In the spring 2023 issue of the Property Chronicle, “stranded asset” was playfully cited as real estate’s phrase of the year. We tend to agree. Not only is commercial real estate (CRE) facing a once-in-a-generation disruption at the hands of remote and hybrid work, but at the same time, owners are having to deal with increased costs of capital and gradual hikes in environmental performance requirements.
Remote and hybrid work
Commentators have shared their thoughts on remote work ad nauseum, so there is little need to add too much more to this conversation. On one hand, in-person work is seen as a necessity to promote focus, culture, learning, and water cooler-adjacent moments of commercial serendipity. On the other hand, it is argued that knowledge work can be completed from anywhere, and that it can be a force for happy workers and increased productivity. Either way, the very nature of the human-office relationship is being challenged, corresponding with the oft-cited “bifurcation” of offices into those agile enough to adapt to change, and those which aren’t. This has prompted research into what amenities and other characteristics are actually valued by occupiers (see Braesemann, et al, 2022). Although JLL reported a central London office vacancy rate of 8.4%, an arguably more insightful metric is the actual utilisation rate of these spaces. Occupiers might be paying rent for the time being, but how much longer will they tolerate that payment when desks remain empty for most of the week?
Environmental performance
Back in 2021, Pi Labs’ own research – “Real estate and environmental performance” – was published; in it, we cite a 2019 paper by Kevin Muldoon-Smith and Paul Greenhalgh which claims that global stranded asset risk is $16 trillion for residential real estate and $5 trillion for CRE. In the UK, energy-driven stranded asset risk for CRE emerges in the form of energy performance certificate (EPC) requirements to achieve a C-rating by 2027 and B-rating by 2030. The problem? 76% of commercial space in England is rated C or below (Figure 1) representing £1.2 trillion of CRE in the UK. With 2027 and 2030 fast approaching, industry feedback indicates lenders have largely ceased financing assets rated within the lower EPC tiers.
