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Fully electrified CBD buildings present a major opportunity for the big players in Australian office rentals, according to Annabel McFarlane director of strategic research for JLL.
Speaking at the NABERS + CBD conference in Sydney on Friday, McFarlane looked at electrification in the journey towards net zero from an occupier’s perspective.
This included results from research the company did with commercial clients last year, as well as its own experience as office tenants in Melbourne’s premium 101 Collins Street building.
Tenant perspectives: research results
According to McFarlane, the first thing the research looked at the sustainability and net zero targets of the largest tenants in Melbourne and Sydney’s CBD office markets. These were defined as those companies that occupied 5000 square metres or more, which make up about 25 per cent of commercial clients in both cities.
2028 and 2030 will be critical years in both the Melbourne and Sydney commercial markets, when a lot of big leases will expire.
It found that 67 per cent of major commercial tenants in Melbourne have net zero carbon targets, and in Sydney this figure was higher at 74 per cent. In total, this added up to around 18 per cent of this market – almost one out of every five clients in this cohort.
It’s important to look at what happens when the leases of these tenants expire, McFarlane explained. ”As we’re approaching a time when the Australian sustainably reporting standards are starting to kick in, they’re all going to care about their emissions and the impact that buildings they occupy will have on their scope three reporting.”
From early 2025, companies with over 500 employees, $A500 million in revenue and $1 billion in assets will need to disclose information about their sustainability and climate-related risks and opportunities to investors in their annual statements. Many of JLL’s major Australian commercial tenants in client sites fall into this category.
The research also found that 2028 and 2030 will be critical years in both the Melbourne and Sydney commercial markets, when a lot of big leases will expire. Leading up to this, tenants will increasingly demand that landlords contribute to their net zero aims.
Electrification is the answer, at least for now
The research was based on the premise that, within current Australian technological and building practices, a commercial building needed to be fully electrified to be net zero ready by 2030. But existing options and those in the pipeline in this category revealed a startlingly sparse field.
“In Melbourne and Sydney, most of the CBD office buildings have gas boilers for heating, so we’ve got very few without fossil fuel,” McFarlane said.
In Melbourne, the scarce offerings include two retrofits: ISPT’s recently completed 500 Bourke Street, as well as 101 Collins Street, which will be electrified by July this year.
This indicated a “massive mismatch in demand and supply,” McFarlane said, which she anticipates will only grow into the future. But how does this translate into commercial real estate outcomes?
If you electrify, will they come?
“If you have an asset that’s electrified, will all these tenants come to your building?” The answer is an emphatic no, according to McFarlane.
“Electrified or net zero ready assets are higher up on the list, but this doesn’t beat location and amenities in the tenant’s mind. You have to tick off those things first, and then you can start talking about electrification.”
In Melbourne, for example, with a high 18 per cent vacancy rate in the CBD office market, electrified buildings that meet these criteria are doing remarkably well.
McFarlane said 500 Bourke Street was renting fast, and the vacancy rate in 101 Collins, where her own company has offices was only four per cent. “It’s really material that they have the amenities, the location, and now they’ve got electrification,” she said.
101 Collins Street is leading the way
McFarlane said the building was exciting from the perspective of both an occupier and a commercial real estate professional. As a tenant leasing the space throughout the entire retrofit over the past four years, she had some valuable insights into the advantages and challenges of the project to share.
The estimated cost was a relatively small price to pay for the major advantage of far lower vacancy rates in the long-term, and the building’s current vacancy, sitting at 14 per cent lower than Melbourne’s CBD average.
This translates into higher rents, a critical factor for commercial landlords who are grappling with post-COVID hybrid working arrangements, high interest rates, and growing maintenance and running expenditures.
The challenges of electrifying a commercial CBD building
There were several major challenges in the 101 Collins electrification retrofit. One of these was expanding the area needed for plant, which included equipment and machinery required to run the building.
Originally sitting at 160 square metres, this was increased more than four-fold to 660 sq m, which would typically mean less space available for leasing, unless there are underutilised areas, which is the case at 101 Collins Street. At 500 Bourke Street, the plant area was also doubled in the retrofit.
But lower vacancy rates can compensate for this. McFarlane also pointed out that older towers built before 2000 can also be easier to retrofit, as they were built with less space efficiency in mind.
The electrification also necessitated the building of a new substation in the precinct, as well as installation of 3.7 kilometres of copper cabling. Given that the building has back-up systems, however, these works are being completed with virtually no impact on tenants.
McFarlane emphasised that good planning was a critical aspect of retrofits and sustainability upgrades to commercial buildings, as it can minimise disturbance to occupants and remove the need to decommission buildings or levels.
Relocate? Nah
As JLL has a global strategy in place to get their offices net zero carbon ready by 2030, the company investigated relocating its Melbourne office. But it soon realised that 101 Collins Street remained the best option for location, amenity and sustainability.
It’s moving to a different floor this July. “It’s a very, very exciting, project, and it’s adding weight to the [commercial] leasing story,” McFarlane said.
Global perspective – green leases are in
On a recent trip to the UK, McFarlane saw that the green lease story was becoming more and more prevalent around the globe.
Our rental framework allows commercial tenants to threaten to break a lease if landlords don’t electrify by a certain date
She also explained that in her view, Australia has a unique advantage. Our ratings framework allows commercial tenants to threaten to break a lease if landlords don’t electrify by a certain date – and there are case studies in both Melbourne and Sydney where this has happened. This sets an important precedent for building owners.
Early adopters can cash in
McFarlane was mainly focused on the positives. Given the low supply of electrified commercial CBD buildings with great locations and amenities, landlords could step into a space that offers low vacancy rates and high rental yields in a challenging environment.
And those who move quickly will benefit most from the rapidly approaching changes in sustainability reporting.
“What we uncovered is an opportunity for anybody – occupier, landlord, investor – all stakeholders in the commercial property industry.”
