Landlords embrace environmental, social and governance standards
All buildings, new and existing, in the commercial real estate sector are heading to a net zero carbon goal by 2050. Photo: Mat Tubb

Landlords embrace environmental, social and governance standards

Landlords are on notice: embrace environmental, social and governance (ESG) standards or die.

It may sound dire, but the rapid race to better ESG plans is heralding a new era in organisations across the world, and office landlords and investors cannot afford to fall behind.

“It’s where Australia and the world has been headed over the last couple of years, with companies now more than ever focusing on their ESG policies,” says Ben Christie, Colliers national director of office leasing.

“People are looking at organisations and asking, ‘What’s your stance on carbon neutrality?’ and so forth.

“And a lot of the big corporates are looking at it as a way of aligning themselves with like-minded landlords who are really leading the way in the eco-space.”

Such is the demand for ESG features in today’s office environment, landlords and investors who show a commitment to net zero carbon emissions are being rewarded with premium clients, efficient buildings and low to zero vacancy rates.

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The Cbus Property-owned building at 435 Bourke Street, Melbourne, will have a “solar skin” facade. Photo: Supplied

On the flipside, those who do nothing are more likely to face high vacancy rates and even stranded assets.

The far-reaching nature of ESG means it goes beyond sustainability factors such as recycling and energy efficiency to include issues such as diversity and inclusion, indigenous reconciliation, the circular economy and cyber risks.

For existing buildings, it can mean expensive refurbishments that satisfy sustainability ratings systems such as Green Star, WELL and NABERS (National Australian Built Environment Rating System).

It can also extend to enhancing buildings to make them accessible for people with disabilities, to securing all digital systems from cyber threats and to ensuring all supply chains are ethically sourced.

What’s more, landlords need to monitor and measure an asset’s ESG performance and report the outcomes to stakeholders.

Landlords are taking different approaches to ESG.

At 500 Bourke Street in Melbourne, previous tenant NAB left behind 15,211 desks and chairs, 42,000 square metres of ceiling tiles, 173 whitegoods and about 1000 blinds.

Instead of steering these items towards landfill, as is the usual practice in large office refits, landlord ISPT sold them and contributed $200,000 of the sales to the Property Industry Foundation.

The foundation will use the funds to help build homes for displaced youth in the regional town of Shepparton, Victoria.

Tech giant Atlassian is developing a 40-storey skyscraper made of timber and concrete that ​​will operate on 100 per cent renewable energy and include solar panels built into the facade.

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An artist's impression of Atlassian's 40-storey headquarters to be built near Sydney's Central Station.

Large planted terraces will be a big feature of the building, which is billed to be the tallest commercial hybrid timber building in the world by the time it’s finished in 2026.

Similarly, the Cbus Property-owned building at 435 Bourke Street, Melbourne, will have a “solar skin” facade that will generate 20 per cent of the building’s electricity requirements.

It will feature a sky garden and several landscaped open-air terraces, and achieve a six-star Green Star rating.

All buildings, new and existing, in the commercial real estate sector are heading to a net zero carbon goal by 2050. As an interim ambition, all new buildings are aiming to achieve zero carbon in operations and aim to reduce carbon emissions by 40 per cent in 2030.

Not acting on ESG plans now could be disastrous for landlords, says Chris Nunn, AMP capital’s head of platform operations and ESG investing.

“ESG attributes are an essential element of a premium building being offered to the Australian office market,” he says.

“Tenants and investors are discerning enough that you can’t claim it’s premium unless there’s a very high degree of ESG credibility to that building.

“We’ll start to see a discounting effect – lower returns and higher vacancy rates for buildings which don’t have ESG credentials,” Nunn adds.

“It could lead to stranded assets if a building owner continues to do nothing and doesn’t switch to a renewable electricity contract, doesn’t have a strategy to get to zero carbon, doesn’t have a strategy to improve wellbeing, respond to COVID,  improve accessibility, have a reconciliation action plan.

“If the owner doesn’t do these things, maybe that asset comes to a point where the vacancy rate is so high they think about converting it to a residential building because it’s not that desirable anymore.

“At the extreme end, there is the possibility of there being so much downside risk that an asset can become stranded.”

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Office extras

Wellness, culture and sustainability are the new buzzwords when it comes to promoting office features.

Pre-COVID-19, it was all about end-of-trip amenities such as showers, change-rooms and towel services. But now tenants are prioritising more holistic wellness packages which also incorporate food and beverage offerings, in-house social and exercise activities, and sustainability goals.

These not only boost an organisation’s culture but help tenants earn the commute from their workers, says Tristan Gannan, CBRE director, office occupier team.

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Tenants are prioritising more holistic wellness packages. Photo: iStock

“Organisations want to encourage people back to the office and not mandate it. So it’s about creating an environment that’s more appealing than working from home.

“If the technology is no good, the environment is depressing, and the building’s old, it won’t entice them back. You have to provide a really great experience for them.”

Equally as important is technology, which needs to be seamless across every room of the building from the lobby to the top-floor meeting room.

Luring workers back and driving occupier rates up also hinges on flexibility, which is where pay-per-use meeting rooms and co-working facilities have become popular.

“They are becoming important as organisations struggle to predict how many people are coming in on any given day,” Gannan says.

“There’s a reluctance to carry too much space in the hope that you’re going to have everyone in, but there’s also a fear of carrying too little space.

“Having those on-demand areas that you can book and use as needed is becoming quite important.”

The “softer sells” as Ben Turner, director of office leasing in NSW at JLL describes them, include activities such as running clubs and in-house yoga classes.

There’s also the emergence of touchless access into building entry and exit points, meeting rooms and bathroom facilities, along with improved ventilation and air quality.

“COVID didn’t necessarily bring about anything new – we were already starting to see these wellness offerings being introduced – but it has definitely accelerated some of them,” Turner says.