Green development:
a market-driven perspective
Leigh Warner
Director, Research & Consulting
28 March, 2014
My angle… I have none
With no vested interests, my views on sustainability are born out of agnostic observation
• Data on the ‘green’ premium/performance need to be questioned
• Sample sizes are small
• Cannot separate ‘green’ from ‘new’
• Survey data is subject to rationalisation (and ‘new’ factor)
• Attitudes shift through the cycle
• Price factors and perceptions do change behaviour
• The underlying trend is strong, but gets obscured by market trends
• Strong market = ‘green’ demand, but old secondary stock also leases and
owners/agents begin questioning ‘is sustainability real’
• Weaker market = less ‘green’ demand, but when the tide goes out you can
see who is swimming naked (older secondary buildings)
• Problems are becoming evident but how do we fix them?
• Leave it to market pricing, or is there market failure and a public interest?
A ‘Postcode 4000’ initiative? Environmental upgrade agreements?
Brisbane office market outlook
March 2014
Contents
Data Evidence
With a pinch of skepticism
Anecdotal Evidence
Tenant/landlord perceptions
Market Trends
The problems revealed
The sample size is growing, but still small….
Number of Buildings by NABERS Energy Rating
There is still only a short history
of performance on many
buildings
60
No.of Blgs
50
40
30
20
10
0
0.5 - 2.5
Sydney
3.0 - 4.0
Melbourne
Brisbane
4.5 - 6
Perth
Adelaide
Canberra
Source: JLL
NABERS Energy Rating (Base Building)
No. of rated buildings as a % of total buildings
Less than 10% of buildings
18.00%
16.00%
% of Blgs
14.00%
12.00%
10.00%
8.00%
6.00%
4.00%
2.00%
0.00%
0.5 - 2.5
Sydney
3.0 - 4.0
Melbourne
Brisbane
4.5 - 6
Perth
Adelaide
Canberra
Source: JLL
You can’t read too much into results like this…..
Sydney CBD Vacancy by NABERS Energy Rating (Base Building), As at Q2/2013
These are all new buildings
on initial leases, rents are
also stronger – but a new
car is more expensive than
an old one!
24%
20%
16%
The real test is in releasing and
performance over time
of retro-fits
12%
8%
4%
0%
1.5
2
2.5
3
3.5
4
4.5
5
5.5
6
Source: JLL
Data suggests there is stronger capital growth…
But Green Star definitely has a ‘new’ factor
IPD Australia Quarterly Green Property Digest
Summary - Quarter Ending December 2013
Income
Return
(%pa)
Capital
Growth
(%pa)
Total
Return
(%pa)
Total
Return
Rank
Total Return
(%) 3 Year
Annualised
Databank
Capital Value
($m)
Databank
Number of
Investments
(count)
Current
Quarter
Valuation
Evidence (%)
6.9
6.5
8.4
6.9
3.3
3.3
2.8
3.3
10.3
10.0
11.4
10.4
3
4
1
2
10.9
10.9
11.0
11.0
13,415
10,971
2,444
13,081
68
50
18
65
93.4
95.5
84.0
93.3
6.9
7.6
6.9
6.2
6.6
3.3
2.8
3.4
3.5
3.4
10.3
10.7
10.5
9.9
10.3
3
1
2
5
4
10.9
11.7
10.6
10.4
10.4
13,415
3,179
5,898
4,338
10,236
68
20
29
19
48
93.4
96.7
90.7
94.8
92.4
7.2
6.8
8.4
7.0
8.1
2.4
2.7
1.1
2.8
-0.5
9.7
9.7
9.6
10.0
7.4
3
2
4
1
5
9.9
10.0
9.7
10.2
8.1
62,719
49,371
13,294
54,701
8,018
602
294
306
329
273
82.1
84.0
74.8
82.7
78.0
Green Star Market
Total Office
Office: CBD
Office: Non-CBD
Prime Office
Green Star Quality
All Stars
4 Star
5 Star
6 Star
5 & 6 Star
Control (All office sector) Market
Total Office
Office: CBD
Office: Non-CBD
Prime Office
Secondary Office
NABERS also appears to give a premium…
With capital growth again seemingly the driver
IPD Australia Quarterly Green Property Digest
