Why more office retrofits are working around employees

Landlords mindful of NZC benefits aren’t waiting for tenants to vacate spaces

June 24, 2024

Building owners typically wait until offices are empty to spruce up or modernize spaces before the next lease starts.

But landlords have started undertaking more significant retrofit projects while companies are still there. Any inconvenience – either for landlords or tenants – is increasingly viewed as necessary to avoid financial penalties, or outright obsolescence, amid new sustainability regulations.

For the tenants, it means employees may find themselves taking the stairs as elevators are commandeered to transport materials and equipment. Meanwhile, landlords must minimize noise and power outages, as well as make sure the building remains accessible.

“While vacant possession is the ideal scenario for a retrofit, it’s rare that everything falls into place to give you free rein,” says Paula Gonzalez, Director of Program Management at JLL. Regulations such as the Décret Tertiaire in France, the UN Paris Agreement and MEES in the UK, “are pushing landlords and tenants to make changes sooner rather than later.”

In 10 major European and North American cities, 90% of office buildings are over 10 years old and unlikely to comply with future energy efficiency standards. And with more than 8,000 companies globally committed to science-based targets, occupiers now have stringent criteria when it comes to renting offices - and they’re willing to pay more.

The lack of NZC-ready buildings means just 30% of future demand for low-carbon workspace will be met in the next several years, pushing the average rental premium for certified offices in London over 11%, while in North America and Asia it’s between 7% and 10%, according to JLL data.

Bridging the gap between theory and practice

These regulations coupled with demand for more sustainable offices, means there’s a growing urgency to get buildings up to spec. And with the clock ticking, waiting until they’re empty is becoming less feasible.

However, while many building owners have reports full of net zero carbon recommendations, implementation is proving more challenging.

“There’s a big difference between easy wins, such as optimizing building management, systems (BMS) or installing LED lighting and smart meters, and deeper retrofits that are far more disruptive to occupants,” says Katie Krelle, Head of Sustainable Asset Services. “But it’s possible to plan some fairly significant works on a phased basis, timing your interventions to minimize disruption through careful project management.”

For those trades carrying out major improvements such as changing air handling units or getting rid of gas boilers, this means more anti-social hours are on the cards, as they work night shifts and weekends to avoid upsetting occupants.

Other measures include isolating one floor at a time, or where space permits, installing new plumbing or mechanical, and electrical plant alongside the old, before eventually switching across when the system is complete.

One project in London’s Paddington aiming to comply with Minimum Energy Efficiency Standards, is using this approach to replace gas boilers with air source heat pumps. The result will shift the energy performance certificate from E to B.

Gonzalez is developing best practices, mapping NZC regulations, deadlines and lease expiry dates, against equipment lifecycles, CapEx costs and bundled works for economies of scale.

“It’s important to bridge the gap, between audits and reality, between landlords, tenants and funds, to create strategic but practical roadmaps. Today we demonstrate the short and long term financial impact in terms of energy and carbon savings and how it translates into yield, return on investment and IRR,” Gonzalez says.

Getting tenants onboard

Occupiers are fast becoming a key driver for retrofit, says Krelle.

“Occupiers have their own sustainability targets and are weighing up stay versus go,” she says. “Their understanding of what they need to achieve from their building to comply with their own science-based targets has definitely matured and this is informing lease negotiations.”

Some tenants are already taking the lead by financing their own BMS or piloting artificial intelligence platforms like Hank.

Gonzalez says the biggest low cost, high gain measure landlords can take, is to inform, and communicate with their tenants from the get-go.

“Explain how it benefits them, plus outline proposed options and timetables. Then listen to their needs and negotiate solutions that work for everyone,” she says.

As yet there’s no globally consistent NZC standard, but for Krelle, the most important thing is to get started. “This issue isn’t going away, so start talking to your tenants now and agree some easy wins to achieve energy and cost savings in the short term.”

Despite the many challenges, Gonzalez is excited about how the ESG agenda is driving forward best practice in building retrofits.

“We’re figuring out how to do this better and more economically. It’s making it easier for those that come after, but more importantly, it’s helping protect the environment and make a difference to our planet,” she says.

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