The commercial property sector in England is in the midst of a seismic shift propelled by the introduction of stringent minimum energy efficiency standards (MEES) in April. It is no doubt that the industry is grappling with the implications of these regulations, which now prohibit the trading or leasing of commercial buildings that fall below a minimum Energy Performance Certificate (EPC) rating of E.
Here, I take a look at the regions across England that will be impacted most, and what the new EPC legislation means for the commercial real estate (CRE) market, according to EG data.
Tightening regulations
As of April 2023, commercial buildings that do not meet the minimum EPC rating of E or above are now prohibited from being traded or leased, placing an estimated £1.4bn of annual rent at risk this year.
Looking ahead, the regulatory landscape is set to become even more demanding. By 2027, the minimum EPC rating is set to rise to C, and by 2030, it will further increase to B. These forthcoming changes elevate the potential risk to regional rent to staggering figures of £3bn and £4.8bn, respectively.
As a result, commercial property owners should look to improve their buildings’ EPC rating within the next four years. Predictably, properties with lower EPC ratings will likely encounter challenges in attracting prospective tenants, who may opt for more energy-efficient spaces.
Failure to prioritise energy efficiency improvements may not only lead to substantial financial losses for property owners, but also contribute to reduced liquidity in the market.
Regions at risk
Delving into EG’s data, we can identify the regions across England that will bear the brunt of these regulatory changes.
London, the bustling heart of the CRE market, is expected to face the greatest impact. An astonishing 24.1 million sq. ft of commercial space in the capital already fails to meet the new EPC standards, placing the equivalent of 20 Shard buildings at risk.
However, London is not alone in this predicament. The North West and South East regions are also poised to confront significant challenges as the effects of the legislation ripple through the market.
Looking at the nation as a whole, EG data indicates that approximately 95.6 million sq. ft of commercial space, equivalent to a staggering 80 Shard buildings, may become unrentable across England, unless commercial property owners take immediate action.
Surge in rental premiums
The new EPC standards not only pose an immediate risk to rental income, but also signal a wave of transformative changes in the commercial property sector.
As billions of pounds’ worth of rent at stake and an increasing number of assets at risk of being left stranded, we can expect to see a surge in rental premiums for energy-efficient buildings boasting a rating of C and above as tenants prioritise sustainability and cost-effectiveness.
The shift towards energy efficiency will also fuel intensified competition among properties that meet compliance standards, thereby shaping a fiercely competitive market environment.
Adapting to compliance
This regulation demands immediate attention from commercial real estate owners to take proactive measures, as it has become paramount for owners to prioritise improving their building’s energy efficiency rating to align with the evolving EPC standards.
By addressing the new EPC requirements promptly, owners can safeguard their investments, ensure long-term compliance with energy efficiency demands, and position themselves advantageously within the competitive marketplace.
Failure to do so could result in significant financial risks and missed opportunities in the evolving commercial property landscape.
