Viewpoint
Tight office market complicates sustainability ambitions
October 18, 2024 10 Minute Read
The sustainability race has begun and the pressure is on - including for office real estate. Both occupiers and landlords are setting themselves the big challenge of reducing their CO2 emissions, often to the ambitious net zero. But without follow-up, such a target says little. Therefore, CBRE explores what the ambitious plans mean for parties in the tight office market. How do you translate your sustainability goals into your housing strategy? What can you do to align your current housing situation with your ambition? And if relocation proves to be necessary, how do you deal with the fierce competition in the office market?
For this publication, we surveyed CBRE's housing panel. It consists of over 100 office occupiers. We asked them about their sustainability goals and current office buildings. We then combined their input with our own research into the objectives of corporates, public organisations and SMEs in the Netherlands. The result: a clear overview of over 370 organisations, with a total of 4.6 million square metres of office space - more than 10% of the Dutch stock in use. Of these, 1.4 million square metres are in use by companies have expressed their intention to achieve net zero goals by 2030.
Promise is a promise: climate ambitions and their consequences
One in three large real estate users has a target of reaching net zero by 2030. In other words: net zero CO2 emissions. Partly due to legislation such as the CSRD - the European directive requiring companies to set targets and report on their impact on people and the environment - businesses will now have to put their money where their mouth is. Zooming in on office occupiers, we see a difference in ambition between large organisations and SMEs.
Corporates
Large organisations have often already set ambitious ESG targets: 32% of them say they want to be net zero by 2030. And that seems logical. Not only did many corporates already have net zero targets, but they are also the first to face CSRD regulations.
SMEs
SMEs are equally affected by CSRD. In the short term, as part of the supply chain of organisations subject to CSRD, including through so-called scope 3 emissions. In the slightly longer term, many SMEs themselves will also be required to set and report on ESG targets. Yet we see that as many as 73% of SMEs do not have a net zero ambition. For this group, sustainability still plays a much smaller role in housing strategy: for SMEs, it ranks sixth among motivations to adjust housing policy, while for corporates it ranks second.
How to translate ESG ambitions into a housing strategy?
1. Determine the impact of your goals
To find out what it takes to ensure your real estate contributes to your sustainability ambitions, start with your goals - assuming you already have them. For example, to become an energy-neutral organisation, stop emitting CO2, contribute to employee happiness or boost your organization’s social functions. Do those ambitions affect your type of property and its location?
An integrated view is crucial to get a picture of the full footprint of your property. After all, it depends not only on your buildings, but also on your location: how far do employees have to travel to get there, and how do they travel that distance?
2. Set up KPIs
Once you know what your objectives mean for your property, you can translate them into KPIs. In other words, you can concretise them. For example, by determining whether your property:
- must be Paris Proof;
- requires sustainability certification;
- must be accessible to everyone;
- must be located near a train station or provide enough parking and charging spaces.
3. Assess your current property
With your KPIs on paper, you can evaluate your housing strategy. How is your current portfolio doing? Is your building not meeting your goals now, what needs to happen to change that? In some cases, an (interim) negotiation with your landlord is enough, in other cases you will have to bring forward sustainability investments, or you will have to look for a new office.
What is often overlooked is that targets for 2030 or 2035 often call for action in the short term. Leases often run for ten years and technical installations will be replaced once at most. Hence, it seems like one still has time but in reality, before 2035, you can often only negotiate with the landlord once more regarding your wishes and requirements. Sometimes you are even too late. Once the contracts are fixed and your new installation is in place, it can be very difficult to make changes.
Sustainable (and) accessible
To meet your net zero targets, it is best to turn two real estate knobs: housing and mobility. In other words: how sustainable is your office, and how well do you facilitate sustainable mobility.
Net zero offices
To measure your property's CO2 emissions and energy performance, there are two common metrics: Carbon Risk Real Estate Monitor (CRREM) and Actual Energy Intensity Indicator (WEii), also called the Paris Proof methodology. The former is mainly used by landlords and is internationally recognised, while the latter is favoured by occupiers. Both methods measure actual carbon and energy usage - crucial, as this is often not the case for the current energy labels that offices have.
Energy consumption of buildings is not publicly available. However, every office building must have a valid energy label, and every building larger than 100 square metres - and without monumental status - must have a C label or better. This makes the energy label the only indicator we have for measuring the energy performance of the office stock on a large scale. It is important to note that: the label says little about actual energy consumption, but about expected performance. Thus, there is indeed a correlation, but in practice an office with an A-label can have the same consumption as a building with a G-label.
