ISPT’s 50 Lonsdale Street Victoria
Photo: 50 Lonsdale Street, the first 5.5 star NABERS energy rating in Victoria. Photo: ISPT

There’s more evidence that good environmental practices are good for the bottom line. A new report from CBRE says investors and consumers are chasing good environmental, social and corporate governance (ESG) practices and financial performance is a driver. And late last year a report from JLL warned that some buildings risked becoming the tobacco companies of the 1980s and coal miners of the 2000s if they didn’t rise to the challenge.

The report Pacific Real Estate Market Outlook 2022 Australia and New Zealand, emphasises the need for focus on sustainability standards in office buildings to put the “E” back into ESG.

Occupiers favour real estate that aligns with ESG values, including those that are NABERS, GreenStar, GRESB and WELL certified, the report says. 

Buildings with a NABERS energy rating of 5+ stars generally exhibit higher occupancy, and with more demand comes higher net face rents and sharper indicative yields as a result of competition. 

“Finance is increasingly driving ESG – it’s what investors and consumers are chasing,” Su-Fern Tan CBRE Pacific senior director and head of ESG said in a media statement. 

“The link between ESG and financial performance is a virtuous cycle. The public also realises how ESG affects long term sustainable performance. For example, climate change affects the price of insurance premiums, building resiliency and building operations.”

Sustainability metrics are expected to become increasingly important as net zero target dates approach. 

“Consumers love strong ESG; they want to be associated with it – especially Millennials. They see that companies that treat people well, treat the planet well, and have good practices in place, tend to do better. It’s just logical. If you continue to ignore ESG, it may work in the short term but not in the long run. Everyone wants to invest in the future and money is finally talking.”

The key findings of the report in terms of sustainability include: 

  • buildings with higher energy ratings show higher performance (a relatively higher level of energy-efficiency or greenhouse-gas reduction than what is required by building codes or other regulations) compared to lower rated buildings
  • there is growing occupier demand for prime grade assets as buildings that have NABERS energy ratings of 5+ stars – shown in higher occupancy
  • Buildings with greater energy efficiency have sharper indicative yields, and generally higher net face rents, as a result of the competition for these buildings 

Beware the tobacco companies of the 1980s and coal miners of the 2000s

Unfortunately, most office buildings fall below sustainability standards, and Australia’s property sector has been “slow to adjust” to the rising tide of sustainability. 

A report last year from Jones Lang LaSalle (JLL), titled Australian Cities Accelerating built-form sustainability, re-emphasises that developers, asset owners and occupiers must push towards carbon neutrality and built-form sustainability in office buildings, or they risk falling by the wayside. 

“Companies that resist change risk becoming the tobacco companies of the 1980s and coal miners of the 2000s,” the report warns. 

How many office buildings in Australia are sustainable?

According to the report, Australia’s cities are currently at different stages on the environmental journey. 

Sydney has the highest volume of office buildings rated 5.5 stars or better (2.3 million square metres  (about 136 AFL football fields), followed by Melbourne at 1 million sq m and Brisbane at 690,000 sq m). 

Only 12 per cent of more than 4100 office buildings greater than 1000 sq m have a NABERS rating of 5 stars or better.

Only 12 per cent of more than 4100 office buildings greater than 1000 square metres have a NABERS rating of 5 stars or better.

A high NABERS rating may already be a minimum occupier requirement. The report said 73 per cent of recently completed or under-construction office buildings targeting a 5 stars rating, was already pre-committed to reaching that target. 

Employee happiness 

The CBRE report said that businesses are starting to look beyond sustainability to also try and improve social and wellness in their businesses. We can see this with the rise of workplace flexibility

CBRE’s Su-Fern Tan said that “competition with GRESB [Global Real Estate Sustainability Benchmark] scores won’t change. 

“However, for the year ahead I see a real focus on wellness, which has been brought forward because of the pandemic. Landlords across the region are trying to bring people back to their buildings across all building types. Across the board, we’re seeing people look beyond just the ‘e’ in ESG and address more social and corporate governance issues.” 

According to the report, in 2022 GDP is forecast to grow by around 3 per cent over 2021. Unemployment is expected to fall to around 4.5-4.5 per cent by the end of 2023. And the restart of immigration into the Pacific region this year will bulk up the shallow labour pool and fuel the need for office space. Companies will look to take advantage of topline growth by hiring and upgrading space requirements, and chasing “real assets”. 

At present, vacancy rates remain elevated.

“Vacancy remains elevated in most office markets, incentives are high, and tenants have choice, said Australia senior director of research for JLL, Annabel McFarlane who worked on the JLL report. 

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

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