The commercial real estate sector faces mounting pressures to meet sustainability standards and needs a “retrofit revolution”, says global real estate adviser Knight Frank.
There is an urgent need for widespread retrofitting to address the growing risk of obsolescence in commercial properties, the firm says in a report called ‘Meeting the Commercial Property Retrofit Challenge’.
Flora Harley, Knight Frank’s head of ESG research, said obsolescence is accelerating, driven by increasingly stringent regulatory, financial, and functional risks associated with sustainability.
“Our industry requires a retrofit revolution, and our research shows that the pace must accelerate and quickly,” Harley said.
The report reveals that 70% of commercial property floor space in the UK is rated EPC C or below, putting it at risk of being unlettable if proposed minimum standards are implemented. This underscores the critical need for property owners and investors to develop comprehensive decarbonisation strategies to future-proof their assets.
A central focus of the report is the challenge posed by collateralised loan obligations (CLOs), which are financial products that pool together loans, often high-risk, and repackage them into securities sold to investors. As sustainability regulations tighten, properties backing these financial instruments are increasingly at risk of obsolescence, particularly if they fail to meet energy performance standards.
Knight Frank’s research illustrates the scale of the challenge: although the total commercial floorspace rated EPC B or higher has grown by 8% annually since 2019, this rate would need to more than double to meet the proposed 2030 deadline for sustainability compliance. The imbalance between demand and supply is stark—especially in cities like Leeds, where 65% of leased office space is rated EPC A or B, but only a third of the total stock meets this level.
Harley noted that the risks are complex and interlinked, significantly reshaping investor and developer strategies. “Obsolescence is nothing new but is accelerating due to sustainability factors,” she said. “Progress in improving energy efficiency has been slow, and the inadequacies of the current EPC system for rating performance don’t help.”
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The report also highlights a growing gap between predicted and actual energy usage in buildings, further complicating the retrofit challenge. Knight Frank’s analysis of over 1,000 Display Energy Certificates (DECs) found that operational energy performance often fell short of EPC projections. This discrepancy underscores the importance of using more accurate data, such as NABERS and In-Use certifications, to inform retrofitting strategies.
As part of its “retrofit revolution,” Knight Frank urges property owners and investors to prioritise creating amenity-rich, sustainable spaces that meet the changing needs of occupiers. By doing so, they can ensure their properties remain desirable and help occupiers achieve key objectives like talent retention and meeting ESG requirements.
The next installments of the series will delve deeper into the viability of retrofitting strategies, exploring the balance between costs and benefits and other available options. As Harley concluded, “This series outlines key considerations and questions for asset owners, setting out market evidence of the clear regulatory and sustainability imperatives for taking action and getting ahead.”
