Changes to energy efficiency standards mean that the majority of office spaces in the capital will not meet the minimum leasing requirements within the next four years, prompting a rush to retrofit by 2027. Currently, the Minimum Energy Efficiency Standards (MEES) in England and Wales mandate a minimum Energy Performance Certificate (EPC) rating of E for rented commercial properties. This will rise to a minimum of C in 2027 and B in 2030.

The push for sustainable office buildings is evident, as recent data indicates that sustainability is the primary driver of office leasing in the city this year, with over half of the lettings occurring in buildings with excellent or outstanding environmental ratings. In 2023, the City of London Corporation approved a record number of retrofit planning applications, accounting for half of all permissions granted across London. Grosvenor’s UK property business also achieved a significant milestone, retrofitting 1 million square feet in the capital earlier this year.

Mike Hook, Executive Director at LMG, highlighted a “clear flight to quality,” with grade A rents in prime locations reaching record levels. This trend includes energy-efficient buildings, smart technology, and generally more appealing workplaces. Graeme Dick, Principal Consultant at Proxima, described this shift as a “real change in the commercial property landscape,” noting the urgency for landlords to invest in significant upgrades to energy systems and insulation. He emphasized that mobilizing the necessary resources and expertise will be a considerable challenge for landlords and property managers.

Data from Savills suggests that while the market is improving due to an easing economic climate and a drive for sustainability, there is a trend towards smaller, higher-quality buildings. As pre-pandemic leases expire, tenants are seeking more value for their money, preferring smaller but higher-quality spaces. They are also avoiding older properties, with higher expectations for smart technology and modern refurbishments. According to Savills, around 17 percent of office tenants in London are looking to downsize.

In the first half of the year, 33 of the 45 assets acquired by UK purchasers were priced below £25 million, making up 44 percent of the market. Only one deal exceeded £100 million in the quarter.

Landlords without the financial capacity to invest in upgrades may have to decide whether to sell or wait for potential government assistance. Hook pointed out that owners of B or C grade office spaces in less desirable locations must assess their ability to afford repurposing or refurbishment, as their assets risk becoming stranded. However, he also noted that these “currently marginal buildings” have significant potential.

For some landlords, the right investment can lead to long-term growth, with Grade A buildings commanding average rents £20 higher per square foot than Grade B buildings, a price difference of about 30 percent, according to Oktra. Additionally, making an office more energy efficient can significantly reduce running costs. For instance, improving air conditioning can cut energy costs by up to 20 percent, as per the International Energy Agency.

Savills estimates that most spaces will require modifications costing over £40 per square foot. Developers, therefore, have a strong business case to invest in smart building technology, which should be a core component of any project. Such investments can enable new service-based relationships, green or social leases, and reduce overall operating costs.