From conversion costs of 650 euros/sqm, a reduction in office space is not worthwhile

8. August 2023
Posted in What's New
8. August 2023 admin

From conversion costs of 650 euros/sqm, a reduction in office space is not worthwhile

On average, 55% of offices are vacant – yet only very few companies want to cut back on them. This is an initially contradictory result of the third home office study by PwC. But the explanation can be found in the conversion costs for subleases.

125 employers were surveyed by the real estate experts at PwC for the new edition of the home office study. The average office occupancy rate cited by these companies is 45%. Conversely, this means that the offices of the companies surveyed are on average 55% empty. Even at peak times, the occupancy rate only rises to 63%.

Most companies therefore want to revise their office space in order to adapt it to the changed needs of a more flexible working world – but very few are planning to reduce their space. Only 21% say they want to reduce their office space. In 2021, 31% still wanted to do so, and in the first edition of the study the share of those willing to reduce was as high as 60%. Currently, the share of companies that want to increase their office space is even larger than the share of companies that plan to reduce it. In 2020 and 2021, only 18% each expected their office space requirements to increase.

The quality of space plays a much greater role today

David Rouven Möcker, real estate expert at PwC, concludes: “While in our preliminary studies the question of space reductions was still very much in the foreground, it is now clear among most market participants that it is predominantly a question of changing the equipment and floor plan design while maintaining the same space. The quality of the space in terms of sustainability and wellbeing of the employees plays a very important role before the increased discussions on the topic of ESG.”

It is conceivable that weights have shifted because most companies have already reduced their office space. However, this also seems to be the case only to a limited extent. The question of whether they plan to reduce office space, e.g. by subletting part of it to external companies, was answered in the negative by 82%. Moreover, only 10% plan to do so and only 8% have already done so.

In the case of high-quality offices, dismantling is worthwhile much more quickly because of the low investment required

One reason for the reluctance to reduce space, at least during the term of tenancy agreements – in the past usually concluded for a long term of ten or even 15 years – could be the costs that become due when subletting. According to model calculations by PwC, these should not exceed the mark of 650/700 euros per sqm, otherwise the space reduction no longer pays off on balance, or the sublessor even pays on top. If it is adhered to, a reduction of 20% of the existing offices is already worthwhile or at least reaches break-even.

This means that for tenants of old and inflexible space with a high investment requirement for conversion measures – PwC estimates 1,600 euros/sqm – the reduction of space is not economical. Over the model period of ten years, no savings are achieved compared to leaving unused office space vacant. Only when a tenant of outdated and inflexible and therefore investment-intensive offices reduces 35% of its existing space would the investment have a positive effect on its cash flow.

Tenants of high-quality and flexible office space get their money’s worth fastest. Here, conversion measures require an average of only 300 euros/sqm. According to the PwC calculation, the cost saving amounts to 7.6% for a 20% reduction in space over a period of ten years. In the case of high-quality offices, a reduction in space would already be worthwhile with a comparatively small reduction of 8% of the existing space because of the low investment costs.

Source: Harald Thomeczek IZ Immobilienzeitung