The world has been turned on its axis over the last few years of unprecedented economic, social and geopolitical disruption. Emerging trends and ongoing developments continue to take the real estate market by storm, and preparation will be the key to success for general counsel and senior in-house lawyers to combat these headwinds.
‘In the post-pandemic world, everyone’s in-house focus was sharpened,’ says Jane Edwarde, head of real estate and one of Slaughter and May’s diversity and inclusion partners. ‘There have always been global obstacles, now more than ever, and the in-house community needs to be prepared for battle at any moment. Corporates need to be thinking about how to survive these headwinds in a responsible and sustainable way’.
Despite the disruption caused by Covid-19 to occupiers of commercial property, and the subsequent hybrid working model adopted by corporates, ‘the corporate occupier space has remained consistently busy’, says Jules Needleman, a partner in CMS’ real estate team, who specialises in high-end HQ lettings. Edwarde further highlights that there hasn’t been a mass exodus from the office as anticipated: ‘The demand is still very much there, but an agile policy is here to stay…for corporates, occupational portfolios and HQs are at the top of the agenda.’
This is supported by a survey conducted by real estate group CBRE, which found that 41% of office occupiers plan to expand their footprint over the next three years, demonstrating the ongoing demand for office space and heightened expected business growth.
As Elizabeth Alibhai, who heads the real estate team at RPC, comments: ‘CBRE is predicting that 10-20% of office stock will be repurposed and there has been a flight towards quality stock. Clients are relocating and downsizing to high-quality spaces. There’s an acknowledgement across the board that people will continue to require office premises.’
The hybrid model has boosted the demand for flexible office space and ‘as clients are making decisions to relocate to upgraded premises, developers are responding to this’, says Edwarde.
Though the number of development projects has increased throughout the past year, concerns surrounding potential plunges in demand levels, in addition to increasing construction and financing costs, could result in a slow-down in development completions. However, according to Jones Lang LaSalle (JLL), refurbishments are likely to continue as these are seen as less time consuming, cheaper and a more sustainable option, the latter being a central focus for corporate occupiers.
Rising tide of ESG regulation
‘The response to environmental, social and governance (ESG) issues is at the top of agendas for both owners and occupiers,’ says Mark Rajbenbach, co-head of the international real estate group at Taylor Wessing. Premises contribute considerably towards the UK’s carbon footprint, and both landlords and occupiers are taking into consideration the building’s eco-credentials.
The pressure to adopt ESG standards has compelled all stakeholders to monitor the sustainability and ethical practices of the company, and there is a strong focus to adhere to these principles. Landlords and occupiers will face commercial pressures and legal requirements to attain a sustainable workplace, and in-house lawyers will need to stay on top of these issues and wider developments. Says Alibhai: ‘Now that there are mandatory disclosure requirements coming in, combined with increasing prices of energy and ethical arguments, corporates are pushing towards more sustainable practices.’
Key considerations for in-house lawyers when looking to relocate to new premises include searching for developments with sustainability and building certifications, ‘green’ lease provisions, and checking the EPC rating of premises. Regarding the latter, Alibhai highlights that ‘the minimum standard for EPCs on commercial properties is going to rise to a Grade C in 2027 and a Grade B in 2030’. Occupiers are encouraged to challenge landlords where premises do not meet a B rating. However, ‘the vast majority of stock is not at these standards and there will be a huge retrofitting exercise over the next two years’.
‘When in-house lawyers are looking to secure new premises’, Alibhai advises, ‘they need to ensure that buildings are energy efficient and if they are in-buildings, which are going to be there for a while, companies need to determine whether they will need to contribute to the cost of these changes, to bring the premises up to the required standard’.
In order to fully engage with ESG developments, ‘in-house lawyers will be required to take on a wider role within the company, as we begin to tackle more headwinds in the upcoming year’, says Edwarde. They will become an integral part of initiating the company’s ESG strategies, ensuring the business stays on top of new developments and complying to changing laws and regulations. Rajbenbach says that ‘for in-house lawyers, there is a lot of collaboration with their external law firms in navigating how they adhere to ESG developments in the real estate sector’.
