Could developing on office airspace defuse the EPC time bomb?

9th May 2023

New commercial EPC regulations

Mani Khiroya, Fruition Properties CEO, writing in React News on the commercial EPC timebomb and how airspace development could fund the necessary upgrades required to meet new Minimum Energy Efficiency Standards (MEES).

After ticking away in the shadows for some time, the first commercial EPC time bomb has now detonated, with a series of further explosions due that could spell disaster for the commercial sector – unless preventative action is taken now.

From this month, new legislation bans landlords from renting offices with an energy efficiency rating of E or below, making 10,000 commercial spaces in London obsolete overnight according to BNP Paribas. Ministers will ratchet up these Minimum Energy Efficiency Standards to C by 2027 and B by 2030 – a figure which an alarming 70% of offices in the capital will fall short of, according to Savills.

Knocking down these buildings and starting again is simply not viable from an environmental point of view, due to the embodied carbon that would be released in the process. Reusing, refurbishing and extending is a much more carbon efficient alternative but, while these environmental upgrades to existing properties are increasingly urgent, they are also increasingly expensive as borrowing costs soar and inflation drives building material prices ever higher.

The cost of upgrading a building from today’s standards to 2030 requirements is estimated to be £40/sq ft, in addition to normal refurbishment costs – meaning these buildings will likely cost more to fix up than most can command in annual rental income. Without significant asset management, which may not even be available, or additional capital, which banks will be reticent to provide without security of a good tenant, this will leave many buildings obsolete and their owners stranded.

The solution

Airspace development, which is typically associated with adding new homes on top of existing residential buildings, can provide part of the solution. By partnering with developers and sharing the profits from delivering airspace units above, commercial freeholders can enjoy a significant cash windfall to pay for energy enhancements to the remainder of the building, ensuring they can meet the new standards.

commercial epc

Crucially, thanks to ever-evolving advances in modern methods of construction and lightweight materials, airspace development can often take place while incumbent tenants remain on lower floors generating income.

Currently, under planning policy, two storeys of residential can be added to a wholly commercial building up to 7m in height, yet two storeys of commercial cannot be added to commercial. This would likely require 9m in height, which is a small amount to add – meaning where desirable, asset management can also include extension of the envelope to deliver new commercial space above the existing building.

The planning case

Does resi-on-office really stack up from a planning point of view? Using Westminster’s policy in London’s Central Activity Zone as an example, the answer is a firm yes. Within current policy there is pressure to prevent loss of office space – and where it is lost, there is encouragement that it is replaced elsewhere, which presents new problems with finding suitable sites, leading to huge delays in delivery.

Equally, new housing provision is “encouraged via a mixed-use approach”, while the “retail and leisure offer should not be constrained by residential development”. So, why not retain existing commercial space and build on top, making use of “free” land?

This blended approach meets both needs and there will be guaranteed demand for the new homes, as young professionals want to live in central areas close to their places of work. The target demographic of those wishing to live in inner city areas also reflects a published need for more smaller units, suiting rooftop development and build-to-rent products, which also happen to benefit from a layered development approach with a longer-term view.

Sustainability goals

Viewed through the sustainability lens, airspace development makes perfect sense. There is a reduction in the quantity of new materials used, but also a total removal of the need for new groundworks and foundations, which in small to medium-scale developments typically account for 21% of embodied carbon emissions during construction.

The use of lightweight gauge steel, which is mostly made from recycled steel and is fully manufactured in the UK, minimises transport. There are also numerous options for alternative energy provisions atop airspace developments, such as photovoltaic panels and air or ground source heat pumps, all of which can contribute towards improving that vital EPC rating.

The co-location of uses also takes strain off public transport infrastructure, while giving a helpful boost to local town centre businesses that are suffering due to more people working from home.

Let me be clear. This is not a quick win solution, with significant technical, engineering and legal challenges to overcome. But when done correctly it can be a win-win solution that saves existing buildings and creates much needed new housing. Failure to start acting now will have disastrous consequences in the not-so distant future, so savvy owners of commercial buildings and investors should consider looking up for solutions.

This article first appeared in React News.

New commercial EPC regulations