The Future of Europe’s Office Market: Turning Obsolescence into Opportunity
How Investors and Asset Owners Can Adapt Ageing Office Stock for Long-Term Success
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The European office market is at a turning point. Over the next decade, the sector will face the twin pressures of an ageing building stock and evolving tenant expectations.
According to a recent Cushman & Wakefield report, more than 170 million square meters of office space risk becoming obsolete by 2030. To put this into perspective, that’s the equivalent of six times the total office stock of Central London.
I’m an optimist and firmly believe this represents a huge opportunity for Value-Add or Opportunistic Real Estate Investors. However, challenges loom large, particularly for Asset Owners at risk of rising vacancies and declining property values. The ability to strategically repurpose assets will demand significant capital expenditures (CapEx).
In today’s newsletter, we’ll explore the following topics to uncover both challenges and opportunities:
The Scope of Office Obsolescence.
The Three Drivers of Change.
Location as a Deciding Factor.
Trends in Redevelopment and Investment.
A Framework for Strategic Action.
Let’s dive in.
1. The Scope of Office Obsolescence
Properties that fail to adapt risk declining values, tenant attrition, and prolonged vacancies. However, repositioning or repurposing can preserve and even enhance asset value.
The magnitude of obsolescence risk is particularly pronounced in Western Europe, where nearly 80% of office stock in key cities consists of ageing buildings. Many of these buildings, constructed decades ago, no longer meet the ESG standards expected by today’s tenants and regulators. These issues are compounded by shifting market demands, which have become more urgent in the post-COVID era.
Options for landlords include:
Upgrade and modernize buildings to retain or attract tenants.
Sell assets at a significant discount.
Barcelona’s Torre Pujades offers a compelling case study. Originally a vacant single-tenant office building, it was transformed into a multi-tenant space featuring LEED Gold and WELL certifications.
These enhancements:
Improved sustainability credentials.
Attracted a diverse mix of tenants willing to pay premium rents.
Resulted in higher values and occupancy rates.
2. The Three Drivers of Change
To stay competitive, office assets must adapt to three key factors driving transformation:
1. Carbon Regulations
Legislation like the Energy Performance of Buildings Directive requires landlords to improve energy efficiency and reduce carbon emissions. Non-compliance can result in fines, reduced tenant demand, and reputational damage.
Example: Assets with certifications like BREEAM or LEED are increasingly preferred by tenants and investors because they align with corporate ESG mandates.
2. Community and Service Expectations
Today’s tenants prioritise Grade A office spaces that reflect their corporate identity, enhance employee well-being, and offer high-quality amenities. These features are vital for attracting and retaining top talent in competitive markets.
Example: Offices with wellness facilities, collaborative spaces, curated events, and proximity to transit hubs are in high demand, driving higher rental premiums.
3. Cost Pressures
Upgrading outdated office buildings to modern standards is a significant financial investment. Asset owners must carefully balance upfront costs with long-term benefits such as reduced vacancies, higher rents, and improved asset valuations.
Ignoring these drivers could render assets obsolete, while proactive adaptation positions them as market leaders.
3. Location as a Deciding Factor
Location plays a crucial role in determining whether to reposition or repurpose an asset.
Central Business Districts (CBDs) consistently outperform non-central locations in:
• Demand
• Rental premiums
• Occupancy rates
According to the Cushman & Wakefield report, vacancy rates in non-central areas are on average 550 basis points higher than in prime locations.
For centrally located buildings, repositioning is often the best strategy, leveraging proximity to transport links and city amenities. In non-central areas, repurposing to alternative uses like residential or mixed-use developments might be more effective.
Case in Point:
Stockley Park, located on the outskirts of London, illustrates the potential of repurposing. Once an out-of-town business park, it is now transitioning into a healthcare-led mixed-use development. This shift is projected to deliver higher exit yields, reflecting the growing value of non-office uses in less central locations.
4. Trends in Redevelopment and Investment
Redevelopment in prime locations can unlock substantial rental premiums, while proximity to transit and ESG certifications increasingly influence tenant decisions.
Key Trends:
• Nearly 20% of office sales now involve properties designated for renovation or redevelopment, the highest level on record.
• Core investors are concentrating on best-in-class assets in prime locations, leaving value-add investors with opportunities to upgrade underperforming properties for higher returns.
For value-add investors, the ability to transform these assets into attractive options for core investors offers a compelling pathway to capitalizing on market trends.
5. A Framework for Strategic Action
Adapting office assets to future demands requires proactive and methodical planning.
Here’s a five-step framework for unlocking value in a challenging market:
Assess Risks and Opportunities: Evaluate each asset’s current condition and potential for repositioning or repurposing.
Understand Market Dynamics: Analyze supply-demand trends to identify gaps and opportunities.
Navigate Regulatory Requirements: Ensure compliance with laws governing energy efficiency and carbon emissions.
Plan for Redevelopment: Address zoning laws, planning permissions, and local market preferences.
Perform a Cost-Benefit Analysis: Quantify financial implications to determine the most viable strategy.
This framework equips landlords with the tools to mitigate risks and seize emerging opportunities.
Conclusion
The European office sector is undergoing profound change. Rising obsolescence risks demand strategic action from all stakeholders.
By addressing ESG considerations, leveraging market trends, and embracing flexible strategies, stakeholders can navigate challenges while uncovering new opportunities.
Key Takeaways:
Obsolescence Risk: Nearly 80% of Western Europe’s office stock faces obsolescence, requiring upgrades or repurposing.
Drivers of Change: Carbon, Community, and Cost are the key forces shaping office market transformation.
Location Matters: Prime CBD offices favor repositioning; non-central locations often call for repurposing.
Redevelopment Trends: Activity is surging, presenting opportunities for value-add investors.
Strategic Framework: A five-step plan helps landlords unlock asset potential.
That’s all for today.
See you next week.
— Carlo
Founder and Managing Director Benigni
Weekly Resource List:
1. Rethinking European Offices 2030: Obsolescence or Opportunity? (Cushman & Wakefield)
(Reading time: 5 minutes)
This report analyzes the risk of obsolescence in 16 major European cities, estimating that over 170 million square meters of office space are at risk by 2030.
2. Healthcare Hub Approved in Stockley Park (UK Property Forums)
(Reading time: 3 minutes)
Details the approval of a healthcare hub in Stockley Park, exemplifying the trend of repurposing office spaces to meet current market demands.
3. European Obsolescence Equals Opportunity (Cushman & Wakefield)
(Reading time: 7 minutes)
Explores how repositioning and repurposing office assets can transform potential obsolescence into opportunities for investors.
4. C&W: 70% of European Offices at Risk of Becoming Obsolete (Real Asset Insight)
(Reading time: 4 minutes)
Highlights the increasing risk of obsolescence in European office spaces and underscores the need for strategic investment.
5. Business Parks Left Empty as Office Workers Prefer City Centres (The Times)
(Reading time: 5 minutes)
Discusses the shift in office occupancy trends, with a preference for city centers over business parks, impacting asset values and investment strategies.
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