Office Refurbishments - Cost model, February 1996

Introduction

The recent modest revival of confidence in office development, particularly in the South-east, has led to an increase in the volume of commercial refurbishment. Undersupply of new property is leading to a take-up of good secondhand space. According to the Financial Times UK Property Survery, published in December 1994, only 280,000 m2 (3 million ft2) out of 985,000 m2 (10.6 million ft2) of office space available within the M25 area was new. Apart from the shortage of new buildings, the long-term effect of revised planning controls and demand for flexible office space are combining to make comprehensive refurbishment viable.

Many office buildings of 1960s and 1970s vintage are now at the end of their orginial leases and need refurbishment, both to replace worn-out services and to relauch them on the rental market. Recent innovations in building services and information technology are helping to extend the economic life of inflexible 1960s buildings. It means they can now be serviced to a level comparable with modern office stock, thus creating investment value in buildings that might otherwise remain unlet. However, refurbishment is now an option for buildings in the wrong locations. Viability will also be affected by floor-plate size, floor-to-floor height and other market-led factors. The careful appraisal of refurbishment schemes is essential to ensure a successful investment.

The major benefits of refurbishment over new build stem from lower capital cost, earlier reoccupation, easier planning and proportionately higher capital allowances. The scope of refurbishment can range from cosmetic redecoration for marketing purposes through to stripping back the building to its original frame to provide modern standards of enclosure and services. Limited refurbishment strategies are usually used in conjunction with short leases to retain future potential for redevelopment. Extensive refurbishment is likely to be funded and let on a smiliar basis to new space.

Design considerations

A thorough survey is essential to identify constraints before a decision is taken to refurbish an old building.

Floor loadings are unlikely to achieve the 5 kN/m2 + 1 kN/m2 loading required by institutional investors. The British Council of Offices’ Specification for Urban Offices recommends the adoption of a reduced loading of 2.5 kN/m2, which can be achieved in most buildings. Localised strengthening is desirable, to provide for storage at up to 7.5 kN/m2.

Limited floor-to-floor heights restrict services distribution options. Structured cabling, uplighting, chilled ceilings or displacement ventilation can be used to minimise requirements for accessible floors and ceilings. Recladding costs will, however, be reduced as a result of the lower slab-to-slab dimensions. Floor heights can be increased by up to 50 mm through the removal of insitu concrete toppings to floors, but these contribute to the fire resistance of the structure so additional fire protection may be needed

Standards for thermal insulation have increased since the mid-1960s. Current U-values for walling (0.45 W/m2 °C) compare with an earlier standard of 1.70 W/m2 °C. The high wall-to-floor ratio associated with narrow plan slab developments and a high proportion of single, thermally unbroken glazing make the enhancement of insulation desirable. Options range from secondary glazing or over cladding to complete replacement. Corrosion and carbonation of the concrete in the original structure can complicate cladding replacement. Even if the integrity is intact, the relatively broad construction tolerances of reinforced concrete frames - ±15 mm - can lead to problems adapting standard, metric, modular systems. Measures to reduce solar gain, such as solar shading, blinds or film, should be incorporated.

1960s and 1970s offices do not achieve the letting efficiency of modern deep-plan buildings because of the size and shape of floor plates and the relative inefficiency of the cores. Adopting open-plan layouts may help increase lettable areas, which may be increased further by relocating stair cores outside the original footprint. Where possible, cores and lobbies should permit multiple occupancy and enhanced security on a floor-by-floor basis. Disabled access must be provided.

Restricted floor-to-ceiling heights limit the use of raised floors and suspended ceilings Unless sufficient depth can be found in the floor screed, the introduction of a raised floor into a conventional building will require alterations to floor levels in lobbies and entrances. Raised floor levels may also impinge on sill heights.

