16 March 2020 | Prithvi Pandya
Research by real estate company JLL shows that sustainable office buildings can deliver real financial benefits to investors through a combination of higher rents and stronger leasing velocity.
The impact of sustainability on value also demonstrated the growing occupier demand for sustainable offices in central London that will need to be met in the next decade.
JLL's research looks forward to the next wave of office development and the strong impetus for it to deliver net zero-carbon buildings.
On this basis, JLL calculates that the next wave of office development and major refurbishment would need to accommodate at least 8 million square feet of highly sustainable demand from occupiers across central London by 2030.
This demand assessment for central London office stock is based on the space currently occupied by companies that have signed up to science-based targets (12 million sq ft) and who have lease events before 2030, clearly demonstrating the increasing demand and need for highly sustainable buildings within central London.
The study also identifies demand from companies signing up to net zero-carbon commitments, which currently occupy over 1.5 million sq ft of space across central London.
JLL's research finds that, based on historical leasing activity, the future development and redevelopment pipeline of offices incorporating sustainability would deliver real financial benefits for developers in addition to strong levels of demand.
The company analysed leasing activity for new grade A office buildings in central London and found that those with a BREEAM rating of very good or higher achieved higher rents than those without a rating and that the average rental premium over non-rated buildings over the past three years was around 8 per cent.
The analysis also shows that new grade A buildings with an A or B EPC rating achieved a rental premium of 10 per cent per cent over comparable offices with lower ratings over the same period.
The research further demonstrates that the payback for investors targeting higher BREEAM ratings is higher occupancy rates throughout the cycle.
JLL analysed the leasing velocity of 120 central London development schemes completed between 2013 and 2017 and found that those that have an outstanding/excellent rating tended to show a higher pace of leasing and have lower vacancy rates - of 7 per cent compared with 20 per cent for those rated very good - 24 months after completion.
Sophie Walker, UK head of sustainability at JLL, said: "Clearly the urgency to build and redevelop these offices in central London to support corporate environmental and people goals is only speeding up. The first developers to undertake the task will reap the rewards of high levels of demand and the intrinsic higher performance of their product. This opportunity to provide sustainability as a point of differentiation and to appeal to forward-thinking occupiers will really play out over the next decade.
"Beyond 2030, tougher building regulations will drive a reduction in energy consumption and carbon emissions and mandated sustainability performance will become more defined - this may mean that the premium associated with it will disappear and buildings that don't comply will underperform, leading to the displacement of tenants and lost rents due to costly retrofits."