Foresight Sustainability | Macro Trends
Sustainable Australian offices deliver investment and operational outperformance
June 14, 2023 25 Minute Read Time
Sustainability focused prime offices in Australia’s three largest office markets delivered superior investment and operating performance over a 13.5-year period through September 2022, relative to the equivalent broader prime office market segment.1
Green Star-rated prime offices in Sydney, Melbourne and Brisbane outperformed achieving higher total returns, lower vacancy, higher rent receivable per square meter and lower net operating costs per square meter. Given increased institutional investor demand for green buildings to meet health and wellbeing objectives and carbon reduction targets, CBRE Investment Management (CBRE IM) conducted a statistical analysis of sustainable office investments and operational performance.
The analysis, based on Property Council of Australia/MSCI Annual Property Index data, used inferential statistics to analyze historical data from March 2009 through September 2022 comparing the quarterly mean performance of Green Star prime offices with the quarterly mean performance of all prime offices using 55 variables including total return, vacancy and net operating costs.
Green Star is a sustainability rating system for buildings in Australia, which assesses a building across nine categories: management, indoor environment quality, energy, transport, water, materials, land use and ecology, emissions and innovation. Green Star buildings in the Property Council of Australia/MSCI Australia Property Index must have a four- to six-star rating, which represents the “best practice” to “world leadership” ratings, for the “buildings” and “design and as built” categories.
Source: PCA/MSCI Australia Property Index as of September 2022, Standing Office Investments and Office Development Assets
We focused on the three largest Australian office markets by area and transaction volumes—Sydney, Melbourne and Brisbane. Annual office transaction volume in the three cities combined comprised an average of 87% of total Australian office transaction volume, over the 10 years to 2021, according to Real Capital Analytics (RCA).
In this two-part series, we highlight the key operational and investment performance comparisons between Green Star prime offices and the broader office market segment. In the first article, we articulate the motivations of the CBRE IM study, summarize the existing literature, and share the study’s operating performance findings. In the follow-up article, we will summarize the study’s findings and provide overall conclusions.
Steady incremental improvements in the sustainability of buildings and their energy efficiency have the potential to bring about sizable and measurable impacts on building lifecycle energy consumption. The benefits of sustainability, including energy efficiency, should flow through to tenants and owners. The accumulation of such benefits across the office sector could collectively advance Australia’s overall climate change goals.
Multiple academic studies have cited credible evidence of the economic value of “green buildings.” In the U.S., Eichholtz et al (2010) found that clusters of certified green buildings in the U.S. commanded substantially higher rents and selling prices, compared to otherwise identical, nearby buildings. Variations in premiums were systematically related to energy-saving characteristics, with the increased energy efficiency associated with increased selling prices. Fuerst and McAllister (2010) analyzed the CoStar database of U.S. commercial real estate assets to measure the effect of environmental certification on both rent and price. They found that eco-certified buildings have both a rental and sale price premium, compared to buildings in the same submarket.
Newell et al (2014) undertook the first research in Australia analyzing a portfolio of 200 green office buildings against a comparable portfolio of non-green buildings. They empirically determined “energy rating premiums for green office buildings are evident at the top energy ratings and energy rating discounts at the lower energy ratings.” More recently, Brookes et al (2021) found an “8%-18% sales price premium for green-rated buildings compared to equivalent buildings” without a green rating in the Melbourne and Sydney prime office markets. In March 2022, a study by CBRE Australia found higher-rated NABERS office buildings had higher occupancy rates and supported rental premiums, compared to lower-rated NABERS buildings.
Vacancy
Within the three-city subset, Green Star prime office had a lower quarterly vacancy rate of 4.8% compared with 5.7% for all prime office and 14.6% for secondary office as of September 2022. Green Star prime office had a lower quarterly mean vacancy rate by 154 basis points compared to all prime offices from March 2009 to September 2022 across 55 quarterly data observations points. These findings were statistically significant.
Source: PCA/MSCI Australia Property Index as of September 2022, Same Store (Sydney, Melbourne and Brisbane Office Property subset)
Weighted Average Lease Expiry (WALE)
Green Star prime office had a longer WALE of 5.3 years compared with all prime office at 4.9 years and secondary office at 2.5 years as of September 2022 within the three-city subset. From June 2012 to September 2022 across 42 quarterly data observations points, Green Star prime office had a longer quarterly mean WALE by approximately 10 months compared with all prime office. These findings were statistically significant. Please note that WALE data was only available beginning in June 2012.