Summary - Quarter Ending December 2013
Income
Return
(%pa)
Capital
Growth
(%pa)
Total
Return
(%pa)
Total
Return
Rank
Total Return
(%) 3 Year
Annualised
Databank
Capital Value
($m)
Databank
Number of
Investments
(count)
Current
Quarter
Valuation
Evidence (%)
All Stars
0 - 2.5 Stars
3 Star
3.5 Star
4 Star
4.5 Star
5 Star
5.5 Star
6 Star
Control (All office sector) Market
7.1
7.3
7.3
6.9
6.9
7.0
7.4
7.9
-
2.5
0.8
0.2
0.7
2.6
3.1
3.2
2.8
-
9.8
8.1
7.5
7.7
9.7
10.3
10.7
11.0
-
4
6
8
7
5
3
2
1
-
9.9
9.1
8.0
9.6
10.2
10.0
10.9
-
49,208
2,688
2,848
4,408
9,859
16,643
10,803
1,959
-
334
40
30
28
58
104
62
12
-
80.2
86.0
76.1
91.9
75.4
78.2
81.3
85.4
-
Total Office
Office: CBD
Office: Non-CBD
Prime Office
Secondary Office
7.2
6.8
8.4
7.0
8.1
2.4
2.7
1.1
2.8
-0.5
9.7
9.7
9.6
10.0
7.4
3
2
4
1
5
9.9
10.0
9.7
10.2
8.1
62,719
49,371
13,294
54,701
8,018
602
294
306
329
273
82.1
84.0
74.8
82.7
78.0
NABERS Energy Quality
Brisbane office market outlook
March 2014
Contents
Data Evidence
With a pinch of skepticism
Anecdotal Evidence
Tenant/landlord perceptions
Market Trends
The problems revealed
Anecdotal Evidence
• Tenants appetite has cooled – tenant reps report that sustainability
has definitely slipped down tenancy priorities for corporate occupiers
• The business environment is still cost-driven
• Still underlying appetite for new – but needs to be justified with business case
and focus on efficiency gains
• Public sector is slightly different and it is impacting on markets
• Tenants more concerned with NABERS as it directly relates to their
operational costs
• Green star is a ‘nice to have’ but just viewed as standard in development
• Landlords are starting to worry about old stock and its
competitiveness in the leasing market
• But the unknown is the extent retro-fitting
• Developers remain focused on sustainability as part of the ‘package’
of new, but has it become most green star points for least $s?
Brisbane office market outlook
March 2014
Contents
Data Evidence
With a pinch of skepticism
Anecdotal Evidence
Tenant/landlord perceptions
Market Trends
The problems revealed
The disconnect between leasing and capital markets…
This is important because the strength of capital and demand for new is driving development
when fundamentals do not justify – creating a problem for older stock
14
21%
600,000
18%
500,000
15%
400,000
12%
300,000
9%
200,000
6%
100,000
3%
0
0%
4
-100,000
-3%
2
-200,000
-6%
-300,000
-9%
0
1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013
Net Absorption
10
8
6
1989
Office
Retail (Regional Centres)
Industrial
^Total retail market
1993
1997
2001
2005
2009
2013
Office
Vacancy Rate
Transaction
Volumes (%)
27.5
8.9^
28.5
Volume of Office Transactions
(> AUD 5 million)
AUD Bill
12
Stock Vacant
Sqm
CBD Net Absorption and Vacancy
700,000
Capital Values
(%)
3.5
2.3
2.2
Yields Rents Vacancy
(bp)
(%)
(bp)
-14
-5.8
277
-17
-0.4
26
-18
-0.5
108
Source: JLL Research
11
Vacancy in context
Australia & US Office Markets Vacancy Rate, 2013
Australia has gone up, other
industrialised countries have
come down – meeting in the
middle
25%
15%
10%
Atlanta
Los Angeles
Boston
Chicago
Houston
New York
San Francisco
Brisbane
Adelaide
Canberra
Melbourne
Perth
0%
Seattle
5%
Sydney
Vacancy Rate
20%
Source: JLL Research
But the composition of vacancy is getting interesting….
CBD Office Market Vacancy by Grade
The big question is whether this vacancy is
becoming structural?
