Ignoring Sustainability Will Cost Office Sector

Developers, asset owners and occupiers in Australia’s office markets have been warned if they resist the push towards carbon neutrality and built-form sustainability they do so at their own peril.

Carbon emissions are expected to become an increasingly important metric over coming years as climate target dates approach.

And according to a new report, “companies that resist change risk becoming the tobacco companies of the 1980s and coal miners of the 2000s“.

JLL’s Accelerating Built-Form Sustainability report indicates that Australia’s property sector, as a whole, has been “slow to adjust” to the rising sustainability consciousness. 

Data from its monitored office markets shows that only 12 per cent of the more than 4100 assets (greater than 1000 sq m) have a NABERS rating of 5 stars or better. The higher the rating, the lower the carbon emissions. 

Of the recently completed or under-construction stock targeting a 5 stars rating, 73 per cent was pre-committed—suggesting this may already be a minimum occupier requirement. 

“The next three to five years are likely to present as a major opportunity to kick start the shift to built-form sustainability in Australia,” JLL’s strategic research senior director Annabel McFarlane said. 

“Vacancy remains elevated in most office markets, incentives are high and tenants have choice. 

“As markets recover from pandemic impacts, upgrades to office space will necessarily include sustainability projects to improve environmental credentials of buildings. 

“While most institutional investors are acting to address sustainability across their portfolios, owners of lower credentialed, higher-emission assets are the most exposed to downside risk as occupiers and funding partners increasingly ask for sustainability reporting.” 

JLL’s research indicates Australia’s major cities are at differing stages on the sustainability journey, led by Sydney with the highest volume office stock rated 5.5 stars or better (2.3 millionsq m), followed by Melbourne (1 millionsq m) and Brisbane (690,000sq m). 

“Early indicators suggest that the occupier flight to quality theme will accelerate post pandemic,” the report said.

“Sustainability consciousness is coinciding with a re-assessment of workplace fit-outs as occupiers embrace hybrid working practices post pandemic.” 

It predicts the two accelerating trends will likely stimulate relocation activity rather than lease renewal at expiry.  

In a sign of the sustainability shift, Deloitte and MinterEllison this week announced they had agreed terms to occupy a total of 19,300sq m to anchor the first of two office towers in Dexus’s $2.1-billion Waterfront Brisbane project. 

“The capital value and rental spread between higher credentialed assets and low or non-graded assets is likely to widen,” JLL’s report said.

“Highly-rated assets will benefit with less vacancy and more stabilised income.” 

The report said the most significant challenge for owners to improve sustainability initiatives was the cost to upgrade, which is not necessarily compensated for by increasing rents. 

Its guideline estimates to upgrade an asset to a 3 stars rating could cost up to $100 per sq m, from 3 stars to 4.5 stars up to $125 per sq m and from 4.5 stars to 5.5 stars a further $70 per square metre. 

“A higher market rent is not a clear driver to upgrade, in most markets, and higher rated assets are usually newer and have other additional features that warrant higher rents—wellness features, flexible spaces, new technology and end of trip facilities modelled on luxury hotel-style amenity,” McFarlane said. 

“Therefore, expenditure on environmental building features by themselves will rarely result in an equivalent rate per square metre rental increase, though there are benefits in utility outgoing costs (saving $9-$10 per sq m per full star).”