The Future of Offices
It takes more than a desk to attract people into the office these days. In fact, the future of offices is still being determined. This article from Toby Horne, looks at the pressures facing office transformation today and the finance solutions that make digitalisation possible.
In the aftermath of the pandemic, the regular 9-5 has been disrupted. The migration to working from home allowed businesses to continue functioning under lockdown, but the lifting of restrictions has not prompted a mass-return to the office as some may have expected. Instead, for many companies, hybrid working is here to stay.
Not only have building owners contended with a period of relatively empty building stock, but there are also new pressures relating to energy targets and building efficiency that are coming into play. Countries around the world are taking increasingly stringent approaches to decarbonisation in the pursuit of carbon neutrality. Given that buildings can account for 36% of a country’s final energy use, they are a prime target for energy efficiency initiatives. To get on track to Net Zero carbon building stock by 2050, the International Energy Agency (IEA) estimates that by 2030, direct building CO2 emissions need to fall by 50 percent and indirect building sector emissions by 60 percent.
Reducing emissions
In the UK, the government aims to reduce emissions by 78% by 2035 (compared to 1990 levels) as part of its ‘Net Zero by 2050’ ambitions. With this in mind, new environmental regulations relating to the energy efficiency of buildings are being brought in. From 2023 it will be illegal to let any building that has an energy efficiency rating of F or lower, by 2030 this will change to C or lower. According to one estate agency, three-quarters of the UK office market currently falls below 2030’s minimum energy efficiency standards, this accounts for 70% of offices in the capital.
The same agency estimates the cost of upgrading a building to these standards to be around £40 per square foot, in addition to the normal cost of refurbishment. While some landlords may be able to absorb this cost, the majority of building owners will find it difficult to fund the necessary upgrades.
Retrofitting existing building stock will be essential to meeting the new standards, reducing energy demand and ultimately achieving these ambitious targets. This is because 80% of the UK’s projected 2050 building stock has already been built. Moreover, a vast quantity of the UK’s building stock is relatively old, 39% of non-residential buildings were built before 1970, pre-dating many thermal regulation laws, while only 30% were constructed in the 21st century. This means significant renovation of the country’s building stock is required in order to meet the goal of net-zero by 2050.
In keeping with this logic, the UK Green Building Council advises that only smart control systems can deliver the energy performance levels required. In short, the office building as we know it must evolve. It must become smarter. By accelerating the digital transformation of buildings, we can interpret accurate building data and introduce digital solutions to make them more energy and resource efficient. With an ecosystem of open technology and IoT solutions, this will enable office buildings to tackle energy inefficiencies and contribute to reducing carbon emissions.
Smart offices
A smart office features integration with IoT sensors that can ensure transparency on space utilisation and manage density, from a building level down to a room and desk level. For example, a simple workplace app can enable desk and space booking and allow building managers to see which rooms and floors are in use and which aren’t, and thus manage power and heating effectively.
Many elements of the smart building are also the foundation for reduced energy consumption. For instance, energy-efficient insulation and door controls, smart heating, ventilation, and air conditioning (HVAC), and sensor-driven LED lighting. Smart building controls that activate usage only when needed also clearly play a crucial part.
Heat pumps
Heat pumps are one of the most instrumental technologies in driving down emissions from heating in the building sector and are estimated to be at least three times more efficient than traditional fossil fuel boilers. Integration with a building’s digital ecosystem and the use of smart thermostats and active controls, can help unleash their full potential and drastically reduce energy wasted on unnecessary heating in the office.
Yet, while there is wide consensus around the need to refurbish buildings and make them smarter, the real estate sector needs a way of making this conversion financially sustainable. In Europe alone, the estimated cost of decarbonising its building stock is over $7bn, and the Global Alliance for Building and Construction has noted that “The pace of renovation in all the countries concerned is insufficient, staying well behind potential. Indeed, annual renovation needs to rise in industrialized countries to an average of 2% of existing stock per year by 2025, and to 3% by 2040.”
Gaps in investment
A recent study from Siemens Financial Services estimates the gap between the existing rate of investment in energy-efficient smart offices and the accelerated rate which experts are saying needs to be reached to achieve sustainability and climate change targets, as over $5bn in Europe alone. To bridge the investment gap, building owners and managers are having to look at changing how their buildings operate, their business models and how they are going to finance the required upgrades.
Luckily, specialist financiers can offer smart financing arrangements to help manage cash flow and capital costs and facilitate investment in new technology. Smart finance offers three major advantages over generalist finance: Technology expertise which understands real business outcomes; a breadth of financing solutions which can meet the organisation’s exact needs; and smooth, sophisticated processes which makes the use of smart finance seamless and easy.
Smart financing techniques can be implemented in a variety of ways, from the technology component level to larger installations or systems. Using the ‘as-a-service’ model, these arrangements can be tailored to align costs with the rate of benefit expected from the energy-efficient technology. Typical building energy efficiency savings are usually at least 20% (often far higher), representing a significant amount of capital that can be used to significantly subsidize, or in some cases, pay for the entirety of the cost of renovation.
Conclusion
The market for office real estate is changing. There is currently a greater public awareness of and concern for climate issues and this is echoed by increasingly stringent environmental regulations, the growing popularity of office-as a-service models, and the new normal of remote work leading to an overcapacity in office space.
In short, building owners need to adapt their offering to the twin pressures of altered occupancy and decarbonisation. Smart, connected buildings technology can help them to tackle both while creating productive and attractive workplaces, and given the associated costs of investing in digital transformation, forward-thinking owners are increasingly looking to specialist finance to enable investment and offset costs.
By Toby Horne, Siemens Infrastructure Financing Partner, Siemens Financial Services UK
