'The Big Bang transformed London offices; the Credit Crunch will too'
Full transcript of speech by Paul Burgess, a director of British Land, delivered at the AJ100 Breakfast Club, Claridges, London 8 July 2009
Good morning Ladies and Gentlemen and thank you Kieran for the kind introduction and thank you also to the Architects Journal for inviting me to speak to you this morning.
It’s a great pleasure to do so as there is no doubt in my mind that working closely with some very good architects has been integral to British Land’s past development success and will be so in the future.
When thinking about what to say I did have a quick look at the reports of what some previous speakers have said to you – “Architects face extinction, says UK-GBC head” that was from Paul King last June – well at least you are going slowly and before that “Bishop slams “trophy architecture” phenomenon” – Peter Bishop that was rather than any exalted member of the clergy talking about cathedral building.
Now I could not come up with any such headline grabbing theme but what I do want to talk about this morning is important and is based on the future of the market that I spend most of my time working in and which British Land has invested a huge amount of our shareholders money – the City of London office market and in particular to look at the future of the market following an unprecedented period of financial market turmoil.
To look at the challenges that we as developers are going to face when we come to develop the next generation of office buildings and how we need your help and guidance in meeting those challenges –and also to think about what new opportunities there are for us to both to make a modest profit out of doing so.
The original Lloyd’s coffee house could well be an influential model for future City offices
Three points, caveats perhaps before I start. The first is that whilst this is very much going to focus on central London, primarily the City –because that’s where my experience is and those are the largest office markets in the UK – I think that the issues affecting future office development have a relevance in all markets and it may well be that the challenges and possible diversification of the City market will throw up opportunities for architects whose experience has been gained elsewhere. The second is that I am a man of the markets. My day to day job is talking to occupiers and seeking to lease British Land developments. I am not commenting on the market from some lofty viewpoint. What you are going to hear is based on experience and empirical observation. Finally, whilst I work for British Land my views this morning are my own and do not necessarily represent those of the company.
We all know where the City market is at present – at probably it’s lowest point since the 1970’s – letting take up down, values down by about 45%, rental values down by 25% in the past year. But cast your mind back two years. London had truly arrived as an international city – indisputably one of three global financial centres.
We spent our time asking if we had overtaken New York. The property market was in full spate. Yield compression had been driving property values ever higher for almost ten years. Rental values were climbing to un-precedented heights. London was awash with cash. This cash was permeating everything. I remember reading an article in the Evening Standard in which a man who had a business doing grand house restyling said that you would have to go back to Renaissance Venice to find a comparable time in which mercantile wealth was driving so much building.
Credit Crunch then meant little more than that the inhabitants of some backwoods trailer parks in the US were having trouble re-mortgaging. Their troubles though started unravelling the whole international financial system and what looked like a wall of cash was revealed to be a wall of debt, there was in fact little liquidity in the property markets but a whole lot of leverage.
The issue for us is that the international financial system has been the most important driver of the London office market through out a period of over twenty years. “The City” came to mean more than the Square Mile but rather the financial services industry in London. An industry that spread from the vast, predominantly American investment banks to the east in Canary Wharf to the mainly more UK and European banks in the traditional City area through to the hedge funds and boutique banks in the West End.
This inexorable growth had started from a fundamental change to the way that the markets functioned in the UK, this was the late 1980’s de-regulation, “Big Bang” when boundaries between previously discrete elements of the markets such as stock broking and stock jobbing were removed and the businesses involved opened up to outside investment and consolidation. These newly structured businesses needed a new form of large floor plate, highly serviced, efficient office accommodation and what came forward to meet this demand was the seminal late 20th Century development in London – Broadgate.
The great and continuing success of Broadgate is based on it being designed to meet market needs and then having the adaptability to change and evolve. The building form established there set the template for two further generations of City buildings and it continues to be one of the most attractive and popular working environments in London – a powerful example of how well architecture and the development industry can meet market and occupier needs.
Big Bang’s conclusion was Credit Crunch and the systemic market changes taking place now as a result of that conclusion are potentially as profound in their impact on the next generation of buildings as Big Bang was on the preceding. If we accept that much of today’s ideas about floor plate size, configuration and specification were driven by a response to the needs of financial occupiers then we need to think as to whether or not post crunch financial services demand is going to be as strong and what form it will take. With less demand from financial and associated professional services we need to think about what new sorts of occupiers we are seeking to cater for.
There are always any number of scenarios for the future City market so lets test that question about the future against a couple of them.
