Commercial landlords are facing a challenging time, with high business rates, changing energy standards, and a slump in demand making it difficult to turn a profit. One of the biggest challenges for commercial landlords is keeping up with changing energy standards. The Minimum Energy Efficiency Standards (MEES) were tightened in April, prohibiting landlords from leasing commercial buildings with Energy Performance Certificate (EPC) ratings below an E. And by 2030, all rental properties will need to achieve an EPC rating of B or above. However, it is estimated that around 15% of the UK’s commercial property stock still has non-compliant ratings, and it may take until 2036 for all rental properties to meet the 2030 MEES standards.
The slow rate of change is primarily due to cost, as rising building material costs make it challenging for landlords to upgrade their properties. Refurbishments can be costly, and landlords often struggle to recoup the investment through rent because tenant demand does not match availability. Additionally, the shift towards remote work prompted by the pandemic has decreased the demand for traditional office spaces. Many companies have downsized their office spaces and are now looking for non-traditional layouts that favor hot desking. Prospective tenants are also seeking shorter lease terms, making it harder for landlords to secure bank loans for necessary upgrades.
As a result of these challenges, many commercial landlords are choosing to convert their properties into residential offerings. Changes to Permitted Development Rights (PDRs) introduced in 2016 have made the conversion process easier by allowing landlords to make certain changes, including switching a building from commercial to residential use, without the need for planning permission. This has led to an increase in office conversions, with former office spaces being converted into residential apartments. Property experts believe this increase in office conversions is positive for the commercial market, as it reduces the oversupply of office spaces and improves the quality of the remaining buildings.
Converting empty offices into residential properties is often more cost-effective for landlords than paying high vacant business rates. Additionally, this trend of office conversions benefits town centers by increasing footfall, which in turn benefits local shops and restaurants. Property experts suggest that instead of lamenting the loss of office blocks, we should celebrate the increased housing options in our cities and towns. However, it is worth noting that the shift towards residential conversions can also be attributed to the decrease in demand for traditional office spaces, which has been exacerbated by the impact of the pandemic.
