Glenn Corney reports on the latest IPD findings which show a deceleration in UK occupancy costs.
IPD’s Occupier Databank of Corporate Real Estate (CRE) for major UK organisations, has seen a slow-down in the rise of occupancy costs per person during the financial year to March 2009. Market conditions and aggressive cost control strategies look likely to mean that we will see little rise in costs during 2009.
The IPD Occupiers Portfolio Analysis service measures the performance of CRE functions in some of the UK’s leading organisations. Total property costs per person across occupied offices rose by only 5%, to stand at £4,724, due to better space efficiency, whilst costs per metre sq rose by 12% in 2008/9 to £424/m². The rise in costs represented growth in both the costs of occupying (6%) and operating (9%) buildings.
Organisations saw their costs of occupation increase as a result of a 6% increase in rents, whilst rates payments fell marginally. With IPD’s Monthly Index showing a definite decelaration in the decline of rental values, there is clearly a closing window of opportunity to take advantage of market conditions.
Figure 1. Change in occupancy costs by category
At the recent IPD RealWorld Conference Malcolm Frodsham, Research Director at IPD identified that occupiers paid on average 5% more at lease renewal than for new leases. Clearly it is in the landlord’s interest to work more closely with tenants to deliver property solutions which respond to the challenges facing CRE teams.
With capital values falling by almost half in the last 25 months we have not seen a fresh wave of major sale and leaseback deals, as organisations are instead choosing to ‘moth-ball’ unwanted space. Changes to vacant rates regulations will impose an unwanted extra cost on corporates looking to rationalise their portfolios in response to business downsising.
Building operation has seen modest increases in the costs of repair and maintenance and security (see Figure 1), whilst all other categories have witnessed falling costs/m². Service charges fell for the first time in 5 years as a result of falling energy prices and increasing pressure from tenants. Reductions in utilities costs have been driven by a fall in the unit cost of energy, with consumption levels seeing little change.
Figure 2. Change in space and cost per occupant
With the Carbon Reduction Commitment coming into play, it is crucial that occupiers can accurately measure energy use and manage it effectively. Reduced space is clearly a direct mechanism for carbon reduction as well as reduced costs. Average space per workstation, now down to 9.6m² (see Figure 2), continues to fall across the IPD sample. While planned density continues to rise, utilisation of workstation capacity has remained at 87% for occupied buildings. Whilst exemplars demonstrate the ability to drive space utilisation in key buildings, the challenge remains for CRE teams to improve space efficiency across the whole portfolio with an increasingly mobile workforce and business down-sizing. Better measurement and data is clearly the key.
Information in this article is drawn from the IPD membership of leading organisations who annually measure, analyse and benchmark performance against best in class and best in market.
Figure 3. Breakdown of total property costs by category
Using IPD benchmarks can help drive the business contribution of real estate, since the information can help identify the drivers of performance and to know – and prove – how one currently compares to the market. By accurately tracking, measuring and analysing the occupancy of space, business cases and project appraisals can be based on actual good practice data, not just gut feeling. It will also provide a better understanding on the impacts that strategies are likely to have on space use efficiency and environmental performance – not just for key operational buildings, but even in the darkest corners of a portfolio.
To find out more about joining the IPD Occupiers Portfolio Analysis service, contact Elspeth Williams at elspeth.williams@ipd.com or on +44(0) 207 336 9244.