After a few belt-tightening years, the City of London’s commercial sector is on the up again. In this cost model, Davis Langdon and Mott Green Wall examine the current market and recent advances in office design – and break down the costs of a high-quality, mid-rise City scheme
Recent pre-let deals to major corporates such as the insurer Willis have raised the prospect of a revival of development in the City. Although the focus of popular attention has been tall buildings such as London Bridge Tower and Heron Tower, it is the less controversial mid-rise schemes, on sites unencumbered by planning or possession issues, that are now on the starting blocks.
One of the most striking aspects of the 1990s development cycle is how much office buildings have evolved, particularly in terms of design quality and, to a lesser extent, floorplate and layout. Companies in the City currently have the opportunity to occupy some of the best office buildings in the world, designed by leading-edge practices, at rents of less than £48/ft2.
Tenants’ approaches to occupying space have also changed dramatically, with today’s interior design thinking driven by the flexibility of modern ways of working and the hierarchy-free universal space plan.
The current marketplace
After a two-year hiatus, the success during 2004 of developers such as Land Securities, Stanhope and British Land in securing 1.5 million ft2 of lettings in pre-let deals in the City has raised hopes of the return of a buoyant property market. However, with two or three years’ supply of new space lying vacant, the prospect of a return to growth in rents and significant speculative development seem distant. At the moment, developers with the resources to bring forward schemes ahead of the market are targeting pre-lets, a long-term strategy that smoothes out spikes in demand and rent, and that provides tenants with an opportunity to influence the detailed design of their building with minimal programme and cost penalties.
The occupier sectors that are currently most active are UK and US lawyers, some corporate occupiers, and in financial services, fund managers and venture capitalists with smaller space requirements. Demand for schemes with large trading floors has fallen away, as most forecast requirements have been met. Developers are, to an extent, tailoring their buildings to more closely match the needs of a target market while retaining flexibility in the specification to accommodate change and the needs of other tenants over time.
In addition to changes in building design and occupancy, the relationship between tenants and building owners is also evolving into one based on service as well as product. A developer who nurtures this relationship will have a competitive advantage in the current marketplace. Elements of service range from building maintenance, through the provision of managed public spaces and security to the inclusion of shared facilities such as gyms and restaurants or concierge services in multi-tenanted buildings. Flexible leases with break clauses, shorter terms and so on are also being introduced to cater for demands for a more responsive product.
The cost breakdown overleaf is based on a typical City office building costing £1650/m2 (GIA) shell and core. Although office design and specification is highly codified by standards such as the BCO’s specification, and rent levels are largely determined by overall market conditions, there is a wide variation in the costs of City buildings, typically in the range of £1400 to £1900/m2 (GIA).
This range is explained by the wide range of factors that influence the overall cost of an office scheme – driven by location and site constraint, layout and design of the building. Although the BCO specification provides a benchmark for building quality, it is increasingly treated as a statement of minimum requirement, which can be subject to upwards review.
Location and site variables
In densely occupied areas such as the City, location is a major determinant of the design solution and a source of a considerable number of cost variables. These include:
- Substructure and groundwork Variables include existing foundations and basements, the effect of neighbouring buildings on retaining wall design, extensive below-ground services, poor ground conditions, a high water table or the potential for archaeological investigation.
- Existing buildings Requirements for demolition, together with party walls, retained facades and so on.
- Size and shape of the site This affects floorplates, wall–floor ratios and logistics.
- Site constraints These include rights of light and protected view corridors, possibly requiring set backs, curved facades, or restrictions on floor-to-floor heights. General planning requirements related to neighbouring buildings may also determine quality levels. Height restrictions could make deep basements viable for plant space that otherwise would be located economically at roof level.
- Logistics Includes access, storage and adjacency to other buildings.
Building layout is the primary determinant of the efficiency of a scheme. In income terms, it is mainly driven by the net–gross ratio and the total area and mix of lettable space. In cost terms, the main drivers are:
- Building orientation Includes requirements for shading and enhanced facade performance.
