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Stranded assets present an opportunity for architects

Brian Green

Office building owners may fret that the value of their property is collapsing because of home-working and demand for greener buildings. But it's the ideal opportunity for the profession to parade its retrofitting skills, says Brian Green

Buildings can become stranded assets, unlettable or unsaleable as the demand changes or people looks for more sustainable alternatives.
Buildings can become stranded assets, unlettable or unsaleable as the demand changes or people looks for more sustainable alternatives. Credit: John Leaver/Alamy

The pandemic and a growing sense of global and environmental chaos have prompted the entry of new words and phrases into daily life and given impetus to others: hybrid working, permacrisis, race for space, zooming, Teams meetings, the list goes on.

One phrase rising up the charts in the property world is ‘stranded assets’. It had been gaining ground in the boardrooms of property and construction sectors for some while but was given a big push by the pandemic.

Put simply, stranded assets are those that have rapidly lost value and may even have become a liability to the owner or investor. The range is wide, from natural assets like farmland lost to coastal erosion or oil reserves that can no longer be exploited, to buildings such as offices, shops or factories made redundant through rapid changes in economic activity.

The issue is not new. The value of canals plunged when railways emerged. In turn, the value of railways slumped as car ownership left them loss-making in the 1960s, prompting the Beeching cuts. In periods of major technological, economic, and social change, assets associated with the past are left stranded, worth far less or possibly turned into liabilities on the books of investors or owners.

Today, high on the worry list of potential stranded assets is the rapidly growing stock of potentially outmoded offices and redundant retail space. To avert a major drop in value, many will need to be upgraded or repurposed.

For architects, this presents a huge opportunity as investors and business owners in Britain and abroad look for solutions to retain the value of their property assets. This is likely to require creative and innovative solutions underpinned by a robust commercial understanding of how to deliver a greener, more people-focused built environment.

Recognise it or not, we are in the throes of a massive transition. This inevitably is creating huge pressure to reconfigure the built environment. Some of this is obvious, some not.

An obvious prompt for change is the need to adjust how we live to both manage and mitigate the effects of climate change. We are also witnessing huge demographic change. Less obvious, perhaps, is how rapid technological advances are changing both the economy and society and in doing so reshaping our needs for buildings and structures.

This coalition of forces is leading to the stranding or potential stranding of ever more assets. Investors are understandably acting to head off the pain and loss. Take oil-rich Middle Eastern nations investing in major football clubs, and the hosting of the World Cup in Qatar. This might be interpreted as nations anticipating the stranding of their oil assets as fossil fuels are phased out. These nations are inevitably looking to invest in new assets and, for numerous not unconnected reasons, looking to embellish their reputations.

The risk of an increase in stranded property assets has been accentuated by growing attention paid to the ESG (environmental, social, governance) agenda, through tightening regulations, and the effects of digitalisation on the built environment, such as growing numbers working from home and shopping online – existing trends that were greatly accelerated by the pandemic.

For the average citizen, these radical changes will lead to a much-altered built environment. Within the investment community, however, the effects will play out in boardroom decisions that will have huge implications for construction activity.

Looked at from a financial perspective, the demand for office and retail property has taken a huge knock. Office occupation levels and retail footfall have plunged. Meanwhile, many if not most building owners must address incoming regulations forcing them to upgrade their buildings to meet higher energy efficiency standards. On top of these challenges, the emergence of ESG means many major office and retail occupiers now want buildings that greatly exceed existing environmental standards.

To get a feel for the level of change in retail demand, springboard data used in the set of real-time economic indicators produced by the Office for National Statistics suggest footfall in 2022 across retail has been running on average about 15 per cent below pre-pandemic levels.

Demand for offices as seen through occupation levels has also taken a hit. A core question in the Office for National Statistics Labour Force Survey asks where in their main job people mainly work. The four options are: in your own home; in the same grounds or buildings as your home in different places using home as a base or somewhere quite separate from home. The number who said separate from home has fallen from 86 per cent in 2019 Q2 to 69 per cent in 2022 Q2, according to analysis by the Construction Products Association. That represents a fall of about 5.6 million people, many if not most of whom will previously have worked in offices.

