Rethinking the Office Sector in Asia Pacific

RETHINKING THE OFFICE SECTOR ASIA PACIFIC OPTIMISINGYOURASSET FOR A NEWERA

RETHINKING THE OFFICE SECTOR | OPTIMISING YOUR ASSET FOR A NEW ERA | ASIA PACIFIC 1

TABLE OF CONTENTS

KEY TAKEAWAYS 01 ROBUST DEMAND DYNAMICS 03

INTRODUCTION 02 IDENTIFYING OPTIMISATION OPPORTUNITIES 04

OPTIMISATION STRATEGIES 05

CITY-LEVEL TRENDS 06

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KEY TAKEAWAYS 01

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The risk of office obsolescence, or at least the need to reposition assets, is rising across the world. Approximately 76% of stock in Europe and 61% of stock in the US will likely be impacted by the end of the decade. Arguably, Asia Pacific is better placed -- but not immune -- from these risks:

To get ahead of the curve and maintain market-relevant assets, landlords and investors should consider appropriate action as a matter of urgency. However, they need to understand the relative risks for their asset and for their market. X Markets that continue to develop rapidly such as mainland China and India have younger prime stock, but it often lacks sustainability accreditation. There are also significant swathes of secondary stock that will require attention, particularly in non-CBD locations which are facing obsolescence. Pressure will be maintained on both grades of assets as these markets have significant new supply pipelines. X More mature markets such as Australia, Japan, and Singapore are ahead of the curve on sustainability though landlords will feel continued pressure to improve their assets as government legislation raises the bar ever higher. This is potentially complicated by the older average age of existing stock. Furthermore, these markets are also at risk from slower growth drivers and heightened competition resulting from occupier churn.

Recognising this intra-regional variance, we introduce the concept of the optimisation lifecycle which provides a framework to assess an asset and identify the most appropriate optimisation strategy. This could be repurposing (finding a new use for an asset or site to maximise value) or repositioning (upgrading an asset whilst retaining its primary purpose).

PRIME GRADE STOCK LACKS ANY FORM OF SUSTAINABILITY ACCREDITATION IN ASIA PACIFIC 1

43%

However, the Asia Pacific region maintains strong growth drivers including the creation of almost 15 million new office jobs by 2030, a higher return to office post COVID than other parts of the world, potential de-densification of workplaces in some markets, together with more youthful office business districts. These factors provide a buffer against some of the more severe headwinds felt in other regions.

ASIA PACIFIC OFFICE STOCK IS OF SECONDARY GRADE 50%

1 Across 10 cities analysed: Beijing, Bengaluru, Delhi NCR, Hong Kong, Melbourne, Mumbai, Shanghai, Singapore, Sydney and Tokyo

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INTRODUCTION 02

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ACROSS TWO SISTER REPORTS, CUSHMAN & WAKEFIELD HAS ANALYSED THE LEVEL OF RISK OF OFFICE ASSET OBSOLESCENCE IN THE UNITED STATES AND EUROPE. THE FINDINGS WERE STARK AND HIGHLIGHTED THE SIGNIFICANT AMOUNT OF WORK THAT LIES AHEAD FOR LANDLORDS IN BOTH REGIONS.

At the headline regional level, 43% of prime office stock in Asia Pacific lacks any sustainability accreditation, while 50% of total stock is estimated to be of secondary grade.

In the U.S., headwinds are being felt from several factors including weaker office jobs growth, a significant shift to flexible working practices and ongoing workplace densification (i.e. less space assigned per workstation). All of this is occurring while new supply continues to enter the market, with occupiers increasingly relocating to higher quality office stock. The result is expected to be 1.1 billion square feet of excess space by 2030. Furthermore, only 39% of space will be of sufficient quality to meet demand while 36% will need repositioning work and 25% will likely become obsolete and require repurposing.

The drivers in Europe differ as office vacancy is currently considerably tighter than in the U.S. and there is robust demand for space, which will exceed levels of new supply in some markets. Against this more positive backdrop, the ubiquitous “flight to quality” will prevail but be exacerbated by legislation such as Energy Performance Certificates (EPCs) and Minimum Energy Efficiency Standards (MEES) that specify sustainability criteria in order for a building to be leased. As a result, 76% of Europe office stock risks obsolescence and will likely require repositioning by 2030.