- Wall–floor ratio A major factor as external facades typically account for 15 to 25% of construction cost. Ratios of between 0.40 and 0.50 are good but a variation of 0.1 can change overall construction costs by 4 to 5%. Extensive party walls will result in reduced external wall costs, but the building may require an atrium to provide adequate natural light. Floor-to-floor height has a marginal impact on overall cost.
- Plan and elevation complexity Curves, set backs and other features will have a significant impact on design, buildability and cost, including the loss of economies of scale associated with standard work
- Vertical circulation and means of escape requirements This is determined by the size and layout of the floorplate and the evacuation strategy.
The principal variables are loadings, spans, building height and requirements for load transfer. For steel frames, total piece count and the simplicity of connection detailing also affect total cost levels. Small increments in live load provision have a marginal impact on structure cost, and some developers specify higher loads throughout to increase the flexibility of the floorplate. Grids are a different matter. Column-free space is valued by many users and spans in excess of 12 m incur premium costs associated with substructure, superstructure and the depth of section.
Total construction costs are, however, not highly sensitive to this variation. Following unprecedented increases in steel costs during 2004, concrete frame options are actively being considered for mid-rise buildings.
The main variables affecting the cost of the envelope are the wall–floor ratio, the aspect ratio, which also influences internal heat loads, and the specification of the facade itself. Unitised, highly glazed, single panel curtain wall has become the facade of choice with costs ranging from £550/m2 to £800/m2, depending upon performance requirements, unit size, glass specification, design of the aluminium profiles, applied finishes and additional elements such as spandrel panels and solar shading. Externally ventilated deep-cavity double wall facades that are specified to provide improved thermal performance will cost between £1000/m2 and £1200/m2. These will be required on an increasing number of projects to meet the 2006 revision to Part L.
Other potential cost drivers associated with facades include:
- Security features including bomb-blast protection;
- Curved and faceted work;
- Architectural framing solutions to atrium walls and entrance screens.
The main drivers for variation in services costs are heat loads, requirements for mechanical cooling, the selection of air-conditioning systems, and the extent of back-up systems required. In the City, potential requirements for local reinforcement to the mains electrical supply has become a further source of cost variation.
Heat loads are driven by solar gain at the perimeter and equipment gains from IT and other office equipment. Solar gain is determined by building orientation, floorplate depth and the performance of the facade.
Air-conditioning systems. Fan coil units continue to be the system of choice due to their low cost, high cooling capacity, flexibility and spatial efficiency. However, they have performance disadvantages including energy use, cost in use, air quality, noise in operation and requirements for maintenance operations in the office area. As an alternative, displacement ventilation systems supplemented by chilled beams have been used in some schemes, including Tower Place, which is occupied by Marsh & McLennan. Although the initial cost of the system is higher, the benefits of flexibility, high air quality and lower running and maintenance costs could win over some occupiers. Key disadvantages, other than initial cost, are requirements for separate heating and cooling systems and the need for larger supply and extract ducts.
Utilities infrastructure. Some connection work for telecoms, electricity and gas is non-contestable work that is undertaken by the utilities’ contractors at costs and programmes determined by the utilities themselves. Recently, due to capacity limits in the electricity supply network, developers have had to procure off-site cable and switchgear to connect to an HV supply. Requirements for the security of supply can also have a big effect on costs, with the highest level of protection using Solkor monitored circuit breakers incurring a cost premium of more than 300% over basic ringmain units.
The number of lifts is determined by the planned occupation density and acceptable waiting times at a given handling capacity – typically 15% of office population. Lifts have a significant impact on the overall size and layout of the core, and the developer will seek the best balance between service quality and floorplate efficiency. Tenants may agree to fund additional lifts as part of an enhancement package.
Increasing value through design
Throughout their economic life, office buildings are required to meet the needs of a range of stakeholders including the developer, investor, occupier and the wider community. Costs and benefits occur at different stages in the development cycle and decisions taken by one party to strengthen their position may be at the expense of other stakeholders – either in the present or the future. The alignment of all interests through product targeting and careful briefing, design and specification is at the heart of any successful development.
