Operating costs for offices spiral since COVID

Downsizing to better located, more efficient buildings is gaining momentum

By Sara Seddon Kilbinger, Senior Reporter, REFIRE

Offices in Germany are facing something of a Catch 22: they are being used less yet operating costs have spiraled by as much as 37% since COVID, according to the latest operating cost report from the Building Academy Performance Management.

This figure becomes especially troubling considering that there were times during the pandemic when many workers worked exclusively from home and, even now, around 46% of workers continue to work from home, according to the report: ‘The risk of a wave of lease terminations in the office asset class has risen dramatically,’ warned Building Academy Performance Management managing director Andreas Kühne.

The study looked at 815 office buildings spread across Germany with a combined net leasable area of around 12.4 million square metres. Of these, 442 buildings with 6.3 million square metres of net leaseable area were owner-occupied and 373 buildings with 6.1 million square metres of leaseable space were investor-occupied.

Spiralling operating costs mark a sharp difference to in 2021, where they typically rose by just 5%. This year, the authors of the report are predicting that the costs will rise by 30%.

The main drivers of the increases include: pandemic-related hygiene measures, higher energy prices and construction and personnel costs. In addition, outdated rigid building equipment and a lack of control systems often prevent flexible operation along capacity utilization lines. As a result, operating and maintenance costs most recently averaged €6.30 per square metre NRF, and apportionable operating costs were €4.60 per square metre NRF.

Downsizing to better located and more efficient buildings becoming popular

‘Tenants are definitely looking at the location and are happy to spend money on good, modern, office buildings,’ Malte Wallschläger, head of Asset Management International at HIH Real Estate, told REFIRE. ‘We see a lot of tenants moving from not the best locations to a better location – they’re looking at what they have to spend completely, including on energy costs. A lot of companies like (Deutsche) Telekom are moving from obsolete buildings, they’re downsizing to better spaces that are more efficient, partly because of COVID and more people working at home. As a landlord, you have to look at the future and what the tenant wants.’

As operating costs spiral, more and more companies are taking the decision to cut back on office space, particularly in major cities across the world where rents are higher. Even though people are increasingly working back in offices at least for some days a week, vacancy rates from London to Tokyo to New York have soared. In most markets high-quality, premium assets are significantly outperforming the rest of the market as occupiers look to upgrade space. The global vacancy rate edged up 20 bps to 14.5% in the third quarter of last year, with the largest jump recorded in Asia Pacific followed by the U.S., while it kept stable in Europe, according to JLL.

Other companies are relocating to take less space in shiny new buildings in a bid to attract employees who may be reluctant to stop working from home. As a result, older buildings in less prime locations, are left in a bit of a pickle: not old enough to be demolished yet too outdated to attract far more discerning tenants.

And as vacancy rates rise, contracts are becoming shorter: ‘Five years ago, we had 10 year contracts,’ Wallschläger said. ‘Now, you’re happy with three to five year contracts but you have to think how you’ll invest after five years. You have to spend money on a space upfront because tenants are moving faster - sometimes, they want to move in in less than a week.’

Cost of cleaning rockets

One operating cost that has risen significantly since the pandemic is cleaning-related costs. According to the Building Academy Performance Management report, such costs have risen by up to 15% due to additional hygiene measures. There has also been an increase in inspection and maintenance, by as much as 35%, partly due to the increased operation of ventilation and air conditioning systems and more frequent filter changes. In addition, maintenance costs for conversions and repairs have risen by up to 20% due to increased construction prices.

Space requirements in the buildings surveyed by owner-occupiers remained unchanged, with a median of 38 square metres NRF and 20 square metres rental space per workplace respectively, according to the report. The ratio of the number of employees to the number of workplaces was 1:1, with operating costs averaging around €2,200 per employee per year. In buildings that are less than 25 years old, the operating costs are around €67 per square metre, while in older buildings they were only €48 per square metre. This is due to the different levels of technology in the buildings. Older buildings typically have around 46 square metres per employee, a figure that drops to 33 square metres in newer builds.

In a market where the power rests firmly in the hands of tenants, they are going to have even more say as to how a building works and what it can offer: ‘We are always looking at good locations but the market is very quiet at the moment,’ Wallschläger said. ‘We’re always looking for long-term performance, which is not easy to find. I think what will be very common this year is bringing more services to the tenant. We have an app that tenants can use to do things such as booking meeting rooms. We did a tenant survey last year because it’s good to know what people want, there are a lot of topics we can improve. Sometimes, it’s the low hanging fruit like having a table in the garden for lunch – that’s an easy thing to fix but can make a difference.’