Looked at from a different perspective, the analysis also showed a steep rise in people mainly working in the same local authority area as they live. The number of people in the UK now working and living within the same borough rose by 3.3 million (10.3 per cent) between 2019 Q2 and 2022 Q2. The shift has been particularly marked in London and in the financial sector. In 2019 Q2, around 350,000 people working in banking and finance lived and worked in the same borough. In 2022 Q2, the number stood above 780,000. A closer look at the data suggests large numbers of people living in outer London no longer commute to offices in central London.

This pandemic-prompted fall in demand appears to have accelerated an existing decline. If we look at the amount of office and retail floor space available, the figures suggest a cooling in the market has been underway for some time.

Data from the Valuation Office Agency for the stock non-domestic property in England and Wales reveals the scale of the falls in the floorspace of both retail and offices in recent years. Having peaked in 2014 at 90.1 million square metres, office floor space has fallen to 84.6 million m2. This can be seen in Chart 1, which illustrates how the pace of decline has accelerated with the pandemic. The fall in retail is less pronounced, peaking in 2019 at 106.1 million m2, it has now dropped to 104.7 million  m2.

Some loss of office floor space may reflect the change of use to residential that was boosted by permitted development legislation in 2013. This presented building owners with a commercial opportunity to maximise the value of their asset through switching markets. Data for England suggests the conversion of offices to homes has accounted for about 81,300 dwellings in the past seven years. There has, however, been significant criticism of many of the homes produced.

A more immediate challenge for building owners and investors is lifting the energy performance of the stock. As things stand, most of the existing stock is at risk of ending up as stranded assets if action is not taken to raise its energy performance to meet legislation. Although there is room for exemptions in the legislation, by 2027 all non-domestic rental properties should be rated at least EPC C and by 2030 the minimum rating will be EPC B. Beyond that there is a growing demand for far more efficient buildings coming from occupiers eager to meet their net-zero commitments.

In its Autumn 2021 report How Sustainable is the Office Stock in the UK? Savills suggested that 87 per cent of the office stock in the major UK office markets is rated EPC C or below. And as we can see in Chart 2, in recent quarters the number of EPCs lodged rated B or above for the wider non-domestic property stock is little more than a third.

This all points to a major struggle to raise the EPCs of the existing stock to a level that matches the regulations. Yet many big commercial occupiers, looking to boost their ESG ratings, are seeking buildings that are environmentally far in advance of what will be acceptable in the legislation. This strong market for new top-end buildings will increase the squeeze on the existing stock.

The combined impact of falling demand and forced redundancy resulting from the cost of improving energy efficiency will mean that large numbers of these buildings will need to be put to other uses if demolition is to be avoided. It is now beginning to be more widely recognised that one of the biggest changes to construction in coming years is likely to be an increase in repurposing buildings rather than demolition or replacement. Two further forces pushing against demolition will be concern over embodied carbon and the desire to minimise disruption within communities, which will intensify the case for repurposing.

This trend should generate massive opportunities for commercially aware and innovative architects able to reconfigure existing buildings in a way that maximises their asset value and prospects as usable spaces. This may be in finding ways to reconfigure buildings to meet modern standards in their current use or find ways to repurpose the buildings to meet growing demand elsewhere within the economy.

Such change of use is not new. The conversion of 19th and early 20th century warehouses and factories into homes has proved popular in the past. But, more recently, the relatively easy option of using the extended permitted development rights to convert offices to homes has courted controversy.

Architects will need to carry out tough and tricky rethinking of urban regeneration in light of the more radical social, economic, and cultural changes that lie ahead. This will mean more inventive, less immediately obvious, solutions that neatly balance local and national needs, socially and economically, with building owners’ desire to maximise their property asset value.

So, while rising numbers of stranded property assets present a major economic threat, they provide a major opportunity for the architectural world to shine. What is more, this is a huge opportunity not just in the UK but globally. Perhaps this is a star worth exploring over the Christmas season.



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