Source: PCA/MSCI Australia Property Index as September 2022 Same Store (Sydney, Melbourne and Brisbane Office Property subset)
Source: PCA/MSCI Australia Property Index as of September 2022, Same Store (Sydney, Melbourne and Brisbane Office Property subset)
Source: PCA/MSCI Australia Property Index as of September 2022, Same Store (Sydney, Melbourne and Brisbane Office Property subset)
Source: PCA/MSCI Australia Property Index as of September 2022, Same Store (Sydney, Melbourne and Brisbane Office Property subset)
The Green Star prime office quarterly improvement expenditure per square meter was AUD 43, lower than for all prime office at AUD 66, but higher than for secondary office at AUD 32 as of September 2022. From March 2009 to September 2022 across 55 quarterly data observation points, the quarterly mean improvement expenditure per square meter for Green Star prime office was lower by AUD 7 compared with all prime offices. These findings were statistically significant.
Source: PCA/MSCI Australia Property Index as of September 2022, Same Store (Sydney, Melbourne and Brisbane Office Property subset)
Green Star prime office outperformed the all-prime segment based on measured operating metrics. Across the approximate 13.5-year period under review, vacancy rates and net operating costs were lower for Green Star prime office, relative to all prime offices. Similarly, quarterly rent receivable per square meter and quarterly NOI per square meter were higher for Green Star prime office relative to all prime offices. All findings were statistically significant based on our analysis. In the next article, we will examine investment performance metrics and draw overall conclusions.
1 Source: CBRE Investment Management statistical analysis using PCA/MSCI Australia Property Index data as of September 2022.
Green Star-rated prime offices in Sydney, Melbourne and Brisbane outperformed achieving higher total returns, lower vacancy, higher rent receivable per square meter and lower net operating costs per square meter. Given increased institutional investor demand for green buildings to meet health and wellbeing objectives and carbon reduction targets, CBRE Investment Management (CBRE IM) conducted a statistical analysis of sustainable office investments and operational performance.
The analysis, based on Property Council of Australia/MSCI Annual Property Index data, used inferential statistics to analyze historical data from March 2009 through September 2022 comparing the quarterly mean performance of Green Star prime offices with the quarterly mean performance of all prime offices using 55 variables including total return, vacancy and net operating costs.
Green Star is a sustainability rating system for buildings in Australia, which assesses a building across nine categories: management, indoor environment quality, energy, transport, water, materials, land use and ecology, emissions and innovation. Green Star buildings in the Property Council of Australia/MSCI Australia Property Index must have a four- to six-star rating, which represents the “best practice” to “world leadership” ratings, for the “buildings” and “design and as built” categories.
Figure 1: Capital value of Australia Green Star office (PCA/MSCI Australia Property Index)
Source: PCA/MSCI Australia Property Index as of September 2022, Standing Office Investments and Office Development Assets
We focused on the three largest Australian office markets by area and transaction volumes—Sydney, Melbourne and Brisbane. Annual office transaction volume in the three cities combined comprised an average of 87% of total Australian office transaction volume, over the 10 years to 2021, according to Real Capital Analytics (RCA).
In this two-part series, we highlight the key operational and investment performance comparisons between Green Star prime offices and the broader office market segment. In the first article, we articulate the motivations of the CBRE IM study, summarize the existing literature, and share the study’s operating performance findings. In the follow-up article, we will summarize the study’s findings and provide overall conclusions.
Study motivations and literature review
The purpose of this study was to better understand how the investment environment and the performance of green offices may be linked. This hypothesis is informed by Australia’s very high urbanization rate (approximately 86% of Australians living in cities) and the large share that the office sector represents across the country’s real estate investable universe. The office sector comprises 46.2% of the total capital value (AUD $225.4 billion) of the Property Council of Australia/MSCI Australia Property Index.Steady incremental improvements in the sustainability of buildings and their energy efficiency have the potential to bring about sizable and measurable impacts on building lifecycle energy consumption. The benefits of sustainability, including energy efficiency, should flow through to tenants and owners. The accumulation of such benefits across the office sector could collectively advance Australia’s overall climate change goals.
Multiple academic studies have cited credible evidence of the economic value of “green buildings.” In the U.S., Eichholtz et al (2010) found that clusters of certified green buildings in the U.S. commanded substantially higher rents and selling prices, compared to otherwise identical, nearby buildings. Variations in premiums were systematically related to energy-saving characteristics, with the increased energy efficiency associated with increased selling prices. Fuerst and McAllister (2010) analyzed the CoStar database of U.S. commercial real estate assets to measure the effect of environmental certification on both rent and price. They found that eco-certified buildings have both a rental and sale price premium, compared to buildings in the same submarket.
