Empty edifices: Bristol's corporate benefit cheats

bristol | the environment | opinion/analysis Thursday April 13, 2006 18:24 by Tony Gosling - The Land Is Ours

The economics and politics of Bristol's empty offices

Can the city of Bristol afford not to provide cheap startup space for small businesses? Why is it that so many offices in the city stand empty? How can landowners afford to leave their offices empty? Tony Gosling investigates.

Fixed Assets

[ this article first appeared in March 2006 in the winter/spring edition of 'The Land' magazine ]

Tony Gosling looks at the scams which ensure office rents stay high - while hundreds of acres of Bristol's office space remain empty.

Why should a coal miner dig extra coal for a few pounds more while he has seen property speculators grow wealthy looking at empty office blocks? - Labour Party Manifesto 1974.

Several years ago the Bristol Evening Post led with a story about the shocking and dangerous lack of office space in the city. Ironically, opposite the Post's headquarters on Temple Way stands Castlemead, a
seven-storey office block, almost empty ever since being built five years before.

The rationale behind the Post's headline about the lack of office space became clear the day after it appeared. A planning application was being considered for a massive new office development which planning officers had recommended be refused. The article had no doubt been gullibly copied out from an industry press release.

Currently new offices are rearing their heads up all over the city centre Bristol bristles with 200 foot cranes. But at the same time hundreds of thousands of square feet of office block are left vacant. These doom-laden edifices evoke a peculiar sense of outrage every time they darken our horizons. How can any landlord afford to leave an entire office
block empty? Doesn't it cost a fortune to protect these buildings? How many small businesses could be using the space at low rent? And how many disillusioned city-dwellers would that allow back into creative employment?

Moreover what is this 'free market' in which so many office owners can't be bothered to rent out their acres of desolate floor space? Even at a low rent it surely has to be more cost-effective than padlocking the doors,
shuttering the ground floor windows and sealing the place up. At least that's what you would have thought. I decided the matter was worth looking into further.

Tale of Two Surveys

Bristol City Council couldn't tell me how many empty offices there were in the City. 'I have no figure to this effect - and no idea of where it might be possible to find it' their Head of Corporate Communications told me. I
eventually discovered that the Office of the Deputy Prime Minister publishes a national survey of empty office space known as 'Commercial and Industry Property Vacancy Statistics' on the web. These are calculated from business rate relief returns. Unfortunately the statistics they contain are
contradictory to the point of absurdity.
Going through the ODPM's spreadsheets I found some glaring inconsistencies.
Between 1999 and 2004 there has apparently been no official change in the amount of empty offices in Bristol. The figure remains at 11% each year despite the opening of the extensive Temple Quay office zone in 2002-2003 which emptied two other city centre tower blocks, one belonging to the
Bristol & West Building Society, and the other Tollgate House, former home of the Government Office of the South West and the Planning Inspectorate .

Meanwhile a map produced as part of the ODPM report clearly colour-codes
Bristol as 'over 15% offices' vacant which doesn't tally with their own previous figure. The national map also marks Bristol out as having a 5 to 20% empty office increase while their spreadsheet gives a 1% decrease!
These statistics were useless, so I decided to do my own survey. In October 2005 I walked around the Redcliffe and Temple area of Bristol counting all the office blocks of over 8 storeys and, of those which were in use, I made a guesstimate of what proportion of it was rented out. Signs in the lobby often give a good idea of how many floors are actually occupied. A few buildings were overgrown and in bad repair, some even had boarded up
windows but the majority were ready to be used, if a little shabby.

My quick survey gave a ball-park figure of 45-50% of offices vacant in 22 separate buildings, suggesting considerable massaging of the figures. Now granted, my survey was close to the centre of the city's commercial district but could their figures really be so far off by accident? It did,
and does, appear to me that something strange is going on that demands an
explanation.

'Competition is sin'

"Competition is sin" is a phrase the banker David Rockefeller allegedly
comes up with from time to time. It appears to be a throwaway comment,
designed to shock by contradicting everything free market capitalism is
supposed to stand for. But it accurately reflects the ethos which ensures
that office owners collaborate to maintain as high a rent as possible, even
when there is an excess of supply.