The first scenario you might call back to the future. The argument goes that the City is the classic cyclical market and despite all the furore and angst this is just another dip in the cycle, that the banks and trading activities will recover and then go on as before, the development industry has responded promptly and intelligently by turning off the supply tap, pent up demand will return sometime in 2011 and if we start developing now we will reap the benefits by providing large trading floorplates on the lower floors of as big a building as we can manage with large floors above which we’ll try to make suitable for use either as open plan offices for financial users or in a cellular layout by the other most likely source of demand, solicitors.
The second scenario you might call back to basics. Here the thinking is that inevitably the City is going to become a much more tightly regulated place, banks will go back to being focussed on lower levels of more dependable growth – become “boring” but essentially be a lower octane version of what they were pre Crunch. Your response to this as a developer might be that rather than putting up the highly specified mega-block that our first scenario calls for you would rein in your ambitions, not seek to go quite so big or costly or grand, trim the specification but generally stick to the same basic approach to the buildings layout and floorplate.
The third scenario is based on a belief that things have changed. That the financial services industry is no longer going to be the dominant driver of London’s office markets. Important yes, but not over- whelming, that a low risk, low growth highly regulated approach is going to be the long term norm in the financial markets and that this will inevitably change the size and nature of the occupational needs of those involved in them.
It will mean that the City, the Square Mile, will need to adapt and change to increase its appeal to a wider range of occupiers, to become a location that will appeal to corporate occupiers seeking headquarters and to companies in London’s other major industries of business services, information, media and design. This is something that will not come about by a change in building style alone – my experience has been that a lot of non-financial occupiers like the clear adaptable floor plates that we have provided in the City and which are hard to achieve in the West End because of site constraints.
A change in occupier’s perception of and attitude towards relocating to the Square Mile will come from a change in the nature of the place. This is already happening and is a great thing. The range of retail, dining, hotels and leisure in the City is far wider than 10 years ago, the streets and public spaces are becoming lively and cosmopolitan. It is an engaging place in which to work and this trend will be continued when the shopping centre at New Change, next to St Paul’s is finished and the renaissance of Cheapside as a shopping street moves forward. Improved transport links are going to help as well.
The drawback that we have found in trying to encourage a number of corporate occupiers to look at our City buildings is the increased journey time to Heathrow. CrossRail, when it comes, will change both speed and ease of access between the City and Heathrow and also between the City and Canary Wharf. It’s interesting that at present links between Canary Wharf and the West End are better than links between the City and Canary Wharf.
The potential for diversity of activity allied with improving amenities and quality of life in the City has a resonance with the history of the Square Mile as the centre of a broad range of trading and market based activities focussed for over 1,000 years on the importance of face to face contact. This is still relevant today – more so I would argue when the need for trust and confidence in the integrity of business is paramount – and the fact is that the increasing reliability and comprehensiveness of communication technology has not created a society of home workers but one that demands a high level of formal and informal social interaction. The original Lloyd’s coffee house could well be an influential model for future City offices.
If we accept then that the Square Mile can become a more rounded business location capable of attracting a more diverse range of occupiers – and from the point of view of an investor and developer that has to be good news as the long term performance of our assets – in plain English the chances that we will get more rent over the economic life of the building – will be enhanced by a leasing market that is not so closely linked with the vicissitudes of the financial markets.
If we think that then it pays to spend a little longer developing the theme of what sort of building we are going to need to produce that both carries through the best of the classic hallmarks of Broadgate and Broadgate inspired City buildings and also meets the future needs of financial, professional and general business service occupiers. To do that there are some other issues and a couple of quite deep seated conundrums that we need to touch on. The first relates to the impact of sustainability. We are all sustainable developers now. We have to be.
At British Land we were in the vanguard of the move into sustainable development and the irrevocable force and pace of legislation will push every other developer in the same direction. Some like us will use this to advantage and design sustainability into buildings from the start and then help occupiers by encouraging and supporting the operation and management of the building informed by the principles of sustainability – others will merely take a standard specification and seek to “green wash “it with a few bolt on features of dubious genuine long term benefit.
Two years ago most traditional City occupiers paid little more than lip service to sustainability in buildings. Yes they would say, green issues are important to us but now what about our extra giga watt of power and N+ 2 redundancy. Now they say yes, sustainability is important to our board and to our employees - we want a building with an excellent BREEAM rating but we also want our extra power and redundancy as well.
Sustainability has grown in importance in the evaluation by occupiers of potential new buildings but not if it compromises their perceived operational requirements and it is that perception of operational requirements rather than what should be the reality of them in a sustainable environment that is one of our largest current conundrums.
