The Coming of the Green Office Revolution?
A paper by Tunbosun Oyedokun, Colin Jones and Neil Dunse just published in the Journal of European Real Estate Research* is the first to look at the development of the market for green offices in the UK. It sheds light on the challenges for the greening of the UK’s office stock.
As global concerns about the carbon foot print of cities and buildings persist, our energy consumption is increasingly under the microscope. Greener offices as the principal workplaces in a service based economy are clearly part of the potential solution. Nevertheless, there has been a historical unwillingness by the real estate market to move away from the longstanding status quo of the prime office specification encompassing air conditioning. The solution is not simply about building new green offices, but also about the green agenda gaining market acceptability to adapt the existing stock.
A Green Office
There are different definitions and classifications of green buildings around the world. BREEAM (British Research Establishment Environmental Assessment Method) was the first green building accreditation scheme, beginning in the UK in 1990. Buildings receive credits for green features ranging over energy, health and wellbeing, water, waste, materials, transport, land use and ecology, and management. Sustainable transport scores are not based on travel usage, but on proximity to public transport, car parking spaces, bicycle friendliness, etc. Similarly, energy consumption and environmental scores are estimated based on computer models and the building design.
BREEAM is a voluntary badge but Energy Performance Certificates (EPCs) were introduced in the Europe Union in 2008. An EPC demonstrates the current energy efficiency capability of an office and is legally required on completion, on sale or on letting or every ten years. EPCs are actually an estimate based on a building’s characteristics and give a rating from A down to the lowest G. Looking to the future, the UK will make it unlawful to let commercial properties after April 2018 in the lowest two EPC bands. These policies are designed to speed up the adoption of green buildings, not least by providing labels for identification in the market.
Dynamics of Going Green
Although the BREEAM scheme was introduced in 1990, initial take up by the real estate sector for the next decade was minimal. There was deemed to be a ‘vicious circle of blame’ in which occupiers, developers, architects and investors all saw the benefits of green buildings, but attributed the lack of green buildings to the other real estate stakeholders. A combination of a reluctance to change and market ignorance was also a major barrier to green offices. The industry focused on looking for a green rental premium to make the construction of such buildings with their additional costs viable. The implication is that this process will be gradual through the successful demonstration of the financial viability of development and an increased share of the local market for green buildings. The evidence presented in the paper is of a very different process occurring.
The paper reports a dramatic rise in the green office ‘market’, but the BREEAM stock still represents only about 2.7% of buildings, although just over 12% of the UK total office space. While there are individual properties spread around the UK, most green (BREEAM) offices are in the largest cities. London and ten major provincial city-regions account for 84% of the green office stock. The largest concentration by some way is in London with 120 green office buildings and over half the UK green office space. Provincial city regions have typically 20 to 30 buildings and 10 to 20 within city business districts. In terms of city centres, green office space is almost 30% in London, just over a fifth of the market in Manchester and Leeds, and approaching a fifth in Bristol and Edinburgh.
The green development ‘transformation’ occurred suddenly after only minimal expansion in the first half of the last decade. Green building expanded dramatically in the latter half of the decade, at the peak of a development boom and in the immediate years that follow as the office market collapsed after the global financial crisis. In fact, in 2009 alone over 8m square feet of green space was completed, expanding the BREEAM market office stock by 54%. A similar pattern of rapid green development occurred in the USA at the same time.
London led the way in terms of not only the timing of this green building boom, but also its scale of growth. In general, green development in the provincial city-regions was minimal until it took off in 2007-2008 and peaked in 2009. Most of the green office space in these cities was completed in this short three year period, and with the possible exception of Edinburgh, output subsequently declined as office development in general was put on hold with the recession. However, London continued to exhibit a rising trend and in 2014 green completions reached a record level in the city.
These trends are inconsistent with the green premium development model briefly referred to above. The driving forces instead appear to be twofold. First, there were worries about obsolescence by investors in the upside of the boom with the prospects of statutory green standards. Second, landlords sought to find a competitive edge for their properties in a market with high vacancies following the recession. In the market scramble created by the credit crunch and the collapse of the decade’s property boom, green offices seem to have become the new norm. Whereas in the first half of the 2000s green completions represented much less than 10% of new building, more than half of all new offices completed since 2009 have been green and since 2011 the figure has risen to seven out of ten.
The Greening Process
The long term implications are still uncertain, muddied by the cyclical nature of the property market. The supply overhang following the property boom has meant that vacancy rates have been high for six years, although they began to fall through 2014, giving rise to the first recovery shoots of speculative development. The green premium development model may not explain the process to date, but it is still relevant to an assessment of the future, especially for the refurbishment of the existing stock. Going green will involve substantial investment for these properties. There is a clear distinction between the existence of green offices and a market for green offices. It is the latter that will ultimately drive the expansion of green offices on a large scale by creating the viability of new development/refurbishment.
The process will inevitably vary by location. It is also dependent on the state of the economy. The slow and weak economic recovery since the global financial crisis has meant historically low levels of market transactions and this in turn has led to stagnation in the dynamics of green market transformation. Only in the London office market has green development continued at a significant scale, with record levels achieved in 2014 with green penetration almost 30%. London therefore represents the only potential place where arguably a green market has been established.
The fundamental unresolved question about green office development is: was the great leap forward in green office building during the property boom simply part of a real estate cycle, or a long term innovation that will be embraced by the industry when the next upturn comes? Furthermore, the green office revolution has just begun with no clear market premium established, thereby inhibiting the greening of the existing office stock. Refurbishment of the current offices will be a far more difficult task than building new green offices.
*Oyedokun, T.., Jones, C., and Dunse, N. (2015). The growth of the green office market in the UK. Journal of European Real Estate Research, 8(3), 267-284. DOI 10.1108/JERER-05-2015-0025