Most recent office developments are characterised by full variable-air-volume or fan-coil-unit air-conditioning installations, which are a prerequisite if high rents are to be secured. The demand for full air-conditioning in provincial and less-than-prime locations is being affected by increasing concern about services charges and energy use. 1960s slab blocks with restricted ceiling heights and shallow floor plates are generally unsuitalbe for VAV systems.

Fan-coil units can be put either at the building’s perimeter or in a ceiling void and can be used in conjunction with natural ventilation. FCUs are particularly suitable for the close control required in cellular office space, but need extensive maintenance and minimum ceiling void of 450 mm. Perimeter location of units will reduce the lettable area.

Displacement ventilation introduces cooled air at a low level. The air rises to ceiling level and is exhausted as it rises in temperature. This method s less suited to buildings with low ceilings.

Chilled beams and ceilings radiate cooling from ceiling panels to air fed by natural or displacement ventilation. They have high initial capital costs but low running costs. The system needs a ceiling zone of only 300 mm, so is well suited to buildings with restricted floor heights. Currently, only owner-occupiers and government tenants have adopted chilled ceilings in the UK, but major schemes will come on to the market in 1996 to test take-up from private tenants.

Natural ventilation is claimed to be suitable for nine out of 10 offices that do not have severed noise or pollution problems. Mixed-mode systems have simpler maintenance needs, lower running costs and generate higher user satisfaction. 1960s buildings are inherently suitable for natural ventilation. Refurb designs that incorporate opening windows, night-time cooling and passive energy-saving features should be considered, but the adoption of innovative cooling/ventilation systems will be determined by institutional reaction to market response. Some developers are responding to uncertainty in demand for air-conditioning by installing plant and vertical distribution only as part of the initial speculative development. The cost of the development is reduced and the lettable space is more flexible. Local distribution would be installed only if required as part of a tenant’s fit-out.

Low-energy lighting can generate significant running-cost savings (£50 over the life of a single lamp) through greater output than conventional fittings. The higher initial cost will be offset by a reduction in the number of luminaires.

The interior of life cars should be refitted as part of any refurbishment for marketing purposes. Lifts must be updated to current technical standards as part of a standard decorative refit, and replaced as part of major refurbishment.

  Mixed-mode ventilation requires relatively simple control systems for monitoring zoning, condensation in chilled elements and to control opening vents for night-time cooling. Controls should be designed by to allow for multiple occupancy on a floor-by-floor basis.

  Underfloor distribution is likely to become less important as structured cabling, fibre-optic networks and cordless technology become standard installations. Limits on ceiling heights will not restrict IT and small-power flexibility as permieter/floor-box-based distribution will suite the narrow floor plates of 1960s offices.

  Provision for improved health and safety measures for maintenance and cleaning to meet the requirements of the Construction (Design and Management) regulations must be included in schemes.

The value of extensive refurbishment

Several factors are combining to make extensive refurbishment attractive as a development option. They include:

• lower capital cost
• faster programmes
• greater capital allowances recovery
• tenants are now placing less emphasis on in-built flexibility, thereby reducing refit costs
• planning restrictions on the density of new developments and parking space
• increasingly flexible office technology.

Changing client requirements, reduced specification standards recommended by the BCO, and office technology less dependent on intensive environmental services will enable older buildings to support modern office functions despite characteristic limitations on depth of floor plates, slab-to-slab heights and floor loadings (table 1).

Comprehensive refurbishment should aim to create an asset with the lifespan of a new building. However, the economics of refurbished space are more complex than those for new build because of uncertainty over demand for secondhand space. Viability can be marginal, so the extent of work should be determined by an assessment of long-term returns and detailed feasibility studies. Shown below (table 2) are guide rates, but these should not be used in isolation when preparing cost estimates.

Investment appraisal

Low rental income, short leases, multiple occupancy and higher yields combine to make the assessment of the viability of a refurbishment development both complex and uncertain. The effect of changes in development variables therefore should be tested using sensitivity analysis.In the sensitivity analysis example, three different levels of rental income are modelled to determine a range of gross development values. In the example, the building considered is a 5500 m2, five-storey office that will be enlarged by 750 m2 to 6250 m2, offering 5100 m2 of lettable space. Total development cost is estimated at £11.5m (see table 3).