But the government have set regulators up to make sure this sort of thing
doesn't happen, haven't they? Indeed they have, but the Office of Fair
Trading and the Monopolies and Mergers commission, just like OFCOM and
other gummy mouthed watchdogs, have been paralysed by the very cartels
they were set up to restrain. The entire economy relies on the buoyancy of
the property market, so no government can afford to be too pedantic about
its interpretation of the term "free market."

In a fixed market it is crucial that no office landlord with vacant space
undercuts the tacitly agreed overpriced rents, so landlords have to be
persuaded to comply. Gangster tactics and protection rackets are unsavoury,
but there is nothing wrong with a little sweetener. This comes, from the
government in the form of partial or total relief from Business Rates, the
business equivalent of council tax, for all empty offices.

For a time I was under the impression that it was 100 per cent relief, because that's what a Bristol City Council official informed me. On
investigation I established that the statutory level is 100 per cent for the first 3 months, then 50 per cent thereafter - but that the local
authority have the discretion to grant 100 per cent relief on any building, if they wish. So (given what my informant told me) are any of the empty office blocks in Bristol subject to indefinite 100 per cent relief? I
contacted the City Council to find out.

I got a reply from Simon Caplan, Head of Corporate Communications. He
doesn't know. He did tell me that empty buildings in Bristol are exempted
from business rate tax relief to the tune of £12 million per year. This is
nearly 7.5 per cent of the total Business Rates bill (including exempted
properties) of £164 million. But Caplan could not provide any breakdown of
how many empty commercial properties in Bristol benefited from 100 per cent
relief, and how many from 50 per cent relief. All one can deduce from his
figures is that somewhere between 7.5 and 15 per cent of all commercial
properties are empty at any one time.
Incidentally, while empty property relief was £12 million, rate relief
granted for reasons of hardship was just £12,000 - a thousandth as much. A
tenant whose business is in difficulty is unlikely to get relief; but once
he's gone bankrupt and vacated the premises, the property owner who has
been extracting the inflated rent gets a free ride.

Accounting Tricks and Planning Ploys

But rate relief is not sufficient on its own to explain why leaving offices
empty is profitable. Another reason is that rent, as a source of income, is
secondary; the prime role of the office block is as a fixed asset on the
annual company balance sheet. Offsetting the office block on the annual
return are the liabilities, such as bank loans. All too often the value of
the building underwriting these loans is the only thing keeping the
business afloat. And yes, even if the building's been empty for twenty
years it's still valued as if it were being fully rented out at the
artificially high rent,
If rents in the block were to go down with market forces (perish the
thought), the building would take on a more realistic, lower value which
could tip the scales on the balance sheet. Those bank loans might suddenly
become unsecured and the entire business find itself over-extended.
A third reason why many office blocks remain empty is that the owners are
hanging out for permission to convert to more lucrative residential use.
According to a researcher at the Adam Smith Institute:

For a developer to gain permission for office space to be converted to
residential use, he must demonstrate to the planning officer's satisfaction
that the space has been actively marketed to potential tenants without
success for two years. So if a developer is determined to convert the
building, he must market it at a price and perhaps with restrictions above
what the market will bear.'
This is the same ploy as is used by owners of tied agricultural dwellings,
who market their holdings at unobtainable prices to demonstrate that there
is 'no demand' and get the condition removed.

Corporate benefit cheats

So how about if we stopped all business rate relief for empty buildings -
even jacked it up after an extended period? After all, an empty building is
not poor, sick or disabled and its owner is not likely to be in dire need
of public support. Yes, let it be the responsibility of every office owner
to keep his block occupied. This would encourage landlords to give long
term leases and give stability to the businesses they host. If he can't
fill his building he can either lower the rent or sell it. No state handouts.
This would lead to a national revaluation downward, which would give
smaller businesses access to affordable office space. But the shakedown
might be more radical than this. The empty office accounting trick has
gone so far that a sudden return to a free market in office space would
mean a day of reckoning for many of the businesses that have been entering
artificially inflated figures all these years.
But then, on reflection, it wouldn't because the Bristol Evening Post would
come to the rescue with another headline "Too Many Office Blocks Blight
City Centre". And Regional Government, from their new offices in Temple
Quay, would respond by introducing planning policies that made it easier to
convert unwanted offices into luxury apartment blocks - which is what some
landowners have been hoping for all along.