The above raises important questions for office assets in Asia Pacific and whether they too are at risk of obsolescence. At the outset, it must be recognised that the Asia Pacific region remains extremely diverse with considerable variations across key drivers and levels of maturity within the commercial real estate sector. For the most part the region faces lower risks of obsolescence, supported by strong office employment growth and comparatively youthful office market precincts. However, pressure is starting to build on several fronts including comparatively high vacancy levels, more discerning occupier space requirements and likely introduction of government legislation on sustainability requirements. The relative pressure of each factor varies by market but at the headline regional level, 43% of prime office stock lacks any sustainability accreditation, while 50% of total stock is estimated to be of secondary grade. In the following analysis we take a deeper dive into the underlying dynamics and drivers across the region’s major markets and provide a roadmap for asset optimisation.

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ROBUST DEMAND DYNAMICS 03

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ONGOING OFFICE EMPLOYMENT GROWTH

ASIA PACIFIC HAS MAINTAINED ROBUST OFFICE DEMAND DYNAMICS THROUGHOUT THE COVID-19 PANDEMIC, BEING THE ONLY REGION TO CONSISTENTLY POST POSITIVE QUARTERLY NET ABSORPTION RESULTS EACH QUARTER SINCE ITS ONSET.

OFFICE EMPLOYMENT GROWTH

As at Q1 2023, 180 million square feet (msf) more office space is occupied compared to Q4 2019 2 . Furthermore the future looks positive, with forecast demand to average 74 msf per annum through to 2025. This is in no small part due to robust jobs growth across the region. At the regional level, almost 15 million new office jobs are forecast to be created by 2030 , of which 4.5 million will be created by the end of 2025 and the remaining 10.2 million from 2025 to 2030. This bodes well for the future, but office employment growth is heavily concentrated across three key markets – mainland China, India and the Philippines (Figure 1). Together these three markets account for 80% of the region’s office employment growth through to 2030, with mainland China accounting for the majority at 50% or 7.4 million jobs. Of course, this means limited jobs growth across the remainder of the region (3.1 million jobs) with markets such as Hong Kong, Singapore and Korea remaining broadly flat or even moderately shrinking. Consequently, there will be considerable variation in office demand dynamics between markets with emerging markets continuing to expand, while mature markets are more likely to experience some form of demand churn. Ultimately this means the continued need for more stock in expansionary markets, while mature markets broadly have sufficient stock but need to focus more on quality improvement.

At the regional level, almost 15 million new office jobs are forecast to be created by 2030.

FIGURE 1: FORECAST OFFICE EMPLOYMENT GROWTH (MILLIONS), 2022-2030

2 Across the region’s top 25 cities.

Source: Moody’s Analytics

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A FOCUS ON VACANCY

OFFICE VACANCY ACROSS THE REGION’S TOP 25 CITIES HAS BEEN ON AN UPWARD TRAJECTORY SINCE MID-2018, RISING FROM 11.8% TO 16.3% AS AT Q1 2023, EQUIVALENT TO 286 MSF.

It is important to note that there is also considerable variation at the sub-market level, especially in India and mainland China as office stock rapidly expands in peripheral and suburban business districts. The core message here is that while headline vacancy may appear comparatively high and therefore that there are large tranches of vacant space, this does not tell the whole story. Demand for high quality locations remains robust and vacancy rates are much tighter than headline figures show; consequently the risks of obsolescence are lower. However, sub-markets that experience lower levels of demand and have high levels of supply or vacancy are likely to face greater challenges in attracting tenants. Both occupiers and investors should be aware of these sub-market variations as they seek to occupy or develop new office space.

In absolute terms, vacancy is highly concentrated with India’s top eight cities accounting for 43% of the regional total and the four Tier 1 mainland China cities a further 28%, leaving 29% across the remaining 13 markets. Such variance reflects not only the size of each market but also its respective vacancy rate. The outlook is for regional vacancy to tick upwards over the coming years, to reach a little over 18% in 2025, which equates to approximately 390 msf of vacant space.