The sensitivity analysis demonstrates that the project will not be viable in a market for air-conditioned offices unless rents exceed £160/m2 (£15/ft2). Given that competing new or refurbished accommodation will probably be available at rents of £130-150/m2 (£12-14/ft2), the project will not proceed without a tenant secured on a pre-let contract. Sensitivity analysis could also be used to establish construction costs and target yields. The advantage of this approach to investment appraisal is that it addresses the uncertainty inherent in refurbishment projects. However, its application is limited because it can only model the impact of a single, isolated variable and the interaction of factors such as market rent, development quality and construction cost cannot be assessed.

In the example, an office targeted at £130/m2 market would not include air-conditioning and, as result, construction costs would be reduced by £100-150/m2. Refurbishment schemes typically involve a high proportion of services installations, which qualify as plant machinery for capital allowances.

Demolition of old plant rooms and the cost of such work such as alterations to lift shafts or the formation of new risers can also be claimed. Overall, a higher proportion of the total cost of a refurbishment scheme is likely to qualify for capital allowances than in a new-build scheme.

Procurement routes and programme

Refurbishment projects tend to involve more risks and cost-sensitive items than new-build schemes. Preplanning to cope with the uncertainties of working in an existing building is essential.

The procurement route chosen should take account of the need to:

• strip out, open up and investigate the building fabric and services before work commences
• secure early cost certainty
• maintain good cost control
• provide flexibility for changes to the scope of work.

Cost certainty is a relative term in refurbishment as allowances for unknown works have to be made as part of a fixed-price contracts such as design and build are unlikely to be suitable. Traditional lump-sum contracts based on quantities or schedules or rates give the best combination of flexibility and control. letting the contract on a two-stage basis will secure early contractor input into programming and buildability issues and increase the contractor’s understanding of complex schemes, but cost certainty will be less secure.

Prime cost contracts give even less control and are suitable only where the scope of work is undefined and speed is essential. In such circumstances, construction management would be more appropriate, but the cost model involves stripping back the building to the frame and is, therefore, based on a single-stage, lump-sum contract, with elements such as cladding and building services let on a contractor-designed basis.

The building used for the cost model

The model is based on a 5500 m2, five-storey office built in the mid-1960s. It is clad in non-loadbearing precast concrete units with single-glazed opening windows. Floor-to-floor height is restricted to 3.35m and the floor-plate width to 12.2m. It has perimeter heating and relies on natural ventilation.

The scheme includes extending the floor slabs by 700mm. This increases the total floor area of the building to 6250m2 and raises the lettable area of the buildig to 5100m2. It also provides a distribution zone for services around the perimeter. Existing cladding is replaced by a combination of lightweight composite panels and an overcladding system to retained shear walls. The cores are replanned to provide disabled toilet accommodation, increased riser capacity, improved fire-escape routes and to permit secure multiple occupancy on a floor-by-floor basis.

The office space is fitted out to Category A standard, whic includes ceilings, comfort cooling, carpeted raised floors and some lighting. All the common areas are fully fitted out, but the office space has no electrical wiring or partitioning. Comfort cooling is provided using a displacement ventilation system and chilled ceilings. Two existing lifts are retained and refurbished as part of the scheme.

The unit rates are based on outer London price levels for the fourth quarter of 1995. It is assumed that a lump-sum contract based on measured quantities is adopted for the project. The model excludes allowances for external works such as the refurbishment of car parking or ancillary buildings.

Adjustments might also have to be made for access or pahsing of the works. It has been assumed that the existing structure is sound. Allowances for any repair and remedial work should be based on specialist advice. As with all construction projects, adjustments should be made for cost implications of location, programme and procurement route.