PERSPECTIVE
HOW OFFICE OBSOLESCENCE COULD BE A BOON FOR HOTEL DEVELOPMENT
Contributed by STEPHEN NICHOLAS , PARTNER , PAUL HASTINGS & ERIC JAFARI , MANAGING DIRECTOR AND FOUNDER , AENDRE
The BT Tower in London .
The beginning of 2024 saw an iconic London landmark , the BT Tower , snapped up by MCR Hotels , one of the largest hotel owners and operators in the U . S ., as BT Group moves to lower costs and reduce the number of offices . It ’ s part of a growing trend , indicative of a wider pattern in property development , as postpandemic shifts toward hybrid working has seen reduced demand for traditional office settings . Consequently , local authorities , such as the City of London , are looking to diversify building usage to transition the City into a bustling 24 / 7 destination . With culture at the forefront of City planners ’ minds , an increasing number of office spaces are exploring being transformed into hotels , which function as creative centers and business hubs for residents and visitors , alike .
OFFICE OBSOLESCENCE ? The surge in hotel interest is underpinned by changing behavior , with the proliferation of hybrid working arrangements signaling a shift in the types of offices desired by tenants . In addition to changing demand from commercial tenants , the modern office must now contend with tightening energy efficiency requirements , which means that many sites are no longer fit for purpose without significant investment . As it stands , by 2030 , in the UK , non-domestic landlords must obtain an EPC rating of ’ B ’, meaning many buildings may need substantial structural work to surpass Minimum Energy Efficiency Standards .
At a time when costly permanent office space is low down on the list of businesses ’ priorities , aside from prime West End or City space , many owners and operators may find it difficult to raise rents sufficiently to cover the cost of updating buildings without impacting demand , or the ability to attract new commercial tenants . Although many pockets within the West End and Mayfair have been resilient to this trend , some other boroughs are seeing the start of a slow steady stream of liquidations of office buildings , the result of lowered demand , higher interest rates , debt covenant breaches and looming debt maturities . This is not to say that the office is superannuated — far from it . The City of London Corporation ’ s City Plan 2040 allocates for more than 1.2 million square meters of additional office floorspace , as many companies are now mandating employees to return to the office at least a few days a week . Accordingly , a two-tier model appears to have emerged for office buildings , with sustained demand for grade A office buildings which are energy efficient , provide flexibility on leases and are built for modern , flexible working . This also leaves plenty of 1970s and 1980s ex-office building stock , ripe for repurposing with alternative uses in mind .
Planning committees are slowly becoming increasingly sympathetic to new uses for stranded assets , including plans to convert older office buildings into hotels . Consequently , there has been an uptick in the number of office-to-hotel conversions , with this trend only set to continue
42 hotelsmag . com July / August 2024