Demand for high quality locations remains robust and vacancy rates are much tighter than headline figures show; consequently the risks of obsolescence are lower.

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OFFICE OCCUPANCY AND DENSITY PROVIDE TAILWINDS

FIGURE 2: ESTIMATED OFFICE ATTENDANCE LEVELS FOR SELECT MARKETS

While the underlying growth in office employment provides arguably the strongest driver of office demand, further support is provided by office occupancy rates and density levels. The return to office in the U.S. and across parts of Europe, although continuing to improve, remains comparatively weak by standards seen in Asia Pacific. For example, office occupancy in Greater China is practically back to 100% of pre-COVID levels while in Tokyo, it is over 85% (Figure 2). Even in markets that have greater adoption of flexible working practices such as Australia, office attendance is as high as 80% in some cities. In comparison, current levels in the U.S. are around 50% (ranging from 40% to 60%) and are a touch lower in the U.K., serving to highlight that the office remains an integral part of the workplace across much of the Asia Pacific region.

Source: Kastle Systems, Property Council of Australia, Cushman & Wakefield

Furthermore, office densities in the region are amongst the highest in the world, averaging from as low as 75 sf per worker up to approximately 110 sf per worker. The implication here being that these office densities are unlikely to become tighter, rather they could move out in response to not only health concerns but also as different fit out typologies, which incorporate more collaboration spaces, become more prevalent. Anecdotal evidence

in Australia suggests that this is occurring with pre-COVID target densities set at 110 sf and current targets closer to 130 sf. In some markets with high levels of attendance, this could exacerbate office demand as more space is required by more workers, while in markets adopting more flexible working practices it could help offset lower space demand – i.e. fewer employees in the office but more space per employee.

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FIGURE 3: MEDIAN AGE OF PRIME OFFICE STOCK (YEARS)

COMPARATIVELY YOUTHFUL BUSINESS DISTRICTS IN LINE WITH THE RAPID LEVELS OF EXPANSION SEEN ACROSS THE REGION, MANY OF THE REGION’S OFFICE MARKETS ARE COMPARATIVELY YOUTHFUL. For example, the average age of Grade A (prime) stock across mainland China and India’s top cities is less than 10 years, that is half of these cities’ office stock were built since 2013 (Figure 3). In the U.S. less than 10% of existing stock were constructed over the same period. The implication here being that the majority of prime office stock should be relevant to the market. However, there is a caveat. While Beijing and Shanghai have youthful prime stock, this only accounts for 30% and 55% of each city’s total office market respectively compared to over 70% in Melbourne and Mumbai, meaning that there is a large amount of secondary stock across both cities (Figure 4). Further pressure will be placed on this secondary stock as these cities continue to expand given their strong supply pipelines.

Source: Cushman & Wakefield

FIGURE 4: PROPORTION OF STOCK BY GRADE

Source: Cushman & Wakefield

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Tokyo has the oldest stock on a median age of over 33 years, closely followed by Sydney, Melbourne and Hong Kong, which have average prime building ages in excess of 20 years. Here, there is increased pressure to keep assets relevant to the market given their age and therefore the need for ongoing refurbishment programmes. AGE OF PRIME OFFICE STOCK BECOMES MORE RELEVANT ACROSS THE REGION’S MORE MATURE OFFICE MARKETS.

AGE OF OFFICE STOCK

AGE OF OFFICE STOCK

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PRIVATE OWNERSHIP DOMINATES IN SOME MARKETS

The need to stay relevant could test private landlords’ desire and capacity to allocate sufficient capital expenditure budgets to maintain assets into the future.

