Is real estate facing an obsolescence crisis?

#Week14 saw the welcome arrival of spring, and with some much-needed sunshine and Easter weekend ahead, the mood in London was an optimistic one. But it was also the first week that new regulations on commercial property energy performance came into force, prompting some questions over the viability of a fair proportion of the UK’s building stock.

It was the subject under discussion in the latest episode of The I Word, Innesco’s new podcast, where the guests were Christina Gamboa, CEO of the World Green Building Council, and Ghislaine Halpenny, board director of ESG and corporate affairs at Regal London. As ever, it was fascinating to hear from people dealing with the issues ‘on the front line’, and hugely encouraging to learn just how important the sustainability agenda is not only to property companies themselves, but occupiers, investors and lenders throughout the sector.

The new regulations mean that, as of April 1st, properties with an EPC rating of F or G can no longer be legally leased out (albeit with some major exemptions). Some estimates make this 10,000 commercial properties affected in London alone. But these are only the first steps in a longer journey – by 2027 those rated D and E also become unlawful, and from 2030 only those with A*, A or B classifications will be allowed. In total, more than three quarters of London properties will need upgrades of some kind.

The big question is: where is the money going to come from to pay for these works? Prime assets in the best locations will in most cases be fine, but for a large proportion of buildings the upgrades will be very tricky if not impossible to finance. In the worst cases, the costs involved will outweigh the potential value of the building, leaving ‘stranded assets’ that are unlettable yet uneconomic to bring up to scratch.

This speaks to a wider issue for real estate across the world: obsolescence. As sustainability becomes increasingly important – and legislated for – many buildings will become simply unviable and, to all intents and purposes, worthless. In parallel, shifting work and play dynamics – home working, internet retailing and demographic trends – are making previously in-demand properties redundant, or at the very least reducing how much space is required. It has been clear for a while that many towns and cities have too many shops; it seems we can start adding secondary office space to the list too.

Taken at face value, this increased obsolescence – from either regulatory changes or reduced demand – could look existential for the sector. But in the spirit of springtime, there’s reason for optimism. The issue isn’t reduced demand for space per se, more that the type of space required – and where it is located – is changing. And if there’s one thing real estate has consistently shown itself capable of, it is finding new uses for land and assets, repurposing to unlock value and delivering a product that occupiers demand. The challenges look great now, but are they honestly any trickier than figuring out what to do with the Victorian warehouses, railway arches and industrial buildings that were redundant 20 years ago and now form the most popular areas of our towns and cities?

Be in no doubt, the transition will be difficult. But it will also, ultimately, be a successful one. One person’s obsolescence is another’s opportunity.