The real estate sector finds itself in a position where expectations surrounding ESG are at an all-time high, which brings with it pressure to turn words into action.
The bar has been irreversibly raised, meaning that the major players in London are scrambling to adjust their strategies to ensure they remain ahead of the curve. As I see it, there are five main ESG challenges affecting London offices: scale; skills shortage; rising occupier expectations; regulation, legislation and accreditation; and construction costs.
One of the main challenges when it comes to potential obsolescence for the London market is scale. The size of the market and sheer number of office buildings mean that simple solutions to ESG-related problems will be few and far between. To demonstrate the scale of the issue in basic terms, it’s worth examining BREEAM certification as it applies to the central London market.
According to market data, there are just 32 buildings rated as Outstanding under the BREEAM rating system, with a further 310 buildings rated as Excellent. On face value, that might seem like a significant number of buildings achieving the highest standards in one element of ESG, but these are generally much newer buildings, which form a relatively small portion of the market.
The Construction Industry Training Board estimates that an additional 350,000 employees will be required by 2028 to meet growing ESG demand, of which the majority will be focused on delivering improvements to existing stock to facilitate reduced energy demand.
The real estate industry is not immune to the ESG skills shortage. As time goes on, there will likely be more educational courses offered to a wider pool of real estate professionals in order to make progress on closing the skills gap. The reality is that there is no quick fix in this scenario, so the shortage of qualified sustainability specialists will likely continue to be a barrier to finding creative and innovative ways to overhaul and adapt the central London office market.
Rising occupier expectations
Occupiers might not be using their office space in the same way as they did prior to the pandemic, but the “flight to quality” trend remains in force and green credentials are increasingly climbing up the agenda for those searching for new office space.
Occupiers are increasingly developing their own ESG strategies and will require office space that at least matches their own sustainability ambitions. Many occupiers are also now conscious of the correlation between office ESG performance and employee wellness. Companies are under pressure to deliver better wellness offerings to their employees, particularly as part of the return to the office drive after the pandemic, so it’s natural that they will seek out the most ESG-supportive buildings they can afford.
Regulation, legislation and accreditation
The prominent topic in terms of impending regulation changes is the new Minimum Energy Efficiency Standard (MEES) legislation that will shortly be implemented to a greater degree. The short-term change is that all leased commercial buildings will need to have an EPC of E or better by 2023 including existing leases, and by 2030 all buildings are likely to need to achieve a minimum of a B rating in order to be let. Our previous research on this topic highlighted that this change could render almost 10 per cent of existing London office stock non-compliant.
Another challenge for landlords and developers is the plethora of ESG-linked accreditations that are available in addition to EPCs. BREEAM certification is arguably the most well-known certification, but there are others available such as LEED, WELL, NABERS, and Fitwel.
Interestingly, the UK Green Building Council has recently made a recommendation that the real estate industry should “prioritise developing a net zero carbon standard that can be verified against, rather than a ‘green building rating tool/certification system.’” This concept is aimed at gaining mass participation by keeping barriers to implementation to a minimum, whilst giving structure to the industry in a shorter timeframe than developing an entire certification system.
One of the most cited barriers to creating sustainable office buildings is cost. The UK Green Building Council estimated that the capital cost uplift for net zero buildings would be 6.2 per cent for office buildings when compared to the baseline scenario, although this is for a relatively short-term outlook to meet the necessary requirements by 2025. The longer-term “stretch” scenario estimates that the capital cost uplift would be between 8-17 per cent for 2030 targets, although some of these costs would be at least partially offset by value benefits. These include increased rental premiums compared to non-sustainable assets, lower tenancy void periods and lower operating costs during the lifecycle of the building.
The World Green Building Council makes the key point that increases in construction and design costs can be mitigated if “cost strategies, programme management and environmental strategies are integrated into the development process right from the start.”
Christopher Dunn began working in the property industry at rating specialist CVS in 2014. In 2021, he joined Colliers as
Head of Insights for the London Offices team from Cushman & Wakefield where he worked in the UK Research & Insight team for over six years, focussing on the central London office market. At Colliers he is responsible for producing forward-looking thought leadership content on key trends that are impacting London. He regularly presents to clients and contributes to industry publications on topics relevant to London offices.
To contact Chris, email Christopher.Dunn@colliers.com