[+] CBD Offices Play Catch-Up as Retrofitting Gains Traction

There used to be more workers in Melbourne’s CBD, a lot more. Much of what is built in a city is predicated on what people use the city for and for many years, that’s been simple: work. But with the housing crisis, finding a home close to work and avoiding a long commute is becoming near impossible, so if they can, many are opting to work from home, leaving companies stuck with under-utilised offices. In Melbourne’s CBD there are more than 1500 mid-tier commercial buildings, that is, buildings below premium or A-grade quality. Thanks in part to high vacancy rates, companies are leasing premium quality space, in the hope this will provide some incentive for employees to return to the office. According to the City of Melbourne’s recent Retrofit Plan, “after Covid-19, the central city is experiencing a permanent shift to a more remote workforce which has increased vacancy rates, especially in lower-grade commercial buildings”. That plan has come about because the City of Melbourne is concerned about bringing workers back, improving office vacancy rates—and reducing emissions. CBD office buildings account for 60 per cent of Melbourne’s emissions, so retrofitting those buildings to zero carbon emissions is not only good for the planet, it is more enticing for tenants. Current state of play The retrofitting plan is not new—last year it was proposed as part of the Zero Carbon Buildings for Melbourne discussion paper. Consultation with 70 experts and more than 1000 people through workshops and events was held before the policy was approved by the City of Melbourne Future Melbourne Committee last month. The city wants to be zero carbon ready by 2040 but to do so it will need to retrofit more than 80 buildings a year. Currently just seven buildings are retrofitted annually. “You hear some of the stats: 80 per cent of the buildings currently in our CBDs today will stll be here in 2050,” Built development director Jono Cottee, speaking at a recent FuturePlaces Retrofit and Repurpose Summit, said. “We need to retrofit a significant amount of them, so about 3 to 5 per cent of those buildings every year, to meet those commitments we have made to ourselves and to the environment.” ▲ New York’s Empire State Building is one of the most energy-efficient buildings in the world, having undergone a retrofitting process. Part of the plan involves the City of Melbourne advocating to state and national governments for a retrofit fund and to implement a periodic energy-use disclosure. For developers it includes much needed information and support—the city has proposed such measures as a zero-carbon buildings portal, advisory groups based on working groups in New York, teams, thought leadership and other events. Such measures are also on the table including zero-carbon precincts, a risk tool and regulations, including rate incentives, penalties and an emissions cap. Retrofitting itself is just one part of achieving zero carbon for a building, and includes replacing equipment and making upgrades to lower energy use and its embodied carbon. How to retrofit But for building owners and investor it can be tricky to work out exactly how this should be done—each asset can come with its own share of concerns. And while some are retrofitting buildings to continue their use as offices, others are considering retrofitting to convert the building to a new use. It’s why the City of Melbourne wants the University of Melbourne to create a risk tool for developers and investors along the lines of the European Union’s free online Carbon Risk Real Estate Monitor. Cushman and Wakefield recently released a how-to guide to retrofitting properties. “There are some really challenging conversations that investors are going through to reach their net zero goals,” Cushman and Wakefield sustainability head Matthew Clifford says. “For groups with a 2030 target, they’ve started to realise that it’s honestly not that far away. “It’s really only one investment cycle. “So, do they need to double or triple their efforts to make up for years of slow progress, or do they sell underperforming assets now, and reconfigure their portfolio with net-zero assets as the target deadlines approach?” ▲ Cushman and Wakefield’s sustainability head Matthew Clifford says investors need assistance about how to retrofit assets. Clifford says part of the problem is that while investors might value sustainability, working out how to reach that goal is neither easy nor straight forward. “Sustainability can be incredibly complex,” Clifford says. “This puts people off because they don’t understand the detail and it makes them feel stupid. “We want to give people motivation to get started, not reason to look away.” Forza Capital co-founder Adam Murchie, also speaking at the Retrofit 2023 summit, said not everything needed to happen at once with retrofitting when trying to de-risk a portfolio. “Particularly now with the element of embodied carbon, there can be a bit of throwing the baby out with the bathwater in the sense that you have assets that are still completely functional and have lifecycle or utility but they may not be as efficient as the alternative,” Murchie says. “We are looking at it in terms of which elements are at the end of their economic life or where are the opportunities to replace equipment or make upgrades that do fundamentally shift the dial when it comes to the investment outcomes of an asset.” Part of the Retrofit Plan will pick up on this, with the City of Melbourne putting together teams to help advise developers and investors on long-term decarbonisation plans. A national trend Naturally, other Australian states are also keen to be part of the push towards zero carbon. At local and state government levels there has been movement in New South Wales on sustainability in development. While NSW premier Chris Minns ruled out a statewide gas ban in new buildings, the City of Sydney council voted to adopt one within the municipality. Though this will mostly affect residential buildings, it is hoped that the attraction to market of fully electrified buildings will push investors to upgrade older assets. Victoria has opted to go gas free from next year. ▲ Each year, more than 80 buildings will need to be retrofitted if the City of Melbourne is going to meet its 2040 zero carbon target. Meanwhile, the NSW government has announced new regulations that require monitoring of the embodied carbon in new buildings. More tools, regulations and incentives need to be in place to make retrofitting viable as despite a market where the highest quality assets are being bought and sold, investors still need information and the finances to do the work. Clifford says it isn’t that investors don’t value the environment, rather, they need assistance. “Investors know that sustainability is important,” Clifford says. “They also want to maximise their returns. “I guess at its simplest, it’s about being returns-driven—it’s about linking sustainability to the value of the asset because, at the end of the day, that’s what real estate investment is all about.”

[+] CBD Offices Play Catch-Up as Retrofitting Gains Traction

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