Serviced offices could be the key to boosting a portfolio’s ESG credentials

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15 Mar 2023

At your service: Serviced offices could be the key to boosting a portfolio’s ESG credentials

In the wake of the pandemic, you would be hard pressed to find a company that had not re-evaluated its office occupancy and hybrid-working policy.

With most businesses reassessing their office space needs, there has been a paradigm shift in what occupiers demand of their offices. Research from law firm Boodle Hatfield, released at the end of 2022, showed that 1.8 million square metres (19.4 million square feet) of UK office floorspace was taken out of use in the previous year — the equivalent of 248 football pitches. Yet, despite this apparent exodus, grade-A office space is in higher demand than ever. The office market is undergoing a “flight to quality”, with occupiers seeking first-rate buildings with energy efficiency at their core. It is unsurprising, then, that commercial landlords are investing in high-quality office space offering more efficient use of floorspace and resources, with a renewed and urgent focus on optimising “green” credentials.

Given this background, could increasing exposure to serviced offices help future-proof landlords’ portfolios by furthering ESG targets? And, could this, in turn, improve tenants’ carbon footprints?

You can take your pick from the many buzzwords used to describe new approaches to working. From “flexible” and “hybrid”, to “employee wellbeing”, the new definitions of the world of work all have the “S” in ESG at their heart.

Serviced-office providers present uniquely collaborative opportunities for businesses to participate in wider social initiatives. Serviced offices are likely to have their own centrally organised ESG initiatives, perhaps in the form of a longstanding relationship with the immediate community. Particularly for smaller enterprises that might not have the resources for their own ESG strategies, the serviced office creates a multiplier effect, allowing smaller firms to piggyback onto centralised ESG activities.

For instance, Argyll, an office-space provider, enables its customers to take an active role in the wider London community. It has a long-standing partnership with The Connection located at St Martin-in-the-Fields, an organisation that offers a range of specialist services supporting homeless people through their physical and psychological challenges, while working with them to move off the streets and towards a better future. Harnessed effectively, the community-minded spirit of serviced offices can be a powerful force for social initiatives.

Putting the ‘E’ into ESG

The demand for sustainable offices has been steadily growing for some time, as companies increasingly evaluate their carbon footprint and energy efficiency — a factor brought to the fore by the ongoing energy crisis and government legislation.
According to recent data from Knight Frank, however, while 90 percent of businesses view their office space as “a strategic device”, few are effectively using their offices to help achieve sustainability targets.

As a result, landlords are giving renewed consideration to how offices can not only enhance the ESG credentials of their own property portfolios, but also how they can align with tenants’ ESG strategies. The office is the next link in the supply chain inviting scrutiny. This makes “green” buildings an increasingly attractive and commercially viable investment to add to portfolios. In fact, Savills’ report on the global real estate investment outlook for 2023 states that energy efficiency remains a priority for occupiers seeking to relocate offices.

While newer offices must now boast strong energy-efficiency standards, the challenges of ensuring existing building stock is energy efficient should not be overlooked. With prime serviced office stock in central locations in European cities often being grade I- or II-listed heritage buildings, retrofitting older buildings to green standards is critical. For instance, Argyll recently embarked on a £27 million (€31 million) refurbishment programme to modernise 275,209 square feet (25,567 square metres) of prime London offices, while retaining the heritage fabric of each unique building. Sustainability improvements ranged from upgraded heating and cooling systems, to substantial mechanical and electrical works to reduce each building’s carbon emissions.

Not only is sustainability increasingly the top priority for tenants, but legislation is also set to make energy efficiency an essential aspect of commercial leases in England and Wales. For commercial leases, the Minimum Energy Efficiency Standard (MEES) prohibits landlords from continuing to let properties with an “F” or “G” EPC rating. From 1 April 2030, these requirements will be increased to an EPC rating of “B”. Deloitte’s 2022 London Crane Survey suggests 80 percent of London’s offices still need upgrading to meet the new energy-efficiency standards.

ESG is, therefore, no longer just a nice-to-have for commercial real estate; it is fundamental to cost efficiency and commercial viability — landlords must act quickly to future-proof their assets in line with this shift.

The centralised management structure of serviced offices allows for more efficient use of space and resources, which is critical for reducing carbon footprints. With many landlords negotiating a fixed rate for utilities, often on a bulk contract with a provider across their portfolio, not only are the operational costs lower, but the centralised management means that occupiers can reap the benefits of economies of scale they would otherwise not be able to access.

Serviced-office providers also offer the ability for businesses to flex their use of workspaces, ensuring offices do not sit empty. While one business might rent a workspace Tuesday to Thursday, another may just need use of an office a few days a month, thereby ensuring workspaces can suit a variety of business models with minimal wastage or operational inefficiency.

Waste not, want not

Another benefit of serviced offices is avoiding regular space customisation.

Office buildings that require regular refurbishment are becoming increasingly unsustainable due to the massive amount of waste resulting from customisation for each new tenant. Serviced offices provide a viable alternative, where fixed, long-term furnishings and fixtures offer a flexible blank canvas to occupants. Unbranded, but high-quality, spaces can be enjoyed by a variety of businesses, vastly reducing the amount of material waste that comes with renovation.

The traditional “trophy” buildings with floors of unused, floodlit offices are no longer fit for the new age of flexible working and sustainable spaces. The grade-A offices that are in demand are those that can be agile enough to ensure the use of resources is maximised.

Ultimately, it is clear that ESG credentials are now central to commercial viability across the office market. The ripple effect of the social and environmental benefits of serviced offices will not only bolster landlords’ portfolios and reporting, but also help enhance tenants’ own sustainability governance.

This article was written for Institutional Real Estate Europe.