New office buildings featuring sustainable design and higher quality amenities are being preferred by tenants over older buildings with lesser sustainability credentials, according to JLL Global Research, the research wing of the world-leading real estate and investment management firm, JLL.

JLL’s survey of senior executives representing both occupiers and investors, provides a clear picture of how organisations across the globe are progressing in their journey toward net zero carbon by investing in more responsible real estate.

Of the 405 occupiers surveyed for JLL’s Decarbonising the Built Environment report, 39% had adopted a Science-Based Target, which is the gold standard for corporates making a net zero commitment. An additional 30% are expected to adopt a Science-Based Target by 2025, bringing the total figure to 69% by 2025.

New buildings Vs older stock

While newer buildings have always commanded a higher premium compared to older stock, the gap is widening at a faster pace with companies consciously seeking sustainably designed buildings combined with better amenities to meet their carbon net-zero goals as well as the demands of their employees.

While the global office vacancy rate increased 20 basis points to 14.5% in the third quarter of 2022, high-quality space is showing the greatest resilience, according to JLL.

Occupancy of new offices in the US has remained steady for over a year (peaking at 16.6% vacancy in Q4 2021). However, for older buildings, the pre-COVID vacancy of 13.5% has risen to 19% in Q3 2022.

In Hong Kong, there is positive net absorption of 282,000sqm for offices built in 2010 and later, compared to negative net absorption of 47,000sqm for offices built between 2000 and 2010.

Similarly, in Australia, prime grade office space is finding higher leasing preference with net absorption of 245,600sqm across the country’s CBDs over the year to September 2022. For secondary grade office stock, comprising older buildings with smaller floorplates or those that have had little capital expenditure spent on them over the years, absorption was negative 119,800sqm over the same period.

“More companies are releasing carbon neutral or carbon reduction statements, and one of the ways they are meeting their objectives is by moving into office buildings that have high sustainability credentials,” says Paul Chapko, research director at JLL.

Sherrie Jones, workplace strategy lead at JLL, comments: “This year, most of our clients have upgraded from leases in buildings with lower sustainability credentials, to buildings with the best credentials, better entry experiences, end-of-trip and wellbeing facilities, third space and placemaking activations. They’ve also made significant investments in achieving the highest possible Green Star certification rating for their new office fit-outs.”

Retrofitting buildings to meet carbon reduction targets

“We cannot simply ‘build our way out’ of the issues we face,” notes the JLL report. Given the implications of embodied carbon in new construction, combined with the inability of the current supply of net zero buildings to meet the projected demand, retrofitting of existing stock remains the dominant, critical solution to transitioning to a low-carbon economy.

However, cost is one of the biggest stumbling blocks to retrofitting, particularly for buildings where the investment required to bring them into compliance outweighs their value. In the northern hemisphere, the rate of retrofitting existing buildings to meet minimum decarbonisation targets needs to triple from barely 1% today to at least 3%, for which an estimated US$3 trillion is required, according to JLL.

Sustainability as a value driver

Building owners need to move beyond operating costs to assess the impact on a building’s overall value, says Greg Bolino, head of global sustainability strategy and assets, JLL.

“Take a building that today is worth $100 million and requires a $15 million upgrade. That may never pencil out on an operating-cost break-even basis. But as tenant demand for low-carbon buildings accelerates, there’s a risk that the building’s value falls because it’s unable to meet the tenants’ low-carbon targets, which in turn affects the number of potential future buyers. On the other hand, low-carbon space can earn a substantial premium from retrofit investments.”

Guy Grainger, JLL’s global head of sustainability services and ESG, observes, “Repurposing the built environment in sustainable and responsible ways requires a mindset shift. In equal measure, it requires a shift in the criteria for assessing return on invested capital to include environmental and social impact. If organisations do not recognise this, then their other stakeholders will – their investors, their customers and their employees. Therein lies the risk of not adapting to the climate risk that exists right now.”

Image credit: JLL

Branko Miletic

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