The Subplot | We plug you pay, carbon chaos, Bolton botheration

Welcome to The Subplot, your regular slice of commentary on the North West business and property market from Place North West.

THIS WEEK

• We plug, you play: the latest money-spinning hybrid office concept analysed

• Carbon neutral chaos: is Manchester’s carbon-neutral building ambition undermined by planning policy?

• Bolton botheration: what is going on at Crompton Place?

WE PLUG, YOU PAY

The real new normal

The summer is over. It’s time to go back to work. But will the office deals follow?

Plug-and-play is every landlord’s latest hot take on the problem of encouraging tenants to return to the lettings market. It makes a lot of financial sense.

Landlord hopes are pinned on plug-and-play. By offering a middle-way between serviced/co-working space on the one hand, and traditional leases on the other, they hope to score lettings fast and at premium rents. For those with smaller floorplates suitable for 1,000-5,000 sq ft suites, and who don’t mind shorter leases, this is a game-changer if they can make the sums work on the up-front fit-out costs. Subplot spoke to several agents, property managers and developers. This is what we learned.

The proposition

The deal is this: instead of letting bare box Category A office space (which the tenant pays to fit out), landlords provide a fully-fitted office, right down to the furniture. It looks like serviced space, but isn’t, because landlords won’t go on to provide a service. Don’t expect them to book you a meeting room or ply you with free beer on Fridays. Leases are typically two to five years for suites 5,000 sq ft or less.

Tenants love it

The upside for tenants is that this is easy: no big fit-out required, with no big fit-out bill attached. It is fast, commitment-phobic (up to a point) and a lovely easy escalator from serviced space into the adult world of office leasing. The landlord gamble is that tenants who might baulk at a traditional lease and the bother (fit-out, dilapidations) that goes with it will think it’s a no-brainer to sign up for plug-and-play space. On Friday, for instance, pensions trustee Dalriada and sister consultancy Spence & Partners signed up for 3,000 sq ft of plug-and-play floorspace at St James Tower, Charlotte Street. They are the latest in a long list. Some sources suggest that more than 40% of Manchester transactions involve an element of fitted-out floorspace.

Landlords too

Landlords are now piling in. Stanhope and Legal & General are boosting their in-house plug-and-play brands. Some big autumn announcements are expected. The prospect that as much as 30% of the floorspace in older, smaller floorplate blocks could go to plug-and-play is being openly discussed. This is going to be big.

Doing your sums

But everything depends on landlords getting their sums right. Which is where it gets tricky because it is not cheap to acquire an office fit-out that could endure for a dozen years and maybe cope with three, four or five tenancies. Landlords hope for £35-40/sq ft fit-out costs.

Skimping = bad

Subplot spoke to one landlord who spent just shy of £700,000 on refurbishing half a 14,000 sq ft floor. This is the exception, not the rule, but in higher-rented stock, fit-out could be close to £70/sq ft, perhaps up to £90/sq ft once you’ve included furniture. And, of course, it is relatively higher for smaller suites. The rationale is that a better fit-out works better, lasts longer, and because it lasts longer it can be written-off over a longer period (see below). Even so, the cash needs to be found up front.

The payback

Will landlords get their money back? If they do this properly, yes they will. Because whilst landlords plug, tenants will pay. Quoting (and achieving) rents are 10-20% up and Subplot has spoken to landlords who say that assuming 15% uplift is fairly standard. In special cases, it can rise to 35% (if, for instance, the tenant wants something customised). This uplift is well worth having.

Fringe benefits

It all begins to look very rosy if you factor in the savings/additional earnings generated by dramatically shorter void periods endured by fitted-out floorspace (they let about twice as quickly, or, put another way, the void period is about half as long). Also bear in mind the trivial incentives required on plug-and-play space (a month or so rent-free over a two-year lease, rather than 4-6 months). Add the long write-off period for your fit-out, and intangible benefits like having a wider product range and thus a wider tenant base and… it’s smiles all round.

Eager beavers

No wonder North West landlords have been clambering on the bandwagon all summer. Earlier this month Boultbee Brooks Real Estate became the latest, promptly securing lettings of 678 sq ft and 1,550 sq ft to two related businesses at its 50,000 sq ft Hyphen development, Mosley Street. OBI advised on the plug-and-play strategy. “Hybrid is probably the most active space in the lettings market at the moment,” OBI partner Will Lewis says.

