Futureproofing 4.0: Opportunity through Obsolescence

• INR 450 billion retrofitting opportunity across India’s top seven cities: 62% of operational office stock requires retrofit interventions. These projects are under single ownership structures, owned by/invested into by either property developers or institutional investors.
  
  
• The four largest markets by size and occupier activity account for ~81% of estimated capital expenditure for retrofitting: Bengaluru, Delhi NCR, Mumbai and Hyderabad comprise the largest share of assets with retrofitting potential. These four markets represent about 75% of occupier activity in the country. Consequently, actions taken by landlords and investors in these markets will be critical for keeping existing assets ‘relevant’
  
  
• Retrofitting goes beyond chasing ‘green’ certifications: It aims to achieve greater efficiency in building performance parameters while targeting a low-carbon future. Landlords and investors should implement holistic interventions that address both physical and operational aspects of their assets. These interventions should integrate a higher degree of ‘human experience’ within the built environment
  
  
• Retrofitting can yield potential rental upside of 15-30% (with respect to current asset rentals) across office clusters while unlocking asset value: Post-retrofit rental premiums offer tangible returns, while improved occupancy rates and longer lease terms further enhance the per-square-foot value of assets. Beyond financial benefits, retrofits optimize asset repositioning and maintain asset relevance as regulations trend towards carbon taxation and pricing mandates

Obsolescence in real estate has come to encompass an asset's inability to keep up with market standards – across tenants, investors, and regulatory norms – resulting in occupancy losses and value reduction over time. However, this challenge now presents an opportunity. Given how occupiers and landlords/investors worldwide have come to truly appreciate the value of amenity-rich and sustainable buildings as drivers of engagement, productivity, and representative of their ESG goals, obsolescence offers a chance for comprehensive retrofitting. This includes upgrading existing building design and engineering, integrating new technology, enhancing user experience, and incorporating climate-adaptive features and capabilities. As sustainability and emission requirements have tightened through regulations and corporate initiatives to be environmentally responsible, building owners need to look at retrofitting as a means to keep their assets relevant, thereby optimizing performance and value.

In the India Futureproofing series, Version 4.0 serves as a reference guide to retrofitting opportunities and potential gains across the country's commercial office landscape. India is marching towards 1 billion sq. ft. of Grade A office stock across its top seven markets, with a considerable portion of the operational office stock held by institutions and under single developer ownership. While India has a relatively young office market, there are assets in the relevant project universe that offer considerable opportunities for retrofitting and upgrades. Around 32% of India's office stock was built earlier than or in the first decade of the new millennium. Even assets built later but prior to 2020 need to look at upgradation in light of what tenants need today, given the changing dynamics around the need for offices to become 'experiential', fulfilling the twin objective of being modern (agile, tech-driven, amenity-rich) and sustainable/low-carbon.

We have observed with interest that the definition of retrofits has undergone a shift across the entire paradigm of property attributes. This shift will keep investors and landlords on their toes as they seek to create higher quality, low-carbon, sustainable, and resilient buildings in a bid to remain relevant and adhere to evolving emission and benchmarking mandates. Nothing can be achieved without stakeholder engagement, and hence landlords and tenants will need to work together to ensure that investments towards retrofits serve the objective of value creation for both parties. Additionally, public-private partnerships and collaboration are crucial for long-term strategic planning and implementation of sustainable retrofitting initiatives. These partnerships can help align interests, pool resources, and create a more holistic approach to building improvements. The retrofitting narrative will ultimately tie into creating opportunities for regeneration of districts and supporting sustainable communities and precincts across cities, contributing to broader urban sustainability goals.

Occupier needs have moved beyond sustainability certifications

Moving beyond ‘green’: Around 59% of India’s grade A office stock is currently green-certified. However, occupiers are demanding more, including greater reporting disclosures, building performance data, green lease clauses and more climate risk-driven actions. While USGBC LEED Gold certifications predominate in India, sustainability definitions are undergoing significant revisions. Landlords and investors must intensify their efforts to keep pace with evolving guidelines and regulations.

Experience centricity: Occupiers are increasingly cognizant of evolving employee needs, with the office becoming the ‘magnet’ that ensures productivity gains and fosters collaboration.This shift necessitates an amenity-rich environment, enhanced technology deployment, and the creation of an engaging relationship between the end user and the built environment.

