JLL Perspectives podcast: How sustainability drives real estate transformation
Hear from JLL's panel of experts Julian Sutherland, Head of Sustainable Assets, Alana Hannaford, Head of Project and Development Services Advisory Australia and Leo O'Regan, Director and Investor Sector Lead for New South Wales, moderated by Jamie Wallis, Senior Manager, Green Buildings Council of Australia, as they dive into effective strategies for building retrofits, market trends, and lessons from global markets.
Transcript
Good morning. How wonderful to see so many of you here this morning. We've got a really great sort of session. We'll keep it really informal just to ease us into day two of transform. It's my great pleasure to be here this morning with the JLL team and we want to thank JLL very much for their support of transform this year. We're looking forward to this conversation and hopefully teasing out some insights from the work that JLL does day to day, day-to-day with buildings. Yes, this is meant to be very informal. We're not overly scripted. We'll keep it very conversational. To that end, please, if you've got questions or input, we'd love to hear it. So we're very happy to go to all of you through this conversation with me. I've got the JLL team. We have Julian Sutherland, who's head of sustainable assets in the APAC region, Alana Hannaford, who's head of project and Development services Advisory Australia, and we also have Leo O'Regan who's a director and investor sector lead for New South Wales at JLL. So please welcome our JLL team.
(:So what we're going to be talking a little bit about this morning is really optimising your building for a sustainable future, really in the context of how do we go about maximising efficiency, value and impact and really what's the role of sustainability in modern real estate asset management. So hopefully we can get some of your insights and again, please, if you do have questions, very happy to hear those as well. So maybe if we start with you Julian, and from your experience, what are the most effective strategies to really initiate and fast track those building retrofits? So we've heard yesterday the challenge around existing buildings. We need to fast track getting them up to speed. From your experience, what are some of the ways that we can really initiate and fast track those building retrofits and across different building sectors? Yeah,
Julian Sutherland (:We'll try and pick that up. Yeah, I think initially thinking about it from a commercial point of view, I love existing buildings. I think they, from a design and engineering perspective, which is my background, they're fantastically exciting projects. It's actually more challenging to get an existing building up to spec than it is to build a shiny new one. Plus it requires a lot more innovation and actually a lot more collaboration from the team. The team being the wider team, design team, client team funders, the whole piece. So they're really, really exciting projects. But I guess if we think about repositioning of assets, there's kind of two scales of it. There's, I'll call the minor scale where we're going in and we might be trying to reposition it in terms of turn into traction. You're looking at end of trip and tidying it up and new lobbies and those sorts of things.
(:Maybe doing a bathroom refresh or something, which is very around attraction. It's probably less of a sustainability play, more of a extending the life of the building for a few more years to make it earn some money. But then on the other hand, we've got the big repositioning pieces, which are the ones that kind of really get me excited, which is the full scale. You are relooking at that building in terms of the way that it sits inside the city, the way it connects in it's now got a whole neighbourhood around it, which it didn't have when it was first designed. It's probably not had the investment it needs. It's probably a little bit dilapidated, it's might be a little bit distressed and there's an opportunity there. And really there's two different opportunities to intervene with those sorts of buildings. The minor ones, it's very much driven by a lease event, a major tenant move.
(:It's a good time to get in there, do some work and sort it out and it's kind of lifecycle money. The big repositioning, they're more challenging because it's a big intervention and it's going to take some time to think about how to go about that and you need to plan ahead. But there's really a couple of moments in the building's life where that makes sense and I think that's the sale moment. When that asset comes up to the market, there's an opportunity to think about what it can look like and therefore integrate that into the whole purchase and sale process. We talk about doing that in three different ways. Really, the person selling the building should have a proposition to the market of what that building can be. So there's a good bit of consulting advisory that you could do there to help them imagine what that building could be to really try and get the price nice and high.
