Guy Grainger at JLL, writing for WEF, believes 2024 will be the tipping point when returns for investing in sustainable office buildings will start to pay dividends for building owners. That’s because, according to JLL research, there is now a good premium on rents for sustainable buildings in important locations: just over 7% across eight cities in North America, around 10% across nine cities in the Asia Pacific and more than 11% in London. In other words, many office tenants are prepared to pay the extra. That’s despite a slowing down in the commercial real estate sector. What is more, the JLL research also shows supply is struggling to keep pace. Across 20 major global office markets, only 34% of future demand for low carbon workspaces will be met in the coming years. New York City has 65% unmet demand, with 54% in Paris and 84% in Sydney. So building owners must start working on the business case for investment, says Grainger. Premium rents or not, they are facing growing transition risks which includes tightening policy and regulation, evolving market expectations and wider societal pressure.
- Major companies have made commitments to operate more sustainably and now must show proof of progress.
- This will increase demand for sustainable buildings and drive leasing decisions, underpinning higher green premiums on rents for buildings.
- Mounting costs from climate risks, including heatwaves, flooding, storms and droughts, are increasingly impacting urban areas.
In today’s tough economic environment, securing the internal agreement and investment needed to make existing buildings more sustainable can be a difficult task. Investment in real estate is down. The office sector in particular is experiencing dynamic shifts in demand with the impact of hybrid work on lease renewals.
These are not good enough reasons for inaction when it comes to decarbonising buildings.
Climate risk and transition risk
Building owners are facing the rising costs of climate risk but also growing transition risk, including tightening policy and regulation, evolving market expectations and wider societal pressure. This has big potential implications for the value of their assets and the income they generate.
Paying the premium
Amid growing pressure to lease spaces that both support corporates’ low carbon goals and meet employees’ rising expectations, companies are opting for “green certified” office spaces – such as the LEED rating system or BREEAM – and are often paying a premium to lease them. These premiums vary between cities but our research shows an average premium of just over 7% across eight cities in North America, around 10% across nine cities in Asia Pacific and more than 11% in London.
Times are changing, however. Green certifications are becoming less of a differentiator and more of a requirement. As momentum for more transparency and accountability around sustainability grows, tenants will increasingly seek environmental performance indicators, such as energy use intensity, electrification and clean energy, on top of green credentials. We’re already seeing this happen in advanced European markets like London and Paris, where low-carbon prime office spaces are reaching historic rental highs this year, even as the commercial real estate sector slows down overall.
Supply is struggling to keep pace
So, corporate demand for sustainable office buildings is growing, but our latest research shows supply is struggling to keep pace. Across 20 major global office markets, only 34% of projected future demand for low carbon workspaces will be met in the next several years. In other words, for every 3 square meters of demand, only 1 square meter is in the development pipeline right now. There are significant differences between cities – New York City has 65% unmet demand, compared with 54% in Paris and 84% in Sydney.
Across all cities, the undersupply of low-carbon space presents opportunities for building owners who take action sooner rather than later. Returns on investment in sustainable office buildings include attracting high-quality tenants and achieving higher occupancy levels, rental uplifts and greater rental yields, as well as lower compliance costs and reduced operational costs.
Sustainable buildings regulations
The market for sustainable buildings is moving much faster than regulators due to growing tenant demand for spaces that reflect and support their sustainability goals. But regulation is increasing, and it’s becoming much tougher – both directly through building performance standards, and indirectly through corporate disclosure mandates.
The Buildings Breakthrough announced at COP28 in December 2023 – which aims to make low emission, climate-resilient buildings the new norm by 2030 – will add to this momentum. So far, it has the support of 27 countries, the EU commission and 18 international initiatives. In the coming years, companies making little to no progress on tackling their carbon footprints including across their real estate portfolios will have nowhere to hide.
Companies, especially those with operations across multiple cities, need to stay informed of incoming and evolving policies to avoid financial penalties and reputational damage. Given the extended timescales involved in decarbonising operations and retrofitting buildings, taking action soon, rather than waiting for new regulations to be announced, will help these businesses stay competitive and compliant.
The mounting costs of climate risk
Cities – and the buildings within them – aren’t immune from the growing impact of climate change. It’s costing business and municipalities money at a time when everyone is under financial pressure. Climate-fuelled extreme weather events have cost the US $612 billion in the last five years, for example, according to the NOAA’s National Centers for Environmental Information.
However, for some companies, climate risk remains a blind spot. While JLL’s Decarbonising the Built Environment research in 2021 found that 78% of investors and 83% of occupiers identify climate risk as a financial risk, a 2023 PwC Pulse Survey found only 23% of executives are contingency planning for disruptions in the next 12 to 18 months.
Making the business case
Part of building a strong business case for investing in sustainable buildings will involve understanding the risks of disruption to business operations and potential damage to buildings.
Climate modelling and scenario analysis tools are becoming more sophisticated, helping more companies understand their risks and develop a plan of action. These short-term resilience measures should be integrated into broader decarbonisation plans, which are key to reducing longer-term risk.
By implementing the right measures in the right way and at the right time, owners of sustainable buildings can minimise the impact of physical and transition risks on their properties. Corporates can also reduce the disruption to their spaces and business operations, while ensuring their corporate goals are achievable.
Most importantly for both owners and occupiers, we believe 2024 will be the tipping point when the value creation and returns for these investments in sustainable office buildings will start to pay dividends.
Guy Grainger is Global Head of Sustainability Services and ESG at JLL
This article is republished in accordance with the Creative Commons Attribution-Non Commercial-No Derivatives 4.0 International Public License