‘Supply and demand’ definition: the relationship between the quantity of a commodity producers wish to sell at various prices and the quantity that consumers wish to buy.
Guessing demand three years ahead of supplying new offices, sheds or homes has always been the game. But today a new skill is needed: to divine the difference between demand and desire. ‘Oh, everybody will want to rent our lovely green offices.’ Or: ‘Oh, everybody will want our warm, modern homes built using modern methods of construction (MMC).’
The business case for building factories to supply prefabricated homes was built upon desire: a clueless government wishing to ‘fix the housing crisis’; eager suppliers bigging up customer numbers to justify investment. Taxpayer millions now look lost by politicians ‘investing’ in MMC via Homes England. Legal & General has lost £176m on its misadventure into MMC. Offsite prefabricators need to grow up and recognise they are not there to solve crises, save the planet or even supply homes. MMC is a components business.
Offices have far more components. Developers have an excellent record of incorporating ‘green’ components. But commercial necessity has become the mother of invention. Beware confusing desire and demand. Rents for grade-A space have not moved for a generation – a pointer to the low weight of demand against desire. Furthermore, offices are not oranges. What gets built adds to supply. Demand is incontestably falling. What has yet to be faced is a continuing fall in values.
Example one: if the present value of a lease is £1m and the cost of upgrading the property is £1m, the property’s value is zero – isn’t it? That’s one question valuers must surely be asking of short-leased grade-B office stock. Do rents until the lease ends in 2027 equal, in present terms, the cost of upgrading to gain an Energy Performance Rating of ‘C’? Zero-value offices already exist, don’t they?
The present wave of moves in and around the Square Mile to better but smaller offices is great news for the small band of developers building green stock. The deal that will see HSBC move out of a million-square-foot tower in Canary Wharf into half the space in the gutted and rebuilt BT HQ near St Paul’s (pictured) is a perfect example. But such headline deals overshadow the plight of stock still falling in value.
Example two: denial here over what is an epochal change contrasts with acceptance in the US, not least in New York, where the mayor promised to fast-track zero-value offices to residential. A 20-storey tower with 254,000 sq ft of offices, 64% let, and leases expiring between 2027 and 2033, sold in March for $105m (£82.4m). At roughly $400/sq ft, the price was less than bare land was selling for in prime Manhattan in 2015.
Keep the Matrix simple
Ofsted-style grading of development plans is a devilish idea. Housing secretary Michael Gove has dubbed the ‘Matrix for Measuring & Delivering Placemaking Quality,’ published by Policy Exchange last week, as “brilliant”. Well, yes, imagine what hoops applicants would jump through to ensure councils stamped designs about to go before the planning committee as ‘outstanding’ or ‘good,’ rather than ‘average’ or, heaven forfend, ‘poor’.
The report’s author, architect Ike Ijeh, is a great writer and one of the ‘good guys’. But the idea you can score a scheme out of 100 based on its physical, socioeconomic, and psychological elements is ingenuous. Ticking a ‘strong yes’ (4 points) down to a ‘strong no’ (nul points ) in answer to 270 questions is over-prescriptive. Relax – easily challenged subjectivity and the weight of complexity will see the plan stillborn.
But Ijeh’s Ofsted plan might work if the number of questions did not exceed 27, did not stray from unchallengeable physical facts and stuck to housing. The only important unfudgeable facts are internal and external space levels. A matrix for internal space standards already exists – the Nationally Described Space Standards (NDSS). Tables that define density in terms of rooms per hectare abound.
NDSS permits housebuilders to build small homes. High-density ceilings permit ‘pack ‘em in’ levels in the name of sustainability. Sod the occupants. In Broken Homes, my co-author Jackie Sadek and I put the case for raising the NDSS minimum by 20% and reducing the number of rooms per hectare by the same amount. Got it! What if councils scored new housing as ‘average’ if built to NDSS and current density levels; ‘good’ if 10% better; and ‘excellent’ if 20% better? Relax – that is not going to happen either.
Peter Bill is a journalist and the author of Planet Property and Broken Homes