The importance of building flexibility into buildings

An occupier is temporary. A building isn’t. We’ve seen this play out time and again. A unit can have two or three completely different occupiers in the space of a decade or two. A building ends up serving a neighbourhood in a way nobody designed it for. And over time, the neighbourhood may change too. In a mixed-use property, this is the key to keeping an asset relevant and income-producing.

Retail concepts evolve. Hospitality trends change. Business models succeed, and more often than people admit, they don’t. Over the lifetime of a building, the commercial space will be occupied by a succession of different businesses, each one suited to its moment, but not necessarily the next one. None of them are permanent, regardless of how well they are trading today. However, the building has to be.

This doesn’t show up in how a deal gets underwritten today – that’s based on the income a lease delivers now, which is contractual and known. Where it shows up is in the yield. A buyer isn’t only pricing the income that’s contracted – they’re pricing what happens at lease expiry, break or assignment. A building that can only work for one type of occupier carries a higher risk of void, costly reconfiguration, or a reduction in rent if that occupier doesn’t renew. A building that can handle a change of use without major capex carries less risk, and investors price that difference. Lower perceived obsolescence risk supports a lower yield, which means a higher price for the same income today.

It also shows up in the reversionary assumption: what happens when the lease ends. In any valuation, you’re not just capitalising today’s rent; you’re assuming what it’s worth, or earns, once the lease ends. Building flexibility is what makes that call credible. If you can’t say with any confidence what the building does after this tenant, the figure becomes guesswork, and buyers discount for that uncertainty.

At one of our buildings on Tottenham Court Road, a former language school – once a printing press – is now a gym. Nobody designed that space with a gym in mind. What mattered was that the building could accommodate the change: floor loadings, servicing and access, without much trouble. This doesn’t show up in a brochure, but it’s the judgement call that decides whether an asset ages well or becomes a headache.

As long-term family office investors, whenever we have a vacant unit, we try to build that capacity in. In our Camberwell property, we converted loading bays too small for today’s vehicles into dwellings – space with little commercial value, now contributing to the asset. On many developments, we’ll ask the structural engineer to over-engineer from day one, so the building can take extra floors later, if planning moves that way. It’s relatively cheap to upsize the beams and foundations if you’re already doing the groundworks. We do this because we’re not underwriting for five years – we’re underwriting for the life of an asset.

Planning ahead isn’t rocket science. It can mean floor-to-ceiling heights generous enough to flex between uses, or vestibules large enough for a new doorway. A structure that can take more than what’s asked of it on day one. It’s unglamorous and rarely gets a line in the investment memo, but it’s usually the difference between an asset that evolves gracefully and one that needs an expensive rethink the moment the occupier’s business model stops working.

The industry spends a lot of time on covenant strength and initial yield. A covenant tells you about the next five to 10 years. The building’s ability to adapt tells you about the next 30. For long-term investors – and mixed-use is a long-term game – this deserves as much scrutiny as the short-term metrics. It’s harder to underwrite. It doesn’t sit neatly in the rent roll, but it’s usually what separates an investment that ages well from one that needs reworking at considerable cost the moment the market turns.

Buildings outlast the businesses that occupy them. The job is making sure they’re built, and kept, ready for whatever comes through the door next.