UK: BUILDINGS - THE BARER THE BETTER.

UK: BUILDINGS - THE BARER THE BETTER. - To attract new tenants, fixtures and fittings are installed in new office space - and then stripped. But now the industry is addressing this spectacular waste.

by Erik Brown.
Last Updated: 31 Aug 2010

To attract new tenants, fixtures and fittings are installed in new office space - and then stripped. But now the industry is addressing this spectacular waste.

During the first 12 weeks of this year, fixtures and fittings worth an estimated £2 million were thrown away by organisations moving to new office space in the City of London.

The estimate is conservative and the cost of stripping out and refitting that relatively small amount of office space may be as much as £5 million. But the total cost of what Roger Carey, the new president of the British Property Federation, has described as 'this tremendous waste' is likely to remain hidden.

In fact, it is so very common that it has become an accepted - and almost invisible - part of the relocation process. And it doesn't only apply to London. All over Britain, carpets are being junked, light fittings scrapped and ceilings torn down in multi-million-pound acts of corporate vandalism.

To understand how this can happen, you have to appreciate some of the more powerful driving forces behind speculative development in the UK.

At its simplest, the process works like this: a developer raises the money to construct a building, which is let to a tenant and then sold on to an investor. The investor is not only buying the property, it is buying an income stream in the form of the sitting tenant's rent, tied to a lease of predetermined length, for which it is prepared to pay a significant amount. The developer takes its profit from the difference between loan, site and construction costs and the completed investment value - and if it is skilful or lucky, it can make a fortune.

The possibility of huge profit encourages speculative development, which is not in itself a bad thing since it provides relocating companies with a wider choice of property than would otherwise be available. But the dangers to the developer of not getting a tenant are enormous. An empty office building is a money pit that can try the patience of lenders, and may force the development company into receivership.

As a result, the competition for relocating tenants is fierce and that leads directly to what is, in effect, the most expensive window dressing in history.

Speculative developments are fitted out to what is known as Category A, or developer-standard, to pull in the punters. Expensive carpets are laid, even though they will have to be taken up again to give the incoming tenant access to underfloor trunking for computer cables; light fittings are built into ceilings, even though they may be in the wrong place for the new occupier's business needs; boardrooms are partitioned off, just to show what might be possible. And when the competition is at its most fierce - as in the late '80s - development standards have a tendency to become more and more extravagant.

The level of refitting that takes place once a lease is signed depends on the new tenant's business. A publishing company, for instance, may need to make very few changes to Category A space; a legal firm, which has a business requirement for a large number of small offices and meeting rooms, will have to make more.

Whatever the reason for the refit (a carpet may be changed because it doesn't match the corporate colour, for example), the cost is startling. John Desmond of chartered surveyors and building economists Bernard Williams Associates, estimates it at between £5 and £13 per sq.ft: up to £260,000 for a 20,000-sq ft office floor. And that cost recurs time and time again.

Jeff West, joint MD of building consultancy at DTZ-Debenham Thorpe - one of the UK's largest surveying firms, says that 90% of his work involves putting tenants into buildings, and that some level of refit is involved in eight out of every 10 projects his team handles. 'We are doing it virtually all of the time,' he says. 'It's almost all finished to Category A.'

The question of who bears the costs is a matter of timing. In a market where demand outstrips supply, it will probably be the occupier; in a market where supply outstrips demand, it is more likely to be the developer although the payment towards refit may be represented in some other way, as a longer rent-free period, for instance.

In any event, the time taken to fit a building to developer standard and then refit it to occupier standard has an obvious impact on speed of delivery and occupation, as well as market fluidity, which affects everybody.

The tragedy is that none of this is necessary. The British Property Federation, the landlord's pressure group, and the British Council for Offices both agree that the more sensible approach - for landlord and tenant - is to market new buildings before they are fitted-out, to what is known as 'shell and core' standard.

Because a shell and core office has no floors, ceilings, walls or partitions, it is ready to be fitted out to the occupier's specification. The drawback is that it is not very pretty, and for tenants with little imagination it might be less easy to get to grips with - but it speeds up the delivery process and it saves a fortune.

Even the sense of unease an incoming tenant may feel at having to mastermind the interior construction of a new building can be overcome. At Broadgate Properties' 525,000-sq.ft Ludgate development in London, the developer has absorbed any fears the tenant might have by tying rent commencement to the fit-out completion date in a process marketed as 'the fully fitted option'.

Eugene Doyle, Broadgate Properties' leasing director, explains: 'The commercial property business revolves around the movement of tenants, but some haven't moved in 10 or 20 years and they get nervous. The cost of moving and the perceived problems of fitting out mean that some tenants are wary of shell and core buildings.'

Doyle dealt with the problem by putting his company in the position of sub-contractor to the incoming occupier: guaranteeing delivery of a tenant-specified fit-out on time and in budget. As a result, law firm Baker and McKenzie was able to move into 81,000 sq.ft at Ludgate in record time, using Doyle's fully fitted option to take advantage of a break clause in its existing lease. Good for the occupier and good for the developer.

So why hasn't shell and core taken off in the UK as it has in America? After all, it is perfectly possible to set up a show suite even in a building that is otherwise unfinished.

The commercial estate agents responsible for marketing office buildings say that it is easier to move space if the customer can see what the money is going on. Those closer to the construction process say that it is the agents who have a problem, not the occupiers. The truth is that if the building lets quickly, the costs of Category A fit-out are easily absorbed in the investment sale that is likely to follow: the profits are large enough to make almost any effort worthwhile in an investment-led market.

It will change, though. The British Council for Offices is recommending shell and core delivery in its standard urban office specification for the '90s.

At the same time, tenants are more property-aware than ever, and are increasingly able to appreciate the benefits of cutting out the Category A fit-out process.

In the meantime, the scrabble for tenants continues. DTZ Debenham Thorpe's researchers say that 23.5 million sq.ft of office space is currently available in central London, that 9.8 million sq. ft of it is new - and Jeff West says that most of it is fitted out to Category A standard.

The most bizarre element in this curious tale is that there is no organised salvage system in place. The fixtures and fittings junked on refit are almost never re-used. We asked that question time and time again,' says DTZ's Jeff West. 'The truth is that most of it goes into the skip.'

TYPICAL COST OF REFITTING NEWLY DEVELOPED OFFICE SPACE

Alteration Insurance company Legal firm

(30% cellular space) (60% cell' space)

£/sq ft £/sq ft

Taking up and refitting floor 1.00 1.25

Taking up and refitting carpet 0.60 0.60

Altering suspended ceiling 0.50 1.00

Decorations 0.25 0.25

Altering/adapting power supplies 0.80 1.40

Adapting air conditioning 1.50 3.00

Altering/adapting lighting 0.90 1.50

Adapting sprinklers/fire alarms 0.35 0.70

Surveys/groundwork, etc. 0.50 0.70

Total cost (sq.ft) £6.40 £10.40

Source : Bernard Williams Associates.

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