IN TURN, OWNERSHIP STRUCTURES THEREFORE BECOME HIGHLY RELEVANT. ALBEIT A GENERALISATION, IT IS ASSUMED THAT INSTITUTIONAL LANDLORDS ARE MORE LIKELY TO POSSESS THE CAPITAL, KNOWLEDGE AND EXPERIENCE TO BOTH MAINTAIN ASSETS AS WELL AS PLAN AND EXECUTE COMPREHENSIVE REFURBISHMENT WORKS WHEN NEEDED.

budgets to maintain assets into the future. The extent to which this becomes a significant issue is currently unquantifiable – the young age of assets in general means that significant refurbishment works will not be required for several years yet. However, it is prudent to flag this as an issue sooner rather than later and astute landlords looking to hold their assets over the longer term should assess their capital and operational-expenditure budgets. The basis of expenditure requirements should stem from an objective assessment of the asset with regard to operational efficiency, sustainability and tenant profile to identify areas that should be prioritised for action and/ or that deliver maximum return on capital. This may be as simple as setting a preventative maintenance program, targeting sustainability or wellness accreditation or diversifying tenancy mix to provide resilience of income.

This is clearly seen in Australia, where institutional ownership of prime grade assets is above 90% (Figure 5) and there are multiple instances of premium grade office towers retaining their premium grade rating even though they were built in the early 1990s. It is a similar situation in Singapore and to a lesser extent Hong Kong -- high institutional ownership and a longstanding demonstration of ongoing asset refurbishment.

Elsewhere in the region, institutional ownership is lower which coincides with their somewhat “emerging” nature. Approximately 14% of office stock in India is owned by REITs, though it is noted that this will rise to around 22% by the end of 2024 with various REITs preparing to launch over the next 18 months. Consequently, the need to stay relevant could test private landlords’ desire and capacity to allocate sufficient capital expenditure

INSTITUTIONAL OWNERSHIP

FIGURE 5: PROPORTION OF INSTITUTIONAL OWNERSHIP OF PRIME ASSETS

Source: Cushman & Wakefield

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LARGE VARIATION IN SUSTAINABILITY ACCREDITATION

ALTHOUGH AN OFFICE BUILDING IS LIKELY TO REQUIRE SEVERAL SIGNIFICANT REFURBISHMENTS OVER THE COURSE OF ITS EFFECTIVE LIFESPAN, THIS DOES NOT MEAN THAT LANDLORDS SHOULD IGNORE NEAR-TERM AND LESS CAPITAL-INTENSIVE OPPORTUNITIES. TARGETING A SUSTAINABILITY RATING IS ONE SUCH EXAMPLE.

Over the past few years, sustainability has dramatically increased in importance. Both occupiers and investors are pushing the market towards becoming more sustainable, not least to meet their own stated sustainability goals. In this vein it is now practically universal for major occupiers, especially blue-chip multi national corporations (MNCs), to have minimum sustainability requirements for any space they are looking to lease.

Notwithstanding, we see significant bifurcation across the region. In part this is reflective of government legislation, though it is noted that government intervention has not (yet) occurred to the extent seen in Europe where minimum sustainability standards have been legislated. In this regard, Australia and Singapore lead with over 90% of prime office stock sustainability-rated, with Tokyo at over 70%. However, government legislation in these markets continues to be tightened meaning sustained efforts to improve building performance are required.

In contrast, less than 50% of prime stock across the rest of the markets considered has been rated. It is important to note that this does not mean these buildings are not rateable, rather that landlords have not sought sustainability accreditation. Given the widespread shift to a greener future, it’s likely that pressure on landlords to demonstrate their assets’ sustainability credentials will only increase. More widely, there is little to no standardisation of sustainability accreditation across markets. Unlike in Europe and the U.S., which operate under a common regulatory environment, this does not exist in Asia Pacific. Rather sustainability accreditation tends to follow local norms such as NABERS in Australia, BCA Green Mark in Singapore and BEAM Plus in Hong Kong, as well as DBJ’s Green Building Certificate and MLIT’s CASBEE accreditation in Japan, making comparison of standards more challenging. Only mainland China and India have been more inclined to adopt an international standard, mainly choosing to use LEED certification.