(:I think also as a purchaser, you should do your own version of that effectively because it comes down to money. At the end of the day, you've got to have quite a bit of money to reposition the building, and if you're about to purchase that building, then you need to know what you're going to have to do to it. And so again, there's a fantastic piece of consulting to be done to imagine what that can be, but also engage into the funding exercise as well because they're going to have to borrow some extra money. But you are repositioning that asset with a sustainability agenda, which means you can start drawing on green funds, which means you can get better interest rates and all of that starts to play. And so the conversation is very much a value driven one with the funders, with the bankers, with investors, with the designers, with the owners and everything to kind of work that out.
(:And so you need to have the vision from the seller's perspective, the buyer's perspective, and then there's a project that comes on after that because that is really the best moment to reset that asset for its next 50 years. That's really what we're trying to do, and we see so many of these buildings sitting out there. You only got to look outside the window of any building in Sydney to see hundreds of these opportunities, but we need them to start coming onto the market. We need to see people who are passionate, motivated and interested in doing it because I have to say they're not without their challenges.
(:And you need to have a very good group of people around you to help manage the risks and opportunities that come with it. The opportunities are enormous. The risks are quite challenging, but manageable and there's no lack of technology to solve the problem we have at hand. There's nothing missing. You just need to have all of those pieces in place and then yeah, the magic can happen and I think we're seeing, we need to see some of that really happen. I mean, key tower is a very good example of what you can do. And the presentations here yesterday, both key tower and Houston Tower in London, which I used to work in, which is the best project I can imagine. It was a terrible building, but it's great to see. It's great to see the innovation, imagination and dedication from the clients who own those buildings into that process.
Jamie Wallis (:Yeah. Are you starting to see your clients net zero ambitions and strategies starting to influence the uptake of that desire to retrofit and reposition these assets? Absolutely.
Julian Sutherland (:If you have a net zero ambition for a building, it is inevitably going to mean a major refit. Net zero carbon requires you to drive the energy intensity to that building down to below a hundred, probably something like 70 kilowatt hours. Those projects are going to be infinitely cheaper in carbon terms. A retrofit, you might have to do a full scale retrofit for, I don't know, 200, 300 kilogrammes of carbon per square metre. A brand new building's going to cost you 1200 kilogrammes a square metre assuming you can't build it in timber, and it's very hard to build 50 stories in timber. So there's a massive carbon play sustainability play, and net zero is a key part of it. All of those projects are around driving the performance of the building, both environmentally but also financially.
Jamie Wallis (:Alana, obviously market conditions, vacancy rates will influence how asset owners are looking at repositioning assets or when they choose to go through that process. How are you seeing market condition at the moment? Are they influencing your client's net zero ambitions?
Alana Hannaford (:Absolutely.
Jamie Wallis (:Are there any unexpected challenges or opportunities that you're seeing at the moment?
Alana Hannaford (:Yeah, look and for the room, my expertise is in workplace and asset experience. So I work a lot with tenants and engaging with them around what is that experience that they want. And from a vacancy perspective, I was reading 2022 report this week where over 450,000 square metres in Sydney alone, the occupiers are actually currently in a tenancy that's not meeting their net zero ambitions. And obviously that's changed in the last couple of years, but it's really interesting the shift that's happening in the market. When I engage with the tenant, sustainability is first and foremost on the agenda and even our global benchmarking survey last year, seven out of 10, 21 to 30 year olds want to work for a sustainability leader, and that is a huge shift that is coming. So it is about attraction and retention from an experiential perspective. Tenants are wanting everything. They want the end of trip, they want the great coffee downstairs, but sustainability is really starting to be that leading factor for them. So this is an exciting world that we are stepping into because our younger cohort of future talent are leading the way and leading the discussion with their employers and making decisions about who they want to work for. And that's really then leading into the asset discussion because we need to be leading with a workplace experience that attracts those tenants and creates a sticky relationship to drive value in that asset.
