Australia’s office sector is approaching a pivotal turning point. As corporate net-zero commitments accelerate and sustainability reporting becomes mandatory, regulation is contributing to the redefining of the fundamentals of value. For landlords and investors, the message is clear: sustainability is now a financial metric, not a moral one.

According to JLL’s Early Mover Advantage 2025 research, electrified and energy-efficient assets are outperforming the market, while those that lag are facing tangible obsolescence risk.

From 1 January 2025, the Australian Sustainability Reporting Standards (ASRS) require large entities to report on Scope 1 and 2 emissions, expanding to Scope 3 in the following year. By 2028, companies with as few as 100 employees or $50 million in revenue will be covered.

“The move to mandatory reporting is driving an increased focus on emissions and climate risks and the implications this has in reshaping how value may be affected,” says Dr Georgia Warren-Myers, JLL’s Head of ESG & Risk APAC. “Sustainability performance is now an integral part of financial and investment analysis for clients, influencing value drivers.”

This aligns with the 2025 International Valuation Standards (IVS) update, which requires valuers to explicitly assess ESG factors when determining asset value. The inclusion of ESG in these standards ensures that sustainability-related risks and opportunities are captured in both qualitative and quantitative terms.

JLL’s modelling of a 40,000 sqm Melbourne office building highlights the stark contrast between action and inaction. A “do nothing” approach resulted in a -6% net present value (NPV) and 7.2% internal rate of return (IRR), while full electrification and a 5.5-star NABERS rating lifted NPV by 7.5% and IRR to 8.5%.

“These figures show that decarbonisation is not just an environmental imperative - it’s a financial one,” says Warren-Myers. “Buildings that fail to transition, risk becoming obsolete assets with limited tenant appeal and restricted access to capital.”

JLL’s broader market data reinforces this. Office assets below 3.5-star NABERS rating face 11% lower rents and 6% higher vacancy rates than the market average. By contrast, all-electric buildings command 23% higher net face rents and 55 basis points lower yields.

With the Commonwealth Government mandating 5.5-star NABERS ratings for new leases over 1,000 sqm from July 2025, the regulatory trajectory is only intensifying. “The government’s stance is a signal to the broader market - sustainability thresholds will continue to rise,” Dr Warren-Myers explains.

Through JLL’s Sustainability Risk Advisory platform, the firm is now quantifying ESG impacts at both portfolio and asset levels, assessing how sustainability performance affects lettability, liquidity, and capital value.

“Under the new valuation standards, we can’t afford to overlook climate exposure or sustainability performance,” says Warren-Myers. “We’re now able to model value-at-risk scenarios, assess breakeven timelines for upgrades, and demonstrate how sustainability investment preserves - and even enhances - asset value. An important aspect of this analysis is considering the ‘do nothing’ and identifying the quantum of discount to value that can present the alternative perspective driving the case for action.”

Recent transaction evidence supports this shift. Across global markets, properties exposed to physical climate risks have experienced up to 75 basis points in pricing discounts, while Australian assets with poor sustainability performance have faced value declines due to higher insurance, increased vacancy, softening rents and financing costs.

Despite increasing demand, supply remains constrained. JLL research identifies only 372,900 sqm of all-electric office space across Sydney and Melbourne CBDs - rising to 1.2 million sqm by 2027, or just 7% of Melbourne’s total inventory.

“Early movers are capturing a first-mover premium,” says Dr Warren-Myers. “As more stock transitions, that premium will erode, and non-compliant buildings will face the reverse - discounts driven by obsolescence risk.”

To mitigate risk and capture opportunity, Dr Warren-Myers recommends that landlords:

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2. 1. Align electrification with natural asset cycles - such as end-of-life plant replacement or major lease expiries - to minimise disruption.
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4. 2. Conduct feasibility studies early – to support the business case and timing for investment, in addition to sustainability expertise and contractor capacity will tighten approaching 2030.
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6. 3. Establish strong tenant data partnerships - to meet Scope 3 reporting requirements efficiently.
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“Inaction is no longer neutral,” concludes Warren-Myers. “As regulation evolves and sustainability becomes embedded in valuation, the ability to quantify and manage ESG risk will define competitive advantage. The next five years will separate those who future-proof their assets from those who fall behind.”

JLL’s Sustainability Value and Risk Advisory teams continue to help clients navigate the evolving regulatory environment, translating ESG performance into tangible value outcomes across Australia’s real estate landscape. Contact the team today to find out more.