FIGURE 5: PROPORTION OF PRIME ASSETS WITH AN ACCREDITED SUSTAINABILITY RATING

Source: Cushman & Wakefield

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While sustainability has become more high-profile in recent years, occupiers’ needs continue to evolve in other ways. Wellness and technology attributes are also becoming increasingly common in space requirements, though asset accreditation remains patchy. For example, a search of WELL certifications reveals in excess of 150 msf of accredited office space across the 10 cities analysed, whereas just 24 buildings are WiredScore and/or SmartScore certified (predominantly in Singapore and Australia), though it is acknowledged that technology accreditation is still very new to the region.

SUSTAINABILITY OPTIMISATION

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OPTIMISATION STRATEGIES 05

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Below, we provide a guide to the need for asset optimisation across 10 key cities in the region. It is important to note that these are relative assessments across the cities and do not account for local requirements - for example, sustainability standards in Singapore are amongst the highest in the region, but further effort will be required by asset owners to meet increasingly tougher legislation. IT’S CLEAR THAT THERE IS NO SINGLE “ONE SIZE FITS ALL” APPROACH TO OFFICE OPTIMISATION ACROSS THE REGION. NOT ONLY IS THERE VARIATION IN MARKET DYNAMICS, DRIVERS AND LEGISLATIVE STANDARDS, BUT ALSO CLEARLY THE QUALITY OF ASSET IN PLAY WILL HAVE A SIGNIFICANT BEARING ON THE REQUIRED APPROACH AND TARGETED OUTCOME.

An asset should be assessed on its credentials and therefore we advance the asset lifecycle optimisation plan.

OFFICE OPTIMISATION REQUIREMENTS

ASSET LIFECYCLE OPTIMISATION PLAN

GRADE A STOCK (AND ABOVE)

OFFICE EMPLOYMENT GROWTH 2022-2030

PROPORTION OF PRIME STOCK

SUSTAINABILITY RATING

MEDIAN AGE INSTITUTIONAL OWNERSHIP

X Current Rating X Target Rating X Accreditation

X Mark to Market X Valuation X Disposal

                                                 

BEIJING

BENGALURU

HONG KONG

GROW Value Proposition

GREEN Sustainability

MELBOURNE

MUMBAI

DELHI NCR

SHANGHAI

SINGAPORE

SYDNEY

GOVERN Asset Management

GRADE Capital Works

TOKYO

X Technical Due Diligence X Capital Works Plan X Compliance

X Preventative Maintenance X Regulatory Environment X Tenant Mix

LOWER RISK / LESSER NEED

HIGHER RISK / GREATER NEED

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CITY-LEVEL TRENDS 06

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SHANGHAI

THE SHANGHAI OFFICE MARKET, DESPITE BEING ONE OF THE LARGEST IN THE ASIA PACIFIC REGION, REMAINS NOT ONLY HIGHLY COMPETITIVE BUT HIGHLY DYNAMIC.

Further pressure could also come from legislative requirements. Both central and municipal governments have their own net zero road maps, while the financial market is increasingly requiring ESG/CSR reports for listed firms. With tenants looking to lease green office space, and with government directives to follow, more landlords will need to achieve green accreditation for their respective buildings. Nevertheless, given the shorter land tenure in mainland China (typically 40 years for office developments), landlords of older buildings should be mindful of the shorter remaining land tenure when considering any major building overhaul.

It is continually shaped by the quality of existing stock, the amount of new supply completing (45 msf – 27.5% of existing stock – through to 2026) and the construction of new transportation infrastructure. All of which continue to influence occupier decision making. Furthermore, many of these new buildings are in suburban locations which have good access to transport infrastructure with lower asking rents – a double bonus for occupiers. The comparatively short lease lengths, which are standard in the market, add additional fluidity to the competitive leasing environment. Clearly these dynamics will exert leasing pressure on Grade B and older Grade A buildings, especially those that have not been managed or maintained to standard given tenants’ increasing sustainability and amenitisation requirements.

HONG KONG

HONG KONG HAS LONG BEEN A KEY OFFICE MARKET IN THE REGION, AND OFTEN CHOSEN AS THE PREFERRED LOCATION FOR REGIONAL HEADQUARTERS.

