Research article

Offices most shielded from energy shocks

Office occupiers are considered most resilient to the impact of the energy crisis

In the office market, utility costs reflect a relatively small share of the total business costs. A study by the British Council for Offices (BCO) found that energy and water reflect roughly 2% of the total costs for occupiers, while employment reflects, unsurprisingly, more than 50% of the total costs.

The BCO research was conducted prior to the pandemic and the Ukraine/Russia war and, therefore, may not incorporate the new remote working trend and the effects of the energy crisis. Although energy prices soared since the invasion, the breakdown of the costs show that utility costs only account for a small share, and in extreme scenarios with doubling or tripling energy costs, the share of energy costs in total costs would still ‘just’ reflect 4–6%.

This assumption is only true if all other costs would have remained the same for office occupiers, which is not the case. All costs have increased, mainly fuelled by the record inflation rates we witnessed in the last year(s). Especially the higher employment costs, to keep both the existing labour pool and attract new labour, impacts office occupiers as this is the biggest cost factor in the total costs. Taking this into account, it is reasonable to assume that, on average, the utility costs for offices account for approximately 2–4% of the total costs, with the 4% reflecting an extreme scenario of doubling energy costs.

The 2–4% share of energy costs of the total costs reflects an average across all types of office occupiers. However, the energy costs differ per office occupier type. As one can imagine, for large energy-consuming occupiers with high(er) energy requirements, such as high-tech, game developing, or TMT occupiers, their energy costs will reflect a large share of the total cost and are, therefore, more susceptible to higher energy prices than lower-energy-consuming occupiers.

Finally, occupiers from all commercial real estate sectors will look to pass higher energy costs on to their customers. Office occupiers are, compared to other sectors, less likely to do so as it is harder to legitimise higher prices due to rising energy bills since this is less visible in their end product (e.g. consultancy and other professional services). This does make the office sector relatively less resilient to energy price increases. Nevertheless, the energy costs only reflect a small share of the total costs for office occupiers and are therefore less exposed by the impact of the energy crisis.

Read the articles within Spotlight: The impact of the energy crisis on commercial real estate in Europe below.

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