Jamie Wallis (:Great. Any questions at this point? Any other thoughts from the audience? Yes.
(:So we're a builder in this space and we love fit out. I guess from my perspective, not so much a question, but there's a lot of talk about leasing and there's a lot of talk about client engagement and architectural engagement, but I guess from my perspective, I implore you to consider the builders in this process because very often we're brought in at the very end of the piece and then all of a sudden it's rush, rush, rush. And so obviously the first thing that gets pushed aside is sustainability or safety or all those wonderful things that we actually care deeply about as well. Personally, I find that the builders also come to the party with some really fantastic innovations and those often get missed over because they're not consulted in those earlier phases. The second part to my question was are there any builders that you've worked with that have some fantastic innovations in this space?
Julian Sutherland (:I absolutely, absolutely agree because, and I guess it's part of my bringing the whole team together because these projects have enormous amounts of technical risk to them. And one of the big things, soon as you open the cupboard, what's in the cupboard and you find these things start to come out. And I think it's a really important part of the development of the project is understanding the risks and opportunities and it would be a mistake to try and then just do some kind of big lump sum guaranteed maximum price on a big building, like a big redevelopment where there's so many risks involved. So it's got to be more of a partnership approach with the builders, and we would always recommend getting into the building as soon as possible, getting as many surveys as possible, starting to unpick a building. Now you can never unpick it completely, and so it's a process of working from initial investigations through to very detailed investigations. And often once you've got full access to the building and you've had a good chance to pull it apart, you need to have a good chat about the scope of work and the conversation. And many of these projects do get hijacked by major unknowns, asbestos, all these sorts of things, but if you've got the right team around you and the client understands how to participate in that risk process, then you get a really good outcome and usually goes wrong if there's just as you say, not the right engagement with all the parties.
Leo O'Regan (:Thanks, Jasmine. I come from a contracting background as well myself, so I get the point of upfront input from the contractor influencing massively really on the embodied carbon element and how your construction methodologies influenced that embodied carbon piece. Locally here built are quite good in terms of the project that they're doing with Atlassian and dus down at Central, they released a report about the embodied carbon reduction through the use of the timber frame in that structure and how they were attacking it. And then we're going to talk about Europe a bit more. There's a company called Durwin in London who are developer institutional property fund, and they've worked quite closely with a number of contractors to reduce the, I'm getting into the minutia now, but reducing the amount of OS in the steel structure so they can reduce the size of the steel beams and then that reduces the embodied carbon within the billing. And that's all influenced by contractor input in the early stages. So it's very important,
Jamie Wallis (:And I think consideration, we heard so much yesterday around upfront emissions and embodied carbon. It's not something that you can tack on to the end of a project is that it's something that really needs to be brought in early. And we're seeing that right across all of our greenstar projects as well, that consideration in order to achieve those end outcomes, you really have to be building that in right at the right up front. If we swing our thoughts to the investors. So we do a lot of work with investors and look very closely at all of the investor frameworks, so they've got a whole raft of frameworks that they're looking at that drive their decision making as well. Leo, I'm keen to get your thoughts on how are the expectations of investors evolving in this space?
Leo O'Regan (:Yeah, I might just go back to Julian's point at the start as well about the cost and the barriers to repositioning these buildings, especially if you're going for a major reposition rather than a minor reposition. I think policy is very important to influence investors' decisions to go and spend that capital that they get some sort of a gain on the outturn because the costs and the barriers to invest and make these upgrades, it doesn't make sense financially at the minute and the policy needs to change to enable that. So I think that's just something important to note and it probably needs to change at a state and federal level and then filter down into the local councils. Sorry, back to your question, Jimmy kind of went off track. So there's probably two key factors really in the decision making from an investor point of view.