With that there is a high proportion of finance and banking tenants, many from multi-national corporations. As is being evidenced the world over, these MNC tenants are becoming more discerning in their space requirements with the foundation being sustainability credentials. More progressive landlords have already started down this route though less than half of office stock by lettable area, approximately 30 msf, has received a sustainability rating with the remaining 37 msf currently unaccredited. Further risks are also seen through the city’s vacancy rate, which currently sits at 17% - the highest level in over 15 years – equivalent to 11.5 msf.

Given the high vacancy and intense competition to secure tenants, landlords need to become proactive in optimising their assets or risk obsolescence. With annual average net absorption at 1.2 msf for pre-COVID years between 2015-19, the market may need at least another 4-5 years to bring down the availability rate from 17% to sub-10% level. While this should act as a significant catalyst for action, as there is no shortage of vacant space, there are wider benefits that can be derived. Within the same submarkets, green-certified offices have outperformed those buildings without such credentials. Observed rental differences typically range from 5% to 25%, while these assets also demonstrate higher occupancy rates, typically in the range of 3% to 5%.

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SINGAPORE

MUMBAI

Currently, while most Grade A offices in Singapore are currently certified green, a significant proportion (by GFA) of office buildings may see a downgrade or even lose their Green Mark ratings under the refreshed X 80% of buildings island-wide (by gross floor area [GFA]) are targeted to be green by 2030 X 80% of new buildings by GFA to be Super Low Energy (SLE) buildings from 2030 X 80% improvement in energy efficiency for best-in-class green buildings by 2030 THE SINGAPORE GOVERNMENT IS LEADING THE PUSH FOR SUSTAINABILITY IN THE BUILT ENVIRONMENT. SINGAPORE’S GREEN BUILDING MASTERPLAN AIMS TO DELIVER THREE KEY TARGETS OF “80-80-80 IN 2030”. THESE TARGETS ARE:

This has primarily been due to the development of new sub-markets across the city such as Bandra-Kurla Complex (BKC), which has attracted large financial institutions, pharmaceutical giants and regulatory agencies alike due to its high-quality stock, local amenity and high-quality transport infrastructure. change to allow for de-densification, high quality health and safety measures and minimum sustainability standards, existing stock will require repositioning. It is estimated that currently approximately 13% of stock, equivalent to almost 10 msf, will require some form of upgrade to meet these higher occupier standards. Furthermore, Mumbai’s central business district accommodates some of the city’s oldest stock with an average age of over 45 years, which in no small part explains why it has lost the mantle of commanding the city’s highest rents over a decade ago. Although the CBD accounts for only 2% of the city’s total stock (2 msf) it carries a high risk of obsolescence due to its age, congestion and generally lower levels of amenity. Notwithstanding, limited land availability and comparatively high capital values mean that redevelopment is often financially unviable. This is a conundrum that will need to be overcome to breathe new life into the city’s original office hub. MUMBAI’S OFFICE MARKET, BY GLOBAL STANDARDS, REMAINS RELATIVELY YOUTHFUL WITH PRIME STOCK AVERAGING LESS THAN 12 YEARS OF AGE. However, this does not mean the city is not without its challenges. As occupier requirements

BCA Green Mark 2021 scheme. Based on our assumptions, 73% of office buildings island-wide could potentially lose their ratings under the new scheme, with only 7% retaining their platinum ratings compared to 61% under the earlier rating system 3 . This presents a paradox that while Singapore is a global leader in sustainability credentials, new legislation continues to lift the bar higher meaning ongoing improvements are required. With more businesses and consumers embracing sustainability, the future office market landscape will be characterised by a flight to sustainability. The market will become two-tier, with green buildings achieving market rents while non-green buildings may see lower occupier demand, leading to below-market rents and occupancy rates. Between Q4 2020 and Q2 2022, the average occupancy rate and gross achievable rents of green office buildings were 2%-4% and 7%-10% higher than their non-green counterparts.

