assets are high yielding, well located commercial assets which in 3-5 years’ time will become “investment grade” products ready to be sold.”

Acorn's acquisitions and refurbishments align with current office market trends and requirements. Their offerings include:

• Open-Plan Offices with Breakout Space: Adapting to the shift towards collaborative workspaces, Acorn incorporates open-plan designs with dedicated breakout areas within office spaces.
• Smaller Office Suites: Recognising the surge in demand for mid-sized office spaces (up to 7,000 sqft), Acorn tailors its offerings to create vibrant and dynamic office environments.
• Flexible Office Spaces: Acorn offers flexibility by providing a range of options, including CAT A (fitted), CAT A+ (customised to tenant requirements), and hybrid spaces. This caters to the diverse needs and budgets of various companies, particularly SMEs requiring adaptability for growth or downsizing.
• Inclusion of Cat A+ Office Space: By including Cat A+ office space, Acorn allows asset owners to appeal to a broader audience, expanding beyond coworking options. This enables landlords to fill vacancies more swiftly and command premium rents without the constraints of per-desk pricing.
• Flight to Quality: Acorn understands the growing importance of creating office environments that both employers and employees take pride in. Their properties are designed to encourage a return to the office by offering better connectivity, seamless experiences, and enhanced productivity.

Energy Efficiency: Meeting the Future Standards

Starting from April 1, 2023, it has been unlawful to lease a commercial property with an EPC (Energy Performance Certificate) rating of F or G, even if the lease was granted before the MEES (Minimum Energy Efficiency Standards) Regulations came into force in 2018. By 2027, the EPC standard is set to become a C, and by 2030, a B, aligning with the UK's net-zero strategy by 2050.

Mat Oakley, Head of Commercial Research at Savills, highlights the significance of EPC ratings, stating, "In 2021, we saw more than 90% of leasing activity being for the best quality office accommodation in some locations. This is clearly a sign that tenants are looking for prime space with good ESG credentials." The supply of such space is limited in the UK, with only about 10% of office buildings boasting an EPC rating of B or higher. As a result, rental pressure is expected to continue increasing on high-quality offices.

Acorn's Commitment to Energy Efficiency

• Acorn is committed to offering energy-efficient and environmentally friendly office spaces. Their properties are refurbished to meet EPC B standards or higher. This commitment to higher ESG (Environmental, Social, Governance) credentials and superior EPC ratings benefits both landlords and tenants in several ways:
• Higher demand from ESG-focused tenants: Acorn's properties are well-positioned to attract tenants with a strong focus on ESG principles, aligning with the sustainability objectives of modern businesses.
• High potential for rental growth: Higher EPC ratings open the door to potential rental growth, as energy-efficient properties tend to be more cost-effective to maintain and operate.
• Lower service charge and maintenance costs: Energy-efficient buildings typically have lower service charge and maintenance costs, making them economically attractive to both landlords and tenants.
• Potential for lower finance rates: Green properties often qualify for lower financing rates, further enhancing the economic viability of Acorn's offerings.
• Extended lifespan of mechanical and electrical systems: Energy-efficient properties tend to have longer-lasting mechanical and electrical systems, reducing replacement costs over time.

YOUR CAPITAL IS AT RISK IF YOU INVEST 

Investment opportunities available via Acorn Property Invest are exclusively targeted at exempt investors who are experienced, knowledgeable and sophisticated enough to sufficiently understand the risks involved, and who are able to make their own decisions about the suitability of those investment opportunities. All investors should seek independent professional investment and tax advice before deciding to invest. Any historic performance of investment opportunities is NOT a guide or guarantee of future performance and any projections of future performance are not guaranteed. All investment opportunities available via Acorn Property Invest are NOT regulated by the Financial Conduct Authority (FCA) and you will NOT have access to the Financial Services Compensation Scheme (FSCS) and may not have access to the Financial Ombudsman Service (FOS).