(:And number one is tenant to traction long-term rental security as a result of that and getting the right tenants into the space. So more sustainable buildings attract tenants with better covenants. This coupled with another factors have led to lower vacancy in more sustainable buildings. This has been driven by tenant's own sustainability commitments and also their staff. As Alana mentioned, there's a generational shift really in terms of who's occupying spaces and who the decision makers are to minute. So if you look at it from a broad perspective, the boomers are retiring or close to retiring, gen Z are getting into positions where they can make decisions or influence those decisions, sorry, millennials are getting into those positions and then Gen Z are saying, I'm not coming into the office unless you give me X, Y, and Z and probably some free coffee as well.
(:The second key factor really is from the investor side and capital mandates. Investors are saying, we're not giving you the money unless you show you're being responsible and you tick my full list of requirements, so landlords are stuck in the middle, which is probably a good thing really from a sustainability perspective. You have auntie and uncle over here with the money saying, we'll not give you the money unless you show you can be responsible with it. And then you have your little cousins or your customers or tenants saying, we're not going to play with you unless you play by our rules.
(:But that's a good thing really for the industry and it's changing all of our attitudes as a result. And probably with the latest shift in the US market is probably looking at the US and saying things are changing, there's deregulation. How is that going to impact the larger tenants and their sustainability commitments? We've seen some organisational changes, not in terms of property and leasing, but in terms of their move away from compliance and risk and general monitoring the good of what their systems do, how will they move away from sustainability in their real estate decisions that might impact the broader market and something to watch over the next couple of years.
Jamie Wallis (:Any questions or thoughts on investor expectations? Steve?
(:Hi everyone. My name's Steven Peters. I'm from ISPT. I just was interested in that shift in the thematic there around investors expecting a sort of a responsible investment approach. You've got the tenants that are then seeking that sustainability outcome where previously we might've seen a premium associated with moving into a space like that. From what you're seeing in that shift, does that mean that it's not so much that you might get a premium, but it's just a base expectation and if it's not there then they might not move into that property? Is that sort of where you think it's going or is it there's still a premium?
Leo O'Regan (:No, I think there's still a premium for that and it's down to supply and demand. At the end of the day, the latest PCA report on the office market report for Sydney showed that vacancy rates in the primary grade assets were closer to 10%, whereas the broader markets around 17%. So that shows that there's a massive demand for higher grade, more sustainable buildings, and as a result, the rental growth on those buildings is increasing rather than on the secondary grade assets, it's flat. So I think it's still not a given that'll take time. So I think there's still a premium to be paid for sustainable assets.
Julian Sutherland (:I think we've recently seen a few deals collapse because there were more to do with the electrification issue, tenants wanting to move into buildings that were at least on an electrification journey and there was a bit of a Mexican standoff between the investor and the tenant in the end going, well, I'll only come in if you do it and well, I'll only do it if you come in sort of thing. It's like, okay, right, this is never going to work. Whereas actually there's a need to collaborate and to create a deal that actually incentivizes both parties to play ball because you can't just electrify your building overnight. So I think there's a premium for those wonderfully performing assets and there is the deal just isn't going to happen if you're not there. And I think we'll see more and more of that. And I think that's going to be disappointing because tenants need to move and people need to have space and it needs to meet their expectations. So I think we have a window of time to get on with it.
Alana Hannaford (:And it is interesting, the tenants that I'm currently working with, there is an equation at play. It's just sustainability has moved up the ladder and there are factors of cost and experience that are shifting, but I think it is a changing landscape and ever changing landscape. The economic climate that we're currently in plays into it, but it really depends on what is that organization's vision value and what's important to them
Jamie Wallis (:Going forward. Is there a lack of tenant demand in the lower grade buildings, do you think? So we have premium buildings, we also have premium tenants effectively in the lower grade, which we know is a big challenge for retrofitting. And the net zero transition is the lack of tenant demand in that space holding us back. Do you think
Leo O'Regan (:It is holding things back? We've seen in the western corridor between the CBD and Barangaroo vacancy rates as high as 40% in some of those office spaces. And then that creates a real problem for landlords because you can't see the end game. You're seeing everyone, all your neighbours around, you have similar vacancy rates even though they're investing in the building and you're stuck scratching your head, we've a stranded asset here on what do we do? And particularly in that area, there's a lot of individual and private landlords, they don't have the capital to go and invest in the building. They don't have a large enough balance sheet to go and say, we'll take a hit on this one, but we'll invest somewhere else. And they're really stuck. But it creates opportunities then for other investors to come in and say, there's real opportunity in this area of Sydney and take a punt. I think we've got another question there.