Although the common form of currency in commercial development is rent, buildings deliver value to stakeholders in a variety of ways including:
- Exchange value Capital value is the main motivation of the merchant developer, determined by floor area efficiency, rent, yield and marketability of the space.
- Operational value The concern of the tenant and to a lesser extent, the investor, this is generated from efficiencies and effectiveness in business processes. Maintaining operational value requires flexibility and adaptability to respond to changes in business practice and the expansion and contraction of the occupier’s space requirements.
- Brand value Delivers benefits including enhancements to corporate image, recruitment and retention and staff motivation. Brand value is derived by all stakeholders in a successful scheme.
- Esteem value This is the value associated with the address and amenity of a development from which the wider occupier market benefits. Developers use this value to differentiate their product. In the long term, it will also help to reduce void periods.
- Contingent value The multiplier effect of a development on its surroundings including increases in land value, additional inward investment or a wider range of amenity. Beneficiaries include the occupier, other businesses and landowners, and the wider community.
As the market becomes more sophisticated, the developer’s opportunity to differentiate his product is increasingly based on the ability to anticipate customer need, providing a flexible building that can respond to specific tenant requirements without investment in unnecessary features such as capacity for trading or high levels of redundancy in incoming services and main plant.
Opportunities to align the building design to enhance tenant value include:
- Factors that sell the building Location and timing remain the key criteria for any occupier. Design of the exterior and common parts is, however, crucial in creating the kerb appeal that differentiates buildings. The design of these elements should project a timeless quality, as a building that dates quickly – as many from the late 1980s have – is unlikely to retain its value.
- Factors that support effective occupation Floorplate and core design are the most important aspects facilitating the economic subdivision of space together with effective sight lines and movement around the building. Floorplates of 2000 m2 net are currently considered a good size. Success factors include regular layouts that do not have excessive contrast between deep and shallow space, together with compact, regular cores with sufficient plant and riser space to accommodate the tenant’s standby systems.
- Features that drive staff productivity More than 85% of the total costs of occupancy relate to staff costs, so any contribution that a building could make to productivity will generate benefits very quickly. Potential value-generating features include:
- Workstation space allocations, and their design and layout – also including shared work settings;
- Comfort and environment issues including air quality, control of temperature and humidity, natural light, control of glare and acoustic attenuation;
- Organisation of space including circulation and access to shared facilities;
- Availability and extent of support facilities.
Features that contribute to staff recruitment and retention These include:
- Location and accessibility of the building;
- Building quality and image – generating pride in an organisation and reflecting positively on employees;
- Quality of public realm, including the local retail and leisure offer and the security of office users;
- Quality and availability of support facilities.
Occupiers and their advisors do not, as a matter of course, consider productivity issues when selecting a building. Establishing a direct link between aspects of value-adding expenditure and specific outcomes is a difficult task, partly due to lack of evidence and partly as effects are cumulative. However, occupier issues are set to become a major focus for the British Council for Offices’ work.
Future trends in office design
Previous forecasts of the demise of the office following the widespread adoption of teleworking have proved, like the prediction of the “leisure society”, to be wide of the mark. Offices are occupied more intensely, for longer working days, than ever before. Recent research published by the BCO has concluded that demand for office buildings similar to those we build today will continue for at least the next 20 years, even as ways of working and IT systems evolve at a much faster pace.
Looking at the immediate future, issues that are likely to catch the attention of developers, designers and occupiers include:
Sustainability With the emergence of mixed mode buildings in the City such as Swiss Re, there are signs of growing momentum behind the sustainability agenda. Sustainability does not generate a rent premium but will become more significant as regulations tighten and as major corporates develop their own green agendas. The “very good” standard under BREEAM has become the minimum requirement for a sustainable office building, with broader attention being given by developers to the sourcing of materials, embodied energy issues and the management of construction waste.
