Commercial landlords should boost green credentials, or risk losing tenants

Sunday, 26 November 2023

When the tenant at number 152 Fanshawe Street decided they wanted change, the office building’s owner worked with them to produce a new, net carbon neutral fit-out.

The Auckland CBD building was one of unlisted property funds manager PMG Funds’ 47 strong portfolio that had already been identified as ripe for investment to improve its green credentials.

PMG chief executive Scott McKenzie says the fund has an objective to monitor and measure its buildings' environmental performance, and to lift their performance and improve their carbon emissions.

It also recognises the importance of embedded carbon in existing properties, and that repurposing is a better environmental choice than demolishing and rebuilding, he says.

“With 152 Fanshawe St, achieving better sustainability and a green star rating was a real focus for us.

“After our tenant went to market to look at options and came back with some specific criteria, we collaborated on a fit-out that reduces their carbon footprint and suits their needs.”

End of travel facilities, EV charging stations, and better technology were installed, while improved operational systems were put in place, and all now contribute to greater energy and waste efficiency.

The successful refurbishment recently won the Environmental category in the Construction Sector Accord Awards, and shows what can be done in the drive towards greening the commercial property sector.

McKenzie says the built environment contributes 20% of the country’s carbon emissions, and commercial property is a big part of that.

“Listed companies make up about 10% of the sector’s footprint, but the balance of commercial property is owned by unlisted funds or private owners, so there is an onus on us to do something.”

The good news is there is increased interest in greener buildings, and more owners, and tenants, are thinking carefully about what the right thing to do is, he says.

“Strategies to manage carbon outputs and get emissions down are quite widespread, but there is a big proportion of B,C and D grade buildings, and many of those owners are just at the start line on sustainability.”

There are costs that come with upgrading or refurbishing buildings, but there is also a risk for owners who do not take action, he says.

“The ‘flight to quality’ among office occupiers is real, and the changed workplace environment means companies have to provide better office space to attract and retain staff, and get them into the office.

“If an owner doesn’t adapt, tenants will vote with their feet and move to a property that has the features they want, and that they need to meet their own sustainability objectives.”

Building new commercial properties to high green star ratings helps, but the greenest buildings are the ones already built, McKenzie says.

“Repurposing what we have will become a bigger part of construction as developers and occupiers think more about embedded carbon and what that looks like.”

Internationally, there is a big emphasis on the repurposing and recycling of existing building stock. That is because 80% of the building stock that will be standing in 2050 has already been built, according to a JLL report last year.

It means only a small portion of the built environment will be new buildings, and that retrofitting and repurposing existing buildings is key to addressing carbon emission challenges globally.

The JLL report also reveals how different cities are responding. Boston has upped the ante on reporting and disclosure, while Tokyo has a cap-and-trade programme, which incentivises building owners to reduce emissions.

Vancouver and Singapore have adopted holistic approaches to greening their buildings, while Paris is a leader on embodied carbon, and has decreed 20% of buildings must have solar power units by 2050.

JLL head of research Gavin Read says there are long-term challenges for commercial property owners, but repurposing existing buildings is the way of the future, and there are some great local examples to look to.

One is Number One Queen Street, a 50 year old tower block which is being redeveloped into offices, a hotel, and retail space by Precinct Properties. Another is the University of Auckland’s refurbished B201 building, which now has a 6 green star rating.

The “greening” of the sector is happening, he says. In Auckland’s CBD 53.8% of prime office space and 9.6% of secondary office space was green star rated at the end of June, while in the Wellington CBD, 26.9% of prime space and 3.1% of secondary space was.

“But it won’t happen overnight, as it is a multi-decade project to get to net zero, and there will be bumps, such as the weather related events of earlier this year, along the way.”

New Zealand is missing regulation in this space, and central and local government should adopt a “carrot and stick” policy approach towards decarbonisation, he says.

“They should look at creating incentives around funding, such as subsidies or renewable energy guarantees, as the carrot. And then the stick should be carbon taxes on buildings, or carbon pricing.

“Benchmarking, reporting, and auditing of environmental performance is also key, and with publicly listed property companies, it’s part of the financial reporting.

“They have to show their commitments, what they are doing, and where they are being measured. That is a start, and we will see more of this from owners, particularly if they have institutional investors.”

These days investors want to know their money is going into a more sustainable building, and banks, which are publicly listed and have their own targets for their shareholders, do too, he says.

“In contrast, private owners who have had a property for 20 years may be more resistant - until their vacancy rate skyrockets because their offering doesn’t meet occupier standards.

“Regulation would help the repurposing impetus keep going.”

Green Building Council chief executive Andrew Eagles says there has been a dramatic rise in the amount of green star rated commercial buildings nationwide.

Seventy-three new commercial buildings registered for green star certification over the 2022 to 2023 financial year, and that is up from 12 five years ago.

There has also been a five-fold increase in the number of buildings registered for Nabers assessment, which measures the energy efficiency of office blocks, he says. That has gone from around 25 buildings a year to 132.

“It’s not just an increase in volume, we are seeing lots more 6 green star buildings coming through and being achieved, so the ambition has increased.

“Alongside the rise in Nabers assessments, there is increased interest in air quality and thermal comfort, which shows occupiers are thinking about the well being of their staff more.”

Part of the growth is due to the rise in sustainable finance because it is possible to get lower interest finance if building at a higher rating level, but investor requirements around ESG are also a factor, he says.

“These are encouraging trends, and a good sign, but it’s not enough. We want to see more, such as targeted regulation and an expansion of the Nabers system out to industrial buildings too.”

New Zealand is already massively in excess of its carbon costs, and if the country does not up its game, it will end up having to pay to off-set its costs on a regular basis, Eagles says.

“In Treasury’s latest Climate Economic and Fiscal Assessment report, it sets that out as a ‘significant fiscal risk’.

“It will absorb 4% to 28% of all new operating expenditure in the next seven government budgets, and cost up to $23 billion with best estimates at around $10b.”

But the country has another option, and that is to invest more in work to reduce emissions, and in the built environment, he says.

“If we started building low emission offices from next year we could create buildings that reduce embodied emissions by 45% compared to the standard office, a Berl report from last year shows.

“It would also save almost a million kWh in electricity each year, and could contribute billions to the economy.”