What is the return on investment on sustainable office upgrades?

While it’s broadly understood office buildings with good sustainability credentials can make it easier to secure tenants and attract higher rent, it has been difficult to pinpoint how much green upgrades can increase a building’s value and how important refurbishment will be in achieving net zero targets.

But as owners of older assets increasingly look to refurbish their offices to remain competitive, financial modelling from JLL is shedding light on how viable environmentally-focused efforts can be.

By upgrading buildings to achieve a high sustainability rating (including NABERS and Green Star in Australia, BREEAM Outstanding/ Excellent in the UK, or LEED in the U.S. and India) owners can see a 10% rental premium over lower grade assets, according to analysis in JLL’s Valuing Net Zero & ESG for Offices paper.

“Environmentally sound buildings come with a drastically lower risk of obsolescence, leading to a lower discount rate over time,” says Richard Lawrie, executive director, valuations advisory – Australia, JLL. “This is underpinned by increasing tenant demand for sustainable offices and a shortage of supply.”

Meanwhile, the overall rate of return on a net zero refurbishment is more than one percentage point higher than that of a basic refurbishment (8.14% versus 7.08%), the modelling shows.

“While retrofitting requires capex to achieve the best sustainability credentials, the risk of not upgrading will be significantly greater within the next decade to comply with increasing climate regulation and ESG commitments,” says Lawrie.

Buildings with higher green ratings lease faster than lower-rated buildings and lenders are increasingly offering cheaper finance for green investment. These factors add up to higher returns on investment, according to JLL

Owners can also anticipate lower upgrade and modification requirements over the life of a building, lower demolition costs at the end, and a higher resale value of the recyclable materials used, all of which lead to higher returns.

In addition to improved rental performance, investment in sustainable upgrades will drive stronger pricing at sales, says Caitlin Uren, head of ESG and repositioning - capital markets, JLL.

“We are seeing the investor market lead, ahead of the Australian government, on net zero carbon targets. This is directly impacting investment strategies, with ESG alignment being fundamental to the decision-making process,” Uren says. “In promoting sustainable ratings and features, owners can attract a larger purchaser pool and be in a position to really drive pricing.

“There is huge opportunity for investors to acquire secondary office buildings for an ESG value-add strategy. In repositioning existing underperforming buildings, we are able to support the decarbonisation of the built environment, which is currently responsible for 39% of global emissions. This helps with the environmental brand of an asset, as retrofitting emits significantly less carbon than new build developments.”

Supporting the case for refurbishing buildings over knocking down and rebuilding is also a government concern, however some cities are yet to take meaningful steps to encourage the longevity of older buildings.

Sydney and Melbourne have net zero carbon targets for 2035 and 2040 respectively, however, both cities are behind on regulation and incentives for repositioning existing buildings, Uren believes. She says their focus is too much on new green builds which have a larger embodied carbon impact.

Sustainability is among the top three considerations for occupiers leasing commercial real estate, according to JLL’s Responsible Real Estate survey. The survey of more than 550 Asia Pacific-based occupiers and investors also found 70% are willing to pay a premium to lease sustainability-certified buildings. Those paying a premium reported spending 7% to 10% more in rental costs.

This enthusiasm is underscored by a global demand and appetite for enhanced focus on ESG commitments across the corporate landscape

This is putting the spotlight on wellness strategies, which are rated through the WELL certification system, measuring a building’s impact on human health and wellbeing through factors like air, water, light, comfort, and mind.

With this new way of thinking, older buildings are losing their appeal, Lawrie says.

“Organisations are committing to their own net zero targets, affecting their decisions in choosing offices and ruling out older buildings with low sustainability ratings. With less demand for older buildings, there is the potential for owners that don’t upgrade to have a longer downtime period at the lease expiry,” Lawrie says.