Newell et al (2014) undertook the first research in Australia analyzing a portfolio of 200 green office buildings against a comparable portfolio of non-green buildings. They empirically determined “energy rating premiums for green office buildings are evident at the top energy ratings and energy rating discounts at the lower energy ratings.” More recently, Brookes et al (2021) found an “8%-18% sales price premium for green-rated buildings compared to equivalent buildings” without a green rating in the Melbourne and Sydney prime office markets. In March 2022, a study by CBRE Australia found higher-rated NABERS office buildings had higher occupancy rates and supported rental premiums, compared to lower-rated NABERS buildings.
Operating metrics
Our study measured a broad range of operational metrics summarized below.Vacancy
Within the three-city subset, Green Star prime office had a lower quarterly vacancy rate of 4.8% compared with 5.7% for all prime office and 14.6% for secondary office as of September 2022. Green Star prime office had a lower quarterly mean vacancy rate by 154 basis points compared to all prime offices from March 2009 to September 2022 across 55 quarterly data observations points. These findings were statistically significant.
Figure 7: Quarterly office vacancy rate
Source: PCA/MSCI Australia Property Index as of September 2022, Same Store (Sydney, Melbourne and Brisbane Office Property subset)
Weighted Average Lease Expiry (WALE)
Green Star prime office had a longer WALE of 5.3 years compared with all prime office at 4.9 years and secondary office at 2.5 years as of September 2022 within the three-city subset. From June 2012 to September 2022 across 42 quarterly data observations points, Green Star prime office had a longer quarterly mean WALE by approximately 10 months compared with all prime office. These findings were statistically significant. Please note that WALE data was only available beginning in June 2012.
Figure 8: Weighted Average Lease Expiry
Source: PCA/MSCI Australia Property Index as September 2022 Same Store (Sydney, Melbourne and Brisbane Office Property subset)
Rent receivable per square meter
The Green Star prime office quarterly rent receivable per square meter was AUD 201, higher than all prime office at AUD 170 and secondary office at AUD 122 as of September 2022. From March 2009 to September 2022 across 55 quarterly data observations points, Green Star prime office had a higher quarterly mean rent receivable per square meter by AUD 11 per square meter compared to all prime offices. These findings were statistically significant.Figure 9. Quarterly rent receivable per square meter
Source: PCA/MSCI Australia Property Index as of September 2022, Same Store (Sydney, Melbourne and Brisbane Office Property subset)
Net operating income per square meter
Green Star prime office quarterly net operating income per square meter was AUD 183, higher than all prime office at AUD 173 and secondary office at AUD 125 as of September 2022. From March 2009 to September 2022 across 55 quarterly data observations points, compared with all prime offices, Green Star prime office had higher quarterly mean net operating income per square meter by AUD 11 per square meter. These findings were statistically significant.Figure 10. Quarterly net operating income per square meter
Source: PCA/MSCI Australia Property Index as of September 2022, Same Store (Sydney, Melbourne and Brisbane Office Property subset)
Net operating costs as a share of gross income
Green Star prime office quarterly net operating costs as a share of gross income were 11%, lower than all prime office at 15% and secondary office at 21% as of September 2022. For the past 13 years across 55 quarterly data observation points, the quarterly mean net operating costs as a share of gross income for Green Star prime office was lower than for all prime offices by 307 basis points. These findings were statistically significant.Figure 11: Quarterly net operating costs as a share of gross income
Source: PCA/MSCI Australia Property Index as of September 2022, Same Store (Sydney, Melbourne and Brisbane Office Property subset)
Improvement expenditure per square meter
According to MSCI, improvement expenditure per square meter is the ongoing capital expenditure for the period if the property is not a development divided by owned floor space in square meters.The Green Star prime office quarterly improvement expenditure per square meter was AUD 43, lower than for all prime office at AUD 66, but higher than for secondary office at AUD 32 as of September 2022. From March 2009 to September 2022 across 55 quarterly data observation points, the quarterly mean improvement expenditure per square meter for Green Star prime office was lower by AUD 7 compared with all prime offices. These findings were statistically significant.
Figure 12: Quarterly improvement expenditure per square meter
Source: PCA/MSCI Australia Property Index as of September 2022, Same Store (Sydney, Melbourne and Brisbane Office Property subset)
Green Star prime office outperformed the all-prime segment based on measured operating metrics. Across the approximate 13.5-year period under review, vacancy rates and net operating costs were lower for Green Star prime office, relative to all prime offices. Similarly, quarterly rent receivable per square meter and quarterly NOI per square meter were higher for Green Star prime office relative to all prime offices. All findings were statistically significant based on our analysis. In the next article, we will examine investment performance metrics and draw overall conclusions.
1 Source: CBRE Investment Management statistical analysis using PCA/MSCI Australia Property Index data as of September 2022.