(:Hi, good morning. My name's Giant Gamble. I'm from Lendlease, and one of the things that we have found, yes, there's tenant appetite and definitely that is driving the market, which is exciting, but one of the things we find is just the actual, the tenants want sustainability and the landlord wants sustainability. One of the hurdles is the lawyers and the tenant reps in between where the green lease clauses seem to be the first low hanging fruit that gets cut off in the negotiations. I'm just interested in JLL what you guys are thinking in terms of that education space. I think that is a massive education space. Tenant reps, we know their KPI is to get the lease onus on the tenant, but yeah, I would like to know some comment around that. Yeah,
Julian Sutherland (:I was just talking with some of our green leasing team who are in the room here today. If you can have a chat with them where Ed put your hand up. Yeah, that's the man who knows all about it. Yeah, it's interesting because actually if you're a large scale property owner, like man lease, I mean I was Barangaroo yesterday and we were talking about it. It's like we've got all these tenants and they've all got different contract terms and you're trying to manage a precinct which has got fantastic sustainability agenda, all lots of really cool stuff, but all the tenants have got different deals. Well, the nightmare to manage because once you get lawyers involved, of course all reality goes out in the window and it's just an exercise in how do I cross off as many things and have a nice little argument with each other.
(:So sorry, that's my experience of doing contracts, doing construction contracts, but it's a similar process. So that's a different game to actually achieving highly sustainable property and actually getting everybody working together. So it's disappointing that that happens. Maybe that's a kind of fact life because ideally you want a lot of those green lease clauses to be non-negotiable really, because they're what drive the relationship and that relationship in our experiences is driving high performance buildings, great collaboration between all the parties to drive up the sustainability ambitions, sharing data, all that sort of thing. It's all fantastically positive for the life of the building and the performance of the building. So it's disappointing when perhaps parties are for whatever reason, pulling that apart and winding it down and I dunno if there's much we can do about it.
Alana Hannaford (:Well, there is one thing in education and engagement is a big factor here. I mean I was intrigued the other day that 65% of our benchmarking clients have a net zero ambition, but when we look at our survey of their employees, 65% didn't know their organisations had that. And I often reflect on how are we engaging and how are we communicating? So our tenant representation teams across the market, how are we engaging them and educating them on the value and the benefit and the longterm outcomes for their clients? And I think that's a key part of today and every day is how are we engaging and educating.
Jamie Wallis (:I might put just one last question to you. JLL operates beyond Australia and throughout the region. Are there any lessons that we can take from what's good practise internationally to help us in this space? Any insights from the team there?
Julian Sutherland (:Up until two years ago, I was working out of London. So I think before coming down to Australia, I did five or six major repositioning projects across the London landscape. And what struck me about those was that the ambition was enormously high and it was driven by the bankers. I mean, a lot of the projects I was doing were funded by Goldman Sachs and they came to the table and said, it needs to do this. Okay, right. It currently does something way over there. And so it was a process. We were working with a developer who had a particular interest in distressed assets. And I think that's really important. If you've got that mindset, you're looking for a good deal on a building, it's distressed, but your whole reason for doing it is because you're going to wind it up and then get it full of happy tenants and then you've got a great proposition to sell on.
