Why development finance isn't being invested in the right projects

To put it bluntly, office accommodation is not meeting the needs of modern businesses, yet development finance is being misdirected into large office developments for which there is little demand.

As one of the largest firms of property consultants in the South and one that runs a commercial agency branch operating throughout the Thames Valley region, we see first-hand how investment is being misplaced in large ‘head office’ buildings which then sit empty, failing to provide a return on the investment for the investors and subsequently being sold.

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The last 18 months has seen a vast amount of office accommodation being removed from the market due to a change in Permitted Development Rights which has led to landlords choosing to change what was previously above-shop office space into residential property. The knock-on effect of this is that there is now a shortage of smaller office units and ironically, more companies are now demanding these smaller units thanks to changes in working patterns.

Businesses are increasingly outsourcing processes like HR and admin, resulting in lower headcounts. The wider spread of cloud-computing and more portable technology offers flexibility in staff working patterns meaning that fewer people are in the office at one time. Even office equipment such as printers and computer monitors are getting smaller which again, leads to a reduction in the amount of desk space needed for each employee.

All of this adds up to a high demand for office space under 5,000 square feet but this is exactly what the market is lacking. Instead of looking to provide these units, development funds seem to be channelled into prestigious office buildings with large floor plates which, although impressive, don’t match market requirements.

Once these headquarter office developments have been built, they seem destined to sit empty. Time and time again we see these monoliths left unfilled because developers are too focused on the old property model to realise that the UK market has moved on and is demanding a very different type of office.  When one of these showcase developments gets taken by a large corporation, investors are very quick to point to this as a justification for building more, but actually these deals are few and far between.

The answer, based on our experience, would be to create a new build model in which current market requirements are met with high end multi-use development schemes offering quality office spaces under 5000 sq ft that is of high specification and can be customised to end user requirements alongside warehousing and on-site amenities such as meeting space, gyms, cafés and parking.

Developers seem loath to do this for two reasons. Firstly, the fear of cash flow issues when collecting rents from different businesses and secondly the additional complications of managing a development with multiple occupants which can lack the security of sole use long-term tenancy. All of these are reasonable concerns and often cited as the reason developers stick to the traditional model of building a large, single use property but perhaps the real reason is something else entirely – fear of the unproven.

The idea of deliberately developing smaller units has only really become a necessity since the market began to change last year. In our business we’ve heard of only one developer who is bravely taking the decision to try this new tactic and we are confident that this decision will be a good one.  This is what the market is crying out for. Developers and investors need to wake up to the changing mood of the UK office market and have the sense to try a new approach. 

This model may, as yet, be unproven but that doesn’t mean it doesn’t work. We believe it will.