Vacancy in the world of commercial real estate
The negatives and positives
The COVID-19 pandemic; the exponential increase of inflation; sustained interest rate rises; rapidly increasing utility costs; and decreased consumer spending; just a few of the external and often uncontrollable factors which have affected commercial real estate, its occupiers, and therefore, in turn, occupancy levels and vacancy rates in the past 12 to 24 months.
The term vacancy often causes concerns, consequently, while detailing some of the negatives, this article will also aim to identify some of the positives arising from premises becoming vacant.
Acting for and on behalf of landlords, vacant premises, whether it be industrial, retail, offices, or leisure, undoubtedly presents a number of issues for property management teams such as:
Compliance with statutory and insurer-led requirements
One of the most notable ‘issues’ is ensuring that any vacant space is and remains statutorily compliant and complies with the requirements set out by our clients’ insurers, whilst vacant. Depending on the state that the premises are in, this can often be a costly and complex process.
Liability for the payment of business rates
With vacancy often comes a liability to cover the business rates that would otherwise be paid by an occupier. Luckily, at Colliers, we are able to call upon the experience and expertise of our colleagues in our Rating and Accurates Teams to review and, in most cases, mitigate the rates payable in relation to vacant premises.
Security measures and ongoing maintenance
Lastly, two of the costliest by-products of vacancy are ongoing maintenance costs and the costs associated with implementing security measures. Security measures are not only to comply with insurance requirements, as these are sometimes not overly prescriptive however, it is to ensure that the vulnerability of vacant premises is not capitalised on by those with ill intentions, resulting in it falling victim to break-ins, vandalism, squatting, or arson. Whereas, regarding ongoing maintenance costs, to ensure that a vacant premises or building does not fall into a state of disrepair, costs are often incurred in carrying out regular maintenance and reactive repairs to safeguard the asset. The carrying out of planned preventative maintenance works often proves beneficial as it is perceived favourably by prospective occupiers, who are now commonly requesting or expecting up-to-date maintenance records before agreeing to occupy particular premises.
As aforementioned, despite the fact that having vacant premises presents a considerable amount of challenges, it also creates a number of opportunities, such as:
Minimum Energy Efficiency Standard (MEES) Compliance
As of 1st April 2023, it is no longer lawful for landlords of commercial properties in England and Wales to continue letting a property with an Energy Performance Certificate (EPC) rating of below an E, unless they have fulfilled the criteria and have therefore been granted an exemption. This was an extension of the obligations already imposed by the MEES Regulations on landlords in 2018 which prohibited landlords from granting new leases of properties with an EPC rating of an F or a G. This presents a major challenge for landlords, as the improvement of the EPC rating of a property may, in certain cases, require a complete refurbishment or improvement works which may prove disruptive for an occupier in situ. Consequently, a property becoming vacant provides an opportune situation, to allow landlords to carry out any necessary works to ensure MEES compliance without having to work around an occupier, which can cause a project to become more costly and complex.
Refurbishment
As an extension of the point detailed above, when a property becomes vacant, it provides the perfect opportunity to review the condition of the unit or property and carry out any necessary repair and maintenance works, often with the help or input of our Building Consultancy team. Moreover, a unit or property becoming vacant provides a landlord or owner the freedom of being able to carry out a full refurbishment , including implementing improvements to the aesthetics, functionality, and the overall condition of the property. This, in turn, will make the premises more appealing to potential occupiers enabling owners or landlords to attract higher-quality tenants and command higher prices or rents.
Implementation of asset management initiatives
A unit or property becoming vacant offers a landlord or owner the opportunity to reposition or repurpose the asset and implement asset management initiatives, which can lead to new business opportunities and higher returns. In addition to the support that we as a Property Management team can offer, asset management initiatives can be guided by colleagues in our Lease Advisory teams.
Having started with the negatives, I thought I would save the best for last and end with the positives. The commercial real estate sector has – over the past 24 months, if not longer – experienced a turbulent ride in all respects but specifically in terms of occupancy levels. Reading some of the headlines, including some of which feature in the introduction to this article, it is often difficult to see the light at the end of the tunnel.
The UK commercial real estate sector has also seen a huge amount of change over the past few decades and, without a doubt, in recent years. However, throughout these changes, it has arguably remained resilient. I believe this resilience can be attributed to its greatest strength: its regenerative quality. This strength stems from the fact that, at its core, the sector is fundamentally based on bricks and mortar. Therefore, with our assistance, spaces can be effectively repurposed and reimagined, facilitating their return to occupancy and enabling them to thrive once again. Instead of focusing on the negatives, we must care for them whilst vacant and use their period of vacancy as an opportunity to create something greater, and when the time comes, an individual or company will call it home and use it as their base from which to grow.
