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Office Owners: Do Your Own Fit-Out. Get Better Rents. Help Save The Planet

A growing investment manager is embarking on a new strategy of fitting out entire office buildings rather than leaving it to tenants, a move it said will command premium rents and dramatically cut the amount of carbon a building produces over its lifetime. 

Lateral's 22 Shad Thames office building.

Lateral, which is run by brothers Rob and Nick Beacroft and former CLS director Robert Crawley, is fitting out an office building in London and a life sciences building in Oxford to "category A+" standard. That designation means space is fully equipped with both furniture and mechanical and engineering features, and it is ready for a tenant to move in almost immediately. 

In the UK it is more typical for a landlord to provide a basic finish for an office, leaving the tenant to pay for and undertake the full fit-out before handing it back to the landlord at the end of the lease in the state it received it. 

But Lateral said that process creates an incredible amount of wasted material. It cited data from RICS that the average building will be fitted out 20 to 30 times over a typical 60-year lifespan, about every two-and-a-half years, with much of the material going to landfill with each new iteration. Fit-outs account for about a third of the carbon a building produces over its lifespan, taking into account construction and operations, Lateral said. 

The company estimated about 4% of the world’s natural resources are taken up by fitting out offices. It extrapolated that figure from Aecom data, which found about 40% of the world’s natural resources are expended by the construction sector. 

Instead, Lateral said it would fit out its buildings every eight to 10 years, or six to eight times over the life of a building. It will do this by choosing durable materials and sometimes leasing materials rather than buying new ones, only to throw them away at the end of their life. 

The company made the point that smaller tenants often don't have the time or expertise to think about or procure a sustainable fit-out, but a landlord has the scale and expertise to do this for them. 

Combined with refurbishing old buildings instead of knocking them down, Lateral said this could reduce the embodied carbon of a building — the carbon emitted by the materials used within it — by up to 50%. 

“Just think about the amount of raw materials that have to be extracted, transported and then disposed of if you are fitting out a building 20 or 30 times,” Lateral Director Rob Beacroft told Bisnow. “Leases on offices are getting shorter and shorter, but we still have this archaic process of leasing space out and then taking it back in the same condition.”

On the financial side, Beacroft said the company had undertaken significant research that led it to believe category A+ space would allow it to charge rents that more than make up for the fact it is paying to fit the space out rather than that cost falling on tenants.

“We’ve spent a lot of time looking at transactional data,” he said. “When you look at the rents achieved, the reduction in rent-free periods and the lack of voids, the key criteria for an investor, then we think this is a way to outperform in a crowded market. We think the rents that this kind of space will command are a 12-16% premium over traditionally leased space. And the reduced voids and rent-free periods are vital if you are an investor with a three-to-five-year time horizon.”

Beacroft added that Lateral felt there was a gap in the market between traditionally leased office space, which is problematic for small tenants to undertake on their own, and serviced office space, which is significantly more expensive because of its proliferation of services and amenities. Fitting out space for tenants but not providing a wide range of services bridged that gap, he said. 

The company’s first building to utilise the strategy will be 22 Shad Thames, a 16K SF building that was once the office and home of designer Terence Conran. The space is scheduled to be delivered in early 2022.