MARKET PULSE: Real estate advisors might be getting a tad nervous about how prepared their corporate clients are for the climate and sustainability reporting obligations that will soon land on their desks, but at least the leasing market is strong.
You wouldn’t think so, given the Property Council announced last week that the vacancy rate for offices nationally was nearly 13 per cent, the highest rate since 1996.
But while growing parts of office buildings are going dark, there’s good news for leading agents and office fitout businesses because movement is movement. Offices need to be fitted out in smaller spaces or decommissioned. Other sectors are growing.
And then there’s the revamped Green Star Interiors rating tool on the way which will bring its own bundle of commercial joy.
Su-Fern Tan, head of ESG for CBRE, who is working on the upgrade project, says leading corporations are keen to go green when they move to new premises, especially in the banking sector, even (and maybe especially) if they’re downsizing.
Cundall and ADP both told The AFR on Thursday they were seeing more demand for environmental services and new office fitouts.
But engineering companies themselves were part of slowing office space demand. The news report said Arup had lost 60 staff, AECOM, a “small number” from its near 4000 total while others were not commenting (wonder why).
Engineers Australia’s chief executive Romilly Madew said the sector was responding to broader economic trends.
“We have seen a cooling-off in vacancies since September with contributing factors including uncertainties in public infrastructure funding and a decline in the approvals for non-residential buildings. This has caused changes to the pipeline of work, both in the public and private sectors,” she said.
But despite the post COVID ructions that are behind most of these fluctuation of exuberance followed by the blues, Tan says CBRE’s research team still says demand exceeds supply for property of all types. For every 500,000 immigrants coming into the country, there’s a formula that dictates how much commercial, retail, and industrial space we need, she says.
Conversions hard to come by
The biggest gap in supply is in housing, of course. But despite the need, the mooted conversion of redundant offices is not happening.
A couple of buildings in Melbourne have undergone the shift, but according to Tan, it’s challenging.
In New York, where Tan previously worked on Wall Street, there are more retrofits to residential – some not particularly appealing (think apartments without windows or cupboards turned into bedrooms.)
But though resi prices fell during COVID, they’ve returned to their normal stable, but high prices. Tan says the price stability come from plentiful supply (which might make proponents of abundant supply think twice about this being the magic bullet that makes housing more affordable).
The net demographic effect in New York has been to accelerate the push of people out to the neighbouring suburbs such as Long Island and New Jersey, especially as hybrid working takes deep root as more people take advantage of the opportunity previously offered to a privileged few.
“No one wants to work 100 per cent in the office, and there’s a war on talent” Tan says.
The focus on development in Western Sydney could well mirror the population shift out of the CBD that’s occurred in New York, Tan says. But there’s little sign that companies will follow with jobs.
How about apartments on the perimeter and labs on the inside?
In London, where The Fifth Estate called in for some interviews and briefings in early January, the conversion of offices to apartments seems to be more evolved.
The UK’s Make Architects told us that though the bigger floor plates are problematic because it’s difficult to get light and air into the centre of these spaces to make them liveable, one solution is to build apartments around the perimeter of the floor and use the centre for labs or life sciences.
Labs and life sciences are big in the UK and the US and growing here. (What they’re working on is another story: preventative medicine, eternal life? Hard to say, as many such uses are under lock and key.)
Transition risk and the government factor
What’s clear in the market right now is that a big part of the property industry is unprepared for the climate and sustainability reporting regime on the way – not to mention the nature positive movement.
Tan says the concern from clients is that “no one’s done it before, and no one wants to break the rules. They all want to comply, but they don’t know how.”
It’s what Tan and her colleagues call the “ESG transition risk”.
“They’re not ready and don’t have the climate action plans or mitigation measures, and there’s much more financial outlay if you’re not ready for this.”
So, who are the experts? Tan rattles off some names, but we know they’re at the premium end of advisory.
- See The Fifth Estate’s upcoming masterclass, The Shifting Sands of ESG, on 20 February for a way to shed light on these complex topics.
The Australian government’s new mandates for minimum 5.5 Stars NABERS rating for new office space from 2025 and 6 Stars from 2026, add to concerns
So too the tougher expectations for government data centres and hotel bookings, as these too are brought into the net zero net.
- See the article by Carlos Flores, The Net Zero in Government Operations Strategy is a big deal for the built environment
Sooner or later, this will have an impact on the industry. “The government market is massive”, Tan notes.
Sustainability is red hot, and the industrial market is waking up to the opportunities
Matt Clifford, head of sustainability and ESG for Cushman and Wakefield, says as prices stabilise and confidence returns to the market, there will be a lot of activity from clients who are currently “keeping their powder dry”.
And sustainability is key. “Every single conversation has a sustainability lens,” he says – questions such as “How quickly can I get to net zero?”
The market maturity of office tenants has been strong; they’ve been savvy about sustainability. Now, industrial tenants are becoming more sophisticated.
They’re starting to ask what they can get in return for the “juicy” rents. Could it be a solar array on the roof, or a renewable energy buying contract that the agent can organise with other nearby occupants?
Maybe it’s helping to solve entrenched waste and recycling problems.
It all adds up to a “red hot market for sustainability”, says Clifford.
What’s driving it is that a previous voluntary market is now becoming mandatory.