As developers we want to be producing buildings that are right for occupiers needs. As sustainable developers we do not want to be over specifying. I’ll give you an example of the sort of issue this can throw up. A couple of years ago we pre-let a big City building, and this was a big deal, the building is over 500,000 sq ft net. It was an off plan pre-let and the design of the building was tailored beautifully to the occupiers’ needs. We also sat down and agreed the specification with them.
During those discussions there was absolute certainty on their side that a much enhanced and increased power supply was necessary to support their business. We eventually agreed to put this in at considerable cost to us and duly went ahead and finished the building. Shortly after the occupier moved in one of my colleagues who works in our accounts team got a call from her opposite number saying we have got a huge bill for a capacity charge for electricity – we are never going to use this power in a month of Sundays; you have over specified the building and should pick up the tab. Gently pointing out of course that we had been put under a contractual obligation by them to provide the power dealt with the point but it illustrates that for the next generation of buildings we need a far more transparent dialogue with occupiers about what they genuinely need to support their businesses rather than a kitchen sink approach. The more that we can do to test how occupiers actually use buildings as against the assumptions and expectations of design teams and developers the better. It will also help us draw a proper distinction between that which it is reasonable to expect a building to provide and that which is a business requirement and cost to the occupier.
Another big conundrum that we currently have is density of occupation. Every corporate real estate executive wants to demonstrate that his business can occupy less space but accommodate more people. We are under pressure to increase the occupational density at which our buildings can be occupied and this of course has a big impact on viability; it reduces the net to gross ratio and increases the amount of kit and infrastructure that we have to put in. What we are almost invariably finding though is a disparity between the densities claimed to be required and the actual density then used.
The most extreme example recently is an occupier who insisted on the need for a density ration of 1:8 who it then transpired actually occupies at 1:13.8 on a desk and work station layout with a utilisation rate that I would reckon is about 60%. In fairness I would say that there was probably some future proofing here to try and make sure that the offices could meet future growth but the current disparity between what the building can provide and what it is being used for is large and again serves to show that we need more open dialogue with occupiers to ensure that we strike the right balance between meeting present and future needs and over specifying.
This concern about over specification is heightened by economics. The simple fact is that at present the development of office buildings to the cost and specification previously established is not viable. The numbers just do not add up. We can hope for the benign first scenario of the markets coming back and yield compression and rental growth bailing us out or we can respond to the challenge of linking the virtuous necessity of sustainable development to an assessment by both developers and occupiers of just what it is that we need to put into the next generation of City buildings to make them deliverable at an economic cost and to meet the needs of a wider pool of occupiers.
Some of the key aspects that I would see as important in providing buildings that cater for a leaner more diverse City market are greater divisibility of floor plates, greater penetration of natural light, improved opportunities for the occupier to make sustainable choices in its fitting out – particularly to include things such as chill beams and chilled ceilings, increased attention to how building facades can act as an effective passive element in reducing the buildings energy consumption, perhaps looking further at how we can chose materials, particularly finishes that have a lower embedded cost. Our latest City building, Ropemaker – it’s the fifth building that Arup Associates has done for us in central London – is an exemplar of much of this thinking.
It provides a range of floor plates of between 11,000 and 42,500 sq ft, high levels of natural light on all four elevations, a wonderful façade that has been carefully designed with a range of tilted and angled window elements that reduce the loads on the air conditioning by over 25% compared to a standard flat façade, it has rainwater harvesting, roof terrace gardens of a scale and quality unmatched in the City. I was trying to come up with a succinct description of it and found myself looking up a reference to another Arup Associates building, Gateway House in Basingstoke, a mid 1970’s building that I’ve long considered to be very influential. This is what Peter Murray had to say about it in RIBA Guide to Modern British Architecture since 1945, published in 1984;
“The modular design steps back at each level to reveal a series of enchanting gardens in the air. It is an accomplished example of a design approach which integrates energy efficiency, humane working conditions and technology to produce an alternative to the usual office block.”
I think that Peter’s words are well fitted to what we sought to achieve at Ropemaker and describe precisely the approach that we need to take in the future.
I have spoken about change and but wanted to finish on two constants which transcend the fluctuations of the market. The first is that the long term strengths of the City of London that have made it a world city will endure- time zone, language, skills, diversity, culture, political stability all remain – whilst markets and the global economy may ebb and flow all these strengths are here to stay. The second is that fundamentals of good architecture and design are important in every market. Buildings that uplift the spirit of those who work in them and provide spaces that can adapt and change as businesses adapt and change will be inherently better and more sustainable buildings – to the long term advantage of both owners and occupiers.
Ladies and Gentlemen, than you.