20%
14.9%
Percent
15%
11.6%
11.0%
10.2%
10%
10.8%
I’ll come back to Sydney
5%
0%
Premium
Sydney
A-Grade
Melbourne
B-Grade
Brisbane
C-Grade
Perth
D-Grade
Adelaide
Source: Jones Lang LaSalle Research
Structural vacancy in Australian markets
CBD Office Markets – Age Profile of Stock
40%
Almost 50% of stock in
excess of 30 years old
35%
Percent
30%
25%
20%
15%
10%
5%
0%
< 10 Years
Sydney
10-19 Years
Melbourne
20-29 Years
Brisbane
30-39 Years
Perth
>40 Years
Adelaide
Source: JLL Research
There is great concern about the outlook at present…
Vacancy is at a record high and three large developments are under way
14.8%
15.5%
The composition of vacancy is different to the 90s…
Brisbane CBD Office Market Vacancy
28.1%
Predominately supplydriven event
Predominately demanddriven event
19.4%
14.8%
14.1%
15.5%
10.6%
Hidden vacancy in Brisbane was great in the 1990s
Australian CBD Office Market Vacancy and Incentive Troughs
Vacancy
Peak Prime Rent
Peak Incentive
Market
Brisbane
Sydney
Melbourne
Perth
Adelaide
Average
(excl.
Brisbane)
%
Quarter
$/sqm
Quarter
%
14.8
23.3
26.1
31.8
19.9
25.3
Q3/1993
Q3/1993
Q2/1993
Q4/1992
Q2/1993
368
669
467
327
222
Jun 90
Jun 90
Dec 90
Mar 89
Jun 90
41
49
49
50
30
45
Quarter
Q2/1994
Q3/1993
Q4/1992
Q1/1992
Q2/1993
Low rents and no prospect
of leasing surplus space
led many tenants to ‘carry’
space rather than sublease, which is reflected in
the high incentive
(compared to 30% today).
This surplus space just
does not exist across the
private sector today
The prime market can move back into equilibrium
Brisbane CBD Office Market Vacancy Outlook
14.4%
6.2% - would require
average net absorption
of around 20,000 to
25,000 sqm p.a.
(assuming there is a
moderate level of stock
re-grading)
Completions
supply…
Brisbane CBD Completions (including refurbishments) and withdrawals
250,000
200,000
Net Supply
Equation
Sqm
150,000
100,000
+ 236,100 sqm
50,000
0
- 144,350 sqm
-50,000
= 91,750 sqm
-100,000
1978
1982
1986
1990
1994
1998
Completions
2002
Withdrawals
2006
2010
2014
2018
or 4.2% of total
stock over 5 years
Source: Jones Lang LaSalle Research
Testing our withdrawal assumptions - market
44% of Brisbane CBD Stock is B-Grade and vacancy is 19.9%
Assessing Stock
We have identified 19
buildings totalling
225,000sqm that could
feasibly be withdrawn
over the next 5 years,
so our forecast
estimate assumes
64% of this stock will
actually be withdrawn
Testing our withdrawal assumptions - history
Our forecast translates to 1.2% of stock p.a.
1970-2013
1990s
Ratio of
Ratio of
Average Stock
Average Stock
Refurbishments
Refurbishments
Withdrawals
Withdrawals
to Withdrawals
to Withdrawals
(% of stock)
(% of stock)
(%)
(%)
Sydney CBD
1.2%
54%
1.7%
62%
Melbourne CBD
1.1%
46%
1.8%
26%
Brisbane CBD
0.7%
55%
1.2%
42%
Adelaide CBD
1.0%
65%
0.7%
56%
Perth CBD
1.1%
31%
1.0%
35%
Canberra
1.2%
52%
1.7%
40%
1.2%
51%
1.5%
44%
All CBD
Markets
Market
Source: Jones Lang LaSalle Research
Withdrawals could
easily exceed our
expectations,
particularly if more is
done to encourage
conversions like
Melbourne’s Postcode
3000 initiative in the
1990s
Limited product for core capital
CBD Office Markets, Super Prime Cohort
A lower opportunity set in the core
market will force investors to move
up the risk curve.
50 Super Prime Assets
Number of Assets
20
16
12
Market
Market Value
($, billion)
8
Sydney
$12.3
4
Melbourne
$5.5
0
Brisbane
$3.8
Perth
$4.5
Sydney
Melbourne
Brisbane
Perth
Source: Jones Lang LaSalle Research
Are development upgrade agreements the answer?
The Brisbane industry (including me) are just learning about this
• The theory seems great – essentially tries to address the incentive
problem between who undertakes expenditure and who benefits
• Uptake in NSW and Vic has been very limited to date
• Tenants (and tenant advisors) still need convincing as they simply
see all options in the market and think landlords should be
undertaking the capital works to maintain leasing relevance
• Ultimately success will depend on how well it is sold – it needs
good high provide case studies and strong convincing advocates
Thank you
Leigh Warner
Director, Research & Consulting
Brisbane
+61 7 3231 1445
leigh.warner@ap.jll.com
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