(:And then working together with a team, we had a sort of hit team. We'd go in, we'd tackle the building, we'd have a look at what it was currently doing, and then we'd start to see what that opportunity might be. There's been some interesting work done recently in Australia in a similar way and basically providing those to the client, the developer, but also the banker with a series of options from doing a little bit to doing something quite a amazing and major and adding lots of area. And it's really all about that business plan, the business plan that goes with those options. Sometimes you can't quite make that final major repositioning work. Sometimes there's a market that doesn't really want lots of extra area, but actually the key ingredient on all of those projects was extra net lettable area because otherwise you're just spending money, you need some money to come back in because this exercise is not cheap.
(:And so they were all predicated on stretching, expanding extension or some increase in net lettable area. And that was possible because of a very grown up conversation with the local planners and the opportunity to have some planning gain around a few extra floors on top or a bit of extra width or whatever because there was a general understanding that you were doing something positive for the city, you were adding value to the buildings, you were bringing life back into parts of the city that may not have been connected as well anymore. And you were really driving redevelopment and value. And so everybody was kind of on the road to making, and sustainability
Jamie Wallis (:Was part of that
Julian Sutherland (:Sustainability. The
(:Sustainability was the key reason for giving you the money. If you didn't hit the sustainability targets of energy, performance, sustainability, carbon, all those things, you weren't getting the money. And they would spend some significant sums of money on things that drove those performance outcomes, but they weren't too busy about painting the plant room. And so it was a really interesting process where as I was an engineering consultant at the time, and it wasn't about the engineering, it was about the value proposition and what you could do with the building, the innovation that was allowed you to stretch it and do all these things. And it's a wonderful engineers, services, engineers, bankers, developers, tenant reps, the whole lot, everybody was in the mix. Everybody was in the room. And that was what made those projects work. Everybody together in the room with the same objective of this is going to be the best building in the city.
Jamie Wallis (:Leo.
Leo O'Regan (:Yeah. I might just add to the points about, I give you an example of a property fund in Dublin. They're called, I put real estate, quite forward thinking really. And it goes back to that point of where the money is coming from. And the capital mandates their policy for all stages of redevelopment is you've a commercial assessment, you've an architectural design, but you also have a carbon impact. So all the while through every phase before you go to planning, before you appoint a contractor through the construction stage, the carbon footprint or the embodied carbon of the development is measured as same as a QS assessment on the costs. And it doesn't go through those stage gates unless it's meeting certain metrics, which is an interesting one. So an example of that is they've developed over a million square foot of logistics space in Ireland, and they switched all the steel frames to glue laminated timber frames.
(:The cost and the structure is about 15% extra, but the embodied carbon impact was 25% less. So that shows real decision making based on what the embodied carbon is. So they're trying to reduce their upfront carbon from the start. And then what they also do is they've bought a number of acres or hectares of agricultural land and they're actually planting their own trees to offset their own carbon. So that agricultural land then sits in the property portfolio as a value. You're not dealing in the grey market of carbon offsets where you might be buying the same that was sold somewhere else. And it's all very real and it's a very hands-on approach to reducing the embodied carbon. So it's just an example of what's happening in Europe and very simple things that could be adapted here in Australia, especially around the carbon assessment for each stage. You have your QS report already, you have your bill of quantities, it's just a matter of applying the rates for carbon against them. So it's quite simple. And then once that's built into your decision making, you have a real data driven decision.
Jamie Wallis (:Amazing. And Alana, any last thoughts?
Alana Hannaford (:Look, I reflect on the different markets. And again, I'm the data nerd who loves to look at our research and our European market is more mature in the conversation and the perception of employees. Their expectations are higher. But the great thing is we're catching up. And so I'm really looking forward to the next 10 years and what great case studies we can share across to the market.
Jamie Wallis (:Amazing. Well, thank you so much for sharing your thoughts and insights. I think tackling existing buildings is a real challenge, but it's an exciting one, I think certainly something we need to get on top of very quickly. So thank you once again. Please join me in thanking the JLL team and we'll see you downstairs.