What appears from an analysis of energy labels is that especially offices with an energy label A+++ or higher have the potential to be a net zero building. Of course, this ultimately depends on energy consumption by the user. Buildings with an energy label A or lower are expected to be insufficient for net zero without major modifications. This means that the occupiers of such offices with a net zero ambition for 2030 will have to critically examine how to make it more energy efficient, or quickly look for an alternative property.
Of the 371 organisations in our survey, 23% have a net zero ambition for 2030. In total, this group utilizes 1.4 million square metres, with only 8% certified with an energy label of A+++ or higher, and thus the potential for net zero. The remaining 92% have a long(er) way to go - for example, 200,000 square metres of office space is even certified with a B label or lower.
Mobility
Besides the sustainability of the building, accessibility also plays a role. In fact, among corporates within business services, 85% of emissions are largely due to travel movements, and only 15% from the buildings themselves. In the race to become net zero, corporates are therefore likely to base their housing strategy largely on public transport accessibility. If fewer people come to the office by car, you limit a large amount of the emissions. Additionally, in making mobility more sustainable, there is a lot of focus on fleet electrification, including associated charging facilities.
Small stock, little supply
In Amsterdam, Rotterdam, The Hague and Utrecht (G4), about 1.5 million square metres of office space has an A+++ label or higher. If we look at how many of these sustainable office building are situated on or near a public transport hub, that leaves less than half a million square metres. Half of these buildings are located at the Zuidas area of Amsterdam or near other intercity stations in the capital. Utrecht's central station area is in second place, Rotterdam has a few suitable buildings and the entire area of The Hague is missing from the list.
This top segment also has an extremely low vacancy rate: around 2.6%. This is not surprising; the figure below shows that since 2020, demand has been growing for offices that meet the right sustainability requirements, good public transport accessibility or both.
ESG as (eventual) market driver
The market for office buildings that fit within a net zero strategy is tight. Moreover, the gap between supply and demand is only expected to widen in the coming years. This can be explained: in the short term, occupiers tend to have more ambitious goals than landlords. Furthermore, the financial feasibility of new buildings and renovations is under severe pressure due to increased interest rates, construction and material costs, so many projects are facing postponement - and sometimes even cancellation. The shift towards sustainability is irreversible, driven by regulations and user demand. Everyone in the market is moving towards 2050 , although not every stakeholder has the same speed.
Until then, it is important that occupiers and landlords engage with each other. Substantial investments are needed to achieve sustainability targets, who pays for them? And if the costs are shared, how? And what do you do with the benefits: will the tenant get some of his investment back? Negotiating a new lease is an excellent time for this, for instance by laying down the agreements in a Green Lease Agreement.
Fierce competition in a tight market
Turns out that another location is a better fit for your transition plan? Then you will have to be quick: as we have seen, both the available space and the supply in the top segment are very limited. In other words: buildings that meet the highest sustainability requirements and that are easily accessed by public transport.
Many companies are already taking proactive steps, such as moving to better-performing buildings or negotiating improvements with landlords. This creates competition for high-quality, sustainable office space in prime locations. This trend is only expected to increase in the coming years - in view of set targets by 2030. Owners will naturally also notice this increasing demand, and take the initiative themselves to invest in the sustainability of their office buildings. Given that they need to earn back their investment and because land availability is scare, landlords will charge hefty rent premiums. Even between the A and A+++ labels, large differences in rental prices are now emerging.
But are occupiers willing to pay this rental premium? What stands out from the CBRE housing panel's survey is that almost half of the office occupiers indicate they are willing to pay more for a location that matches their sustainability goals. Hence, landlords can recoup their investment through higher rents. Few organisations are willing to pay anything for net zero (3%), more organisations are willing to pay substantially more for net zero (8%) and the largest group is willing to pay a bit more (38%). Remarkably: 36% of companies surveyed do not yet know.
Urgent advice: look ahead
In the market for sustainable office space, occupiers run the risk of not being able to find an office building that fully meets their ESG ambitions. Yet it is essential to start early and explore what steps you can take as a tenant. If your current location does not yet meet all the requirements, you can make improvements to get closer to your goals - but only if you start early and start the conversation with the landlord. And if moving is the best option, expect fierce competition for sustainable property in an easily accessible location, as well as higher rents to pay for an sustainable office.