Valuation is a pain

The fly in the ointment is valuation. Investors took fright at the problems experienced by serviced office operators, and had headaches working out what a mass of short-term insecure tenancies was worth. Hybrid plug-and-play space is more secure and if it is blended with standard leases and serviced space in a single building, the impact on yields isn’t severe. Maybe it knocks a quarter of a point off, probably a lot less, so it’s no big deal.

The real new normal

“Within five years, plug-and-play will be the dominate form of tenure in the 1-5,000 sq ft bracket, and we may see some 10,000 sq ft plus deal too – we’re already starting to see signs. The old landlord/tenant relationship is quickly dying,” says Lewis. Plenty of North West landlords – and tenants – hope he is right.

DRIVING THE WEEK

Crappy carbon compromise?

Manchester is edging towards a net zero carbon new-build policy as the city works to achieve a zero-carbon city target of 2038. Yet the council continues to approve the most carbon-hungry kind of new build: skyscrapers.  What’s going on?

Manchester Climate Change Partnership’s Net Zero Carbon New Build Policy Document, published in July, was written jointly by a public-private group that included the city council with input from developers like Muse and Bruntwood, and consultants including JLL. The idea is that from 2023 all new buildings in the city should be zero carbon in themselves without the use of offsetting or a carbon tax. But the findings have a long way to go before they become policy.

No carbon tax, please

The group comes down against a carbon offset tax (set at a rate of £95 per tonne of carbon, for example) to reduce or eliminate the carbon balance remaining after meeting the embodied carbon target. Or, to put that another way, to buy developers out of their carbon problem. A tax “is likely to be prohibitively expensive if this is introduced as early as 2023,” the report said.

Assumptions

One wonders about that “prohibitive expense” because the report also speculates that developer profits on carbon-neutral office schemes will be higher (23% versus 28%). The claim rests on the idea that carbon-neutral buildings claim a modest premium rent. The logic for the higher rent assumption isn’t explained. If all new-builds have to be carbon neutral it’s scarcely a premium product, surely? A point for debate.

Undermined

The report is worthy, and may do some good. But it arrives as the city council waves through yet another batch of towers and skyscrapers, without doubt the least carbon-friendly form of development, and due to complete around 2023. High-density high-rise development is bad news, according to a study released this month by Edinburgh Napier University. Carbon emissions are as much as 140% higher from high-rise, high-density development than from any other combination of height and density. High-density, low-rise (like Paris, and like Manchester used to be) turns out to be the best.

Any ideas?

Carbon-neutral skyscrapers are possible, but so far only one (in Birmingham) is being proposed. We await an announcement in Manchester. Approving, as Manchester city council has this summer two 56-storey towers at Great Jackson Street, another 55 storeys at Great Marlborough Street and many more in the 20-30 storey bracket is, apparently, a problem-free uncomplicated thing to do. Is it?

IN CASE YOU MISSED IT…

Botheration in Bolton

Bolton council’s plans for the town’s £250m Crompton Place shopping centre redevelopment may have taken another turn.

The road to hell is paved with good intentions. Since Bolton Council acquired the 280,000 sq ft site in June 2018 for £14.8m from Santander Pension Fund, the intentions have been laudable. Planning permission is now in place for a 110-bedroom hotel, 150 homes and 113,000 sq ft of office space. It now looks like delivery is going to be delayed again, as clearing the site gets pushed back once more from its original January 2020 start date.

Parting of the ways

The explanation appears to lie in a deeply non-attention grabbing item on the agenda for the Bolton council cabinet for 26 July that turns out to be significant. “Town Centre Options Agreement” it said, giving no further details. The cabinet discussion was held behind closed doors, but property is a leaky business and the word is that the council considered plans to select a new development partner. A beauty parade would lead to the replacement of the existing Bolton Regeneration consortium, whose membership and ownership has shifted since the early days – you can read up here.

Beauty parade

At the root of problems like Crompton Place you almost always find a question of ambition. Developers may prefer less risk and more security (an annuity strip, in the jargon). Councils might quite reasonably hope for something more dynamic. There are plenty of developers in the neighbourhood who could be a good fit with the council’s aims. Bolton Council, struggling to cope with the weekend’s Food Festival, had yet to respond to a request to comment on the status of Crompton Place’s development agreement as Subplot wrapped up.

The Subplot is brought to you in association with Cratus and Oppidan Life.