However, with the urgency to adhere to ESG regulations, in-house lawyers must take caution to avoid the consequences of ‘greenwashing’: the practice of making people believe, commonly through marketing and public relations, that a company is more sustainable than it is. To mitigate the risk, legal is encouraged to collaborate with teams across the company, to ensure it can support their ESG claims.
Stay on your toes
Rajbenbach says: ‘Due to the ever-increasing complexity of real estate deals, in-house lawyers need to know the real estate sector inside out. This includes keeping up to date with emerging developments, challenges and wider issues’. This is applicable to the Building Safety Act 2022, ‘the biggest revamp of building safety legislation in over 40 years’, says Alibhai. The Bill has been published to improve safety during the design, construction and management of higher risked buildings, in response to the devasting events at Grenfell Tower in 2017.
Alibhai says: ‘This puts obligations on various stakeholders, who are going through the motions of a building’s lifecycle, with a strong emphasis on high-risk buildings. There are numerous issues concerning competence, enforcement of breach, namely sanctions and costs relating to construction, among others. This will have an impact on the in-house community, particularly those in the property development sector’.
For real estate fund managers and investors, ‘the mini budget brought additional challenges to the table, and transactions have either been put on hold or there were price reductions’, according to Needleman. ‘This is due to evaluations, as there is uncertainty surrounding the value of properties and buyers are cautious not to be overpaying. This cycle has been different to previous years, as price reductions were generally accepted in transactions, and these were followed through to completion at a lower price. At this moment in time, sellers have not felt under pressure to sell, so when price reductions are put on the table, they will either pause the transaction or refuse the offer. They do not feel obligated to sell’.
This is further supported by Rajbenbach, who says that ‘the current economic climate, rising interest rates, debt and construction costs have contributed to uncertainty surrounding property evaluations and the slowdown of pace in some transactions’.
Despite the uncertainty and subsequent challenges, Edwarde emphasises that ‘the current market still presents opportunities’. For Alibhai, ‘the time to invest is when there is blood in the streets – while there are constraints for many, there will be opportunities for the few, especially for those who are cash rich or can borrow at sustainable rates’.
For the in-house community, preparation will be the key to success. ‘Everything is time critical, and clients are much more responsive’, according to Needleman. ‘In-house lawyers need to be more prepared, and they cannot just stop the clock until the terms are agreed. Both seller and buyer will want to ensure that any deal follows through to completion swiftly. In a difficult market, transactions tend to go in different directions and in-house lawyers need to know where this is going. This requires an open dialogue.’
Terminated or otherwise-adjourned transactions will come back to life and in-house lawyers must be prepared to see these through to completion. As highlighted by Rajbenbach: ‘Deals initially put on hold should eventually bounce back and naturally, all parties will want to move quickly, particularly those that are price sensitive’. Consideration of costs will also come into play here, says Edwarde: ‘Cost control will be the number one theme for all organisations, as we face economic challenges and global turmoil, which is set to continue into 2023. Corporates will need to be thinking about costs and an in-house lawyer will be a critical role in this strategy’.
The real estate sector will continue to experience a sea change on account of the economic, social and geopolitical disruptions globally, and ongoing challenges will test the resilience of the in-house community. ‘This is undoubtedly a difficult time for in-house counsel’, says Edwarde, ‘but they are working closely with their company’s chief executives and the boards to redefine strategies and tackle the current and fast-approaching headwinds’. Both preparation and cost control are paramount, and those who adopt a holistic approach and engage with ongoing developments in the real estate market, will do well.
From workplace flexibility and the rising tide of ESG regulations, to uncertainty surrounding property evaluations and revived transactions, it is important for the in-house community to regroup, in order to navigate these developments responsibly and successfully. ‘In-house lawyers will play a vital role in restoring relationships within internal teams in the office. This includes rebuilding confidence and refocusing on strategy to face the multitude of obstacles head on’, concludes Edwarde.