Energy The requirement for a 27% reduction in carbon emissions and a change in calculation methods in the 2006 revision of Part L will have a significant effect on building design. Most of the work will have to be done at the facade and roof, and the challenge to designers will be either to adopt complex and potentially costly ventilated double facade systems in glass or to work with stone and other solid materials with better U-values. Recent examples in the City, such as Paternoster Square, show how solid materials can be successfully integrated into contemporary architecture. As the thermal efficiency of the facade increases, the internal heat load also increases because of reduced perimeter heat losses. A balance between facade and services performance will need to be found to meet the new regulations. Developers will also be expected to incorporate renewable sources of energy in buildings in accordance with the requirements of the London Plan.
Lighting The current LG3 standard has, in practice, proved difficult to meet in speculative offices because of the requirements for uplighting on the ceiling plane and wall washing on partitions.
The provision of an upward lighting component on ceilings is difficult to achieve with a typical ceiling height of 2.7 m. The requirement for 50% of workplane illuminance levels on walls means that some elements of a compliant Cat A lighting installation may be discarded once the Cat B floor plan and partition layout is finalised. Completion to shell-and-core means the developer avoids compliance problems. However, current standards address the problems of low levels of light on ceilings and partitions at the expense of flexibility, and are likely to be reviewed.
Property development is a high-risk activity, and the aim of procurement is to manage risk effectively and secure value for the developer and occupier.
If one procurement route characterises work in the City in the late 1990s, then it has been two-stage design-and-build, often associated with a guaranteed maximum price mechanism. Following this route, and with the design team novated to the contractor, developers have been able to secure leading-edge design without some of the risks associated with the management of the design team.
The advantages of this option alongside design quality and cost and time certainty include early contractor involvement and closer integration of the design team. The disadvantages include the need to negotiate the contract sum, the inevitable payment of risk premiums and the loss of client control over design development once the contract sum has been agreed. Because of the risks and commercial pressures involved, it is advisable for developers and contractors who have a track record of working together, or to allow the contractor to use their own design team, while retaining consultants to review the contractor’s work.
Design-and-build-based options clearly have their place in the commercial market, particularly on pre-let schemes where cost and time certainty become critical. Some clients do, however, take a more active role in the post-contract management of their schemes, creating added value by assuming and managing risks that a contractor might otherwise accept and price for.
Construction management is making something of a comeback with its use on projects including Stanhope and British Land’s 51 Lime Street. The benefits include speed, if the risks of fast-track construction on an incomplete design are acceptable, proactive management of the process, and the opportunity for client and designers to work directly with specialist contractors – possibly as part of wider framework agreements. CM suits developers that can raise project funding without the certainty of a lump-sum price, that have the intent and resources to manage the process and risks to their benefit, and the deep pockets to buy a project out of trouble should problems occur.
Traditional procurement based on a lump sum and a more balanced share of design and construction risk also has its place in the City market. However, the contrasting options presented by D&B or CM to either transfer or retain risk meet the needs of most developers.
City office scheme cost breakdown
The cost model features a high quality City office scheme arranged over 13 floors and one basement with a gross internal area of 21,300 m2.
The scheme is steel-framed, with rates representative of the current marketplace and incorporates an internally ventilated double-wall facade, providing a balance between transparency and environmental control. The wall–floor ratio is 0.46. Air treatment is by four-pipe fan-coil unit. The cost of the Category A work, to a net office area of 14,600 m2, is typical of current fit-out costs procured through general contracting. However, the fit-out sector is volatile and if this work was procured from specialist fit-out contractors, these costs could, at present, be undercut. Retail units are finished to shell condition only.
Costs are current in fourth quarter 2004, based on a central London location and construction management procurement. Preliminaries and contingencies are included in the costs, but demolitions and site preparation, external works and services, fit-out costs beyond Category A, tenant enhancement, professional fees and VAT are excluded.
The level of specification described in this model meets current regulations and is appropriate for the central London market. Although regional factors are provided, the specification should be considered if applying these costs to other locations.
Davis Langdon would like to thank Digby Flower of CB Richard Ellis for his assistance in the preparation of this article