Article

A Reset is Underway: Carbon Footprint, Climate Change and Health

It’s not unusual for Dubai’s office sector to be described as a “two-tier market” by commercial real estate professionals in the region.

January 05, 2022

A Reset is Underway: Carbon Footprint, Climate Change and Health & Wellbeing are Important Considerations for Developers and Owners of Best-In-Class Buildings.It’s not unusual for Dubai’s office sector to be described as a “two-tier market” by commercial real estate professionals in the region. After all, the grade A segment has historically been the outperformer when compared with grade B & lower segments of the market. However, the office sector as a whole has faced headwinds in recent years – and the situation was unfortunately exacerbated during the depths of the Covid-19 pandemic. But it was also the spark that led occupiers to re-think their office requirements. We have observed a combination of changing tenants preferences and an acceleration of existing trends, such as a flight to quality. But what constitutes “quality” when considering office buildings? Our conversations with corporates around the globe reveal that employee health & well-being, creating environments that foster innovation & collaboration and the prioritisation of employee safety are now considered necessities rather than luxuries. Unsurprisingly then, sustainability and wellness are moving higher up the agenda for many corporates. Indeed, some of the largest institutional landlords – specifically of prime office buildings – have observed this gradual shift and are taking steps to ensure their developments achieve globally-recognised green credentials. Those that have risen to the challenge are starting to see this strategy pay off.

The Age-Old Question Answered: Yes, Green-Certified Buildings Have Historically Achieved A Financial ROI.
According to JLL’s recent Return on Sustainability report, when green certifications were first introduced in the 1990s – including BREEAM in the UK and the U.S. Green Building Council’s (USGBC) LEED rating system – real estate investors questioned the ‘value of green’. This is not surprising as investors continuously need to strike a balance between all their stakeholders – their capital partners on one side, their tenants/customers on the other, as well as lenders, insurers and government entities. Balancing the needs of all those parties against their return targets, hold period, appetite for risk and the state of the economy is no small task and implies a deep need to scrutinize capital investments and expected returns. Because of this, numerous studies over the last three decades have been conducted to quantify the green premium or value of green certifications in the form of higher rents, occupancy or sales price.
A meta-analysis of 42 studies1 on the value of green was conducted by Dalton and Fuerst in the Routledge Handbook of Sustainable Real Estate, 2018. The studies included in the analysis spanned 14 countries, incorporated both commercial and residential property types, and were conducted between the years 2008 and 2016. Research on the value of green appears to have peaked in the 2013-2014 period. Of the 42 studies, all but 3 concluded that there is a rent premium for green certifications, and all but 4 concluded a sales premium exists as well. In fact, the meta-analysis concluded that, overall, green certifications result in a rent premium of 6% and a sales premium of 7.6%. The table below shows a more detailed breakdown of the results:

Green certification real estate premium

Overall Commercial Residential
Rental Premium
6.0%
5.4%
8.2%
Sales Premium
7.6%
11.5%
5.5%
Subscribe

Looking for more insights? Never miss an update.

The latest news, insights and opportunities from global commercial real estate markets straight to your inbox.

These findings are in line with research that JLL conducted in 2020 which focused on Central London and showed that BREEAM ‘Outstanding’ buildings recorded rent premiums between 4% and 11% and enjoyed 100% pre-leasing compared to 50% for standard properties. All of this data confirms a value premium for green certifications.

1 The 42 studies include notable work such as Fuerst and McAllister (2011), Chegut, Eichholtz and Kok (2014), Das and Wiley (2014), Reichart (2014), Devine and Kok (2015), Fuerst and van de Wetering (2015), Robinson and McAllister (2015), and Bond and Devine (2016).

Adoption of Sustainability Features is High Among Premium Office Buildings
Our Q4 2021 Global Premium Office Rent Tracker report shows that a large proportion (84%) of premium office buildings surveyed globally have a certification in environmental sustainability, such as LEED or BREEAM. The percentage of sustainability-certified buildings rises to 100% for those buildings in “high-end” markets (those with office occupancy costs in excess of US$100/sq. ft./annum). This highlights the fact that developers in this segment fully recognise the importance of achieving sustainability credentials – especially in the world’s top-tier cities.

That said, only 13% of premium office buildings surveyed around the world currently have a health and wellness-related certification, such as WELL or Fitwel. Yet both owners and occupiers are placing greater emphasis on healthy building credentials, which should lead to increasing number of buildings achieving these certifications in the coming years.
The time has come to evolve the conversation.

Looking for more insights? Never miss an update.

The latest news, insights and opportunities from global commercial real estate markets straight to your inbox.