Occupier NZC (net zero carbon) goals: With 60% of Fortune 500 companies already committed to net-zero carbon (NZC) or energy reduction targets, corporate occupiers are becoming more selective about the sustainability credentials of their office spaces. Buildings that fail to meet these standards risk losing high-quality tenants.

Improved tenant attraction and retention:JLL’s Future of Work Survey reveals that 50% of organizations in India are willing to pay a premium for spaces with leading green and sustainability credentials. In India's competitive talent market, high-quality sustainable workplaces are becoming increasingly essential for employee attraction and retention.

Rental premium: Buildings that keep pace with changing tenant needs through regular retrofits, green certifications and asset-level upgrades of services and amenities can command rental premiums of 15-30% compared to non-retrofitted buildings across Indian markets. In certain submarkets, such as the SBD BKC and Western Suburbs in Mumbai, these premiums can reach 40-50%.

Operational cost savings: Energy efficiency upgrades can significantly reduce utility costs – a crucial consideration given rising energy prices. JLL has demonstrated energy use intensity (EUI) reductions of 40-60% for whole-building, deep retrofits of office assets (Retrofitting Buildings to be Future-Fit, 2022).

Enhanced asset value: Improved occupancy rates and future-proofing asset performance can substantially increase asset value, as evidenced by higher per-square-foot valuations during property transactions.

Financial risk: Many real estate assets are likely to face financial risks from climate change earlier than anticipated. As demand for NZC buildings increase, non-upgraded assets may suffer from a "brown discount" – a decline in value of properties lacking sustainable features. This discount is negatively impacting their valuation, rental rates, and occupancy levels.

Regulatory risk: While India's sustainability regulations for existing buildings remain limited, this situation is likely to change rapidly. Globally, climate risk assessments are becoming an integral part of all property valuations. Carbon taxes are already being implemented in markets such as Singapore. As India pursues its own net-zero targets, it is likely to adopt similar measures.

Resource efficiency: With 50% of raw material consumption tied to building development, retrofitting existing structures is crucial for resource conservation in a resource-constrained future. Moreover, retrofitting can reduce costs and expedite project overhaul programs more effectively than wholesale demolition and reconstruction.

Social impact: Upgraded buildings can deliver significant improvements in occupant health, well-being, and productivity. JLL's 3-30-300 principle demonstrates how relatively small investments in creating healthier, more sustainable workplaces can drive outsized returns through improved human capital outcomes.

The imperative to futureproof India's existing commercial real estate assets has never been more urgent. As one of the fastest-growing real estate markets globally, India faces a monumental challenge —to upgrade its ageing building stock to meet rapidly evolving sustainability standards, occupier demands, and regulatory requirements.

This challenge, however, presents a significant opportunity. India's top seven office markets - Bengaluru, Chennai, Delhi NCR, Hyderabad, Kolkata, Mumbai and Pune - account for 853.7 mn sq ft of total Grade A office stock. JLL estimates that 530.8 mn sq ft of this stock, or ~62%, requires significant upgrades to meet future occupier needs and sustainability standards, thereby unlocking asset value for investors.This represents a massive INR 450.3 billion investment opportunity.

Critically, the pace of retrofitting and futureproofing must accelerate dramatically to align with global climate goals. In mature cities, about 80% of office buildings that exist today will still be in use in 2050. To meet net-zero targets, existing building stock must be retrofitted at a rate of 3.0%-3.5% per year. However, current retrofit rates in developed markets are only around 1.0%. India likely lags even further behind, creating an urgent need to rapidly scale up future-proofing efforts.
 

Over the next 5 - 10 years, futureproofing will move from a niche concern to a core business imperative for India’s commercial real estate sector. Key trends to watch:
 

•  Regulatory push: Expect a rapid evolution of energy efficiency standards, emissions disclosure requirements, and potential carbon pricing mechanisms for existing buildings.
  
  
• Green premium to brown discount: The valuation delta between futureproofed and non-upgraded assets will widen significantly, potentially rendering some assets "stranded" if not addressed.
  
  
•  Holistic upgrades: Successful futureproofing will increasingly integrate carbon reduction with broader asset repositioning strategies addressing changing work patterns, health/wellbeing, and climate resilience.
  
  
• New business models: Traditional landlord-tenant relationships will evolve, with more collaborative approaches to sharing costs, data and benefits of upgrades.
  
  
• Technology-enabled: Smart building systems, IoT sensors, and advanced analytics will be key enablers of performance optimization and predictive maintenance.