3 Banking on Green Office Buildings in Singapore

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TOKYO

SYDNEY

WHILE THERE HAS BEEN A LONG-STANDING DIVIDE BETWEEN PRIME AND SECONDARY STOCK IN SYDNEY, THERE IS ALSO BIFURCATION WITHIN EACH OF THESE GRADES AS WELL.

With the average useful life of an office tower at around 45 years, as per the national tax depreciation, an office building with a vintage of 40 years (an “old building”) can become a reasonable candidate for urban redevelopment. Importantly, many of these older buildings are not necessarily obsolete – they are located in highly desirable locations and although old, tend to be well-maintained by global standards due to high building maintenance requirements, which are comprehensive although voluntary. Because building maintenance standards are voluntary, it is primarily J-REIT landlords that seek asset certification. This presents an opportunity. However, rental premiums for green certification are higher for smaller assets: 5.4% for mid-sized buildings compared to 2.6% for larger buildings 4 . Considering that although a comprehensive building retrofit policy framework does not exist, it is important to note that Japan still requires owners and developers to submit an energy savings plan when undertaking large renovations and therefore improved sustainability credentials will need to form part of an asset optimisation plan. Given the size of the secondary market in Tokyo, approximately 93 msf, a number of assets should benefit from such planning. Older buildings in prime locations, especially owned by landlords who do not have the investment capability for required retrofitting, can be a prime candidate for value-add funds seeking higher risk-adjusted returns. OBSOLESCENCE HAS BECOME A MAJOR INVESTMENT THEME IN JAPAN, DRIVEN BY AN AVERAGE OFFICE BUILDING AGE THAT ALREADY EXCEEDS 33 YEARS.

The pressures on prime quality are slightly different. Firstly, as seen globally, large corporate occupiers are becoming increasingly astute in their space requirements with regard to grade, sustainability, wellness, amenity and more recently technology. This places an onus on landlords to meet these minimum criteria to be considered for any space requirement. Secondly, this has come at a time when not only is vacancy above average on a relative basis at 11%, but is also at its highest level on record in absolute terms at 4 msf. In an increasingly competitive environment, there is more pressure on landlords to differentiate their assets from their competitors’. The recent City of Sydney legislation, which came into effect in January 2023 and affects all grades of stock, means that new developments and major redevelopments of existing buildings will need to comply with minimum energy ratings and achieve net zero energy output by 2026. Clearly this targets the need for energy efficiency as well as the use of onsite and offsite renewables which needs to be incorporated into any development plan.

Within the secondary market, B-grade stock accounts for over-two thirds of the total, with lower grades (C- and D-grade) the remaining 31%, equivalent to 6.5 msf. It is these assets at the highest risk of obsolescence in the office market as they average in excess of 70 years of age and for the most part lack a sustainability rating. Often these are historical buildings and so repurposing will need to take this into consideration. B-grade stock risks obsolescence, but there are greater opportunities for repositioning as evidenced by asset improvements in recent years.

4 Cabinet Office, Green value in real estate market: Estimating of green premium for office market considering the renovation (2022)

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AUTHORS:

DR. DOMINIC BROWN Head of International Research dominic.brown@cushwake.com

JAMES YOUNG Head of Investor Services EMEA & APAC james.young@cushwake.com

GORDON MARSDEN Head of Capital Markets APAC Investment & Advisory Services gordon.marsden@cushwake.com

CHRISTINE HO Associate Director, Client Services Project & Development Services, Asia Pacific christine.ho@cushwake.com

MATTHEW CLIFFORD Head of Sustainability & ESG Asia Pacific matthew.clifford@cushwake.com

ABOUT CUSHMAN & WAKEFIELD

Cushman & Wakefield (NYSE: CWK) is a leading global commercial real estate services firm for property owners and occupiers with approximately 52,000 employees in approximately 400 offices and 60 countries. In 2022, the firm reported revenue of $10.1 billion across its core services of property, facilities and project management, leasing, capital markets, and valuation and other services. It also receives numerous industry and business accolades for its award winning culture and commitment to Diversity, Equity and Inclusion (DEI), Environmental, Social and Governance (ESG) and more. For additional information, visit www.cushmanwakefield.com.