Soaring demand for low carbon offices will outstrip supply

As corporates eye their upcoming 2030 sustainability targets at the same time as re-assessing their post-Covid workplace strategy, focus is sharpening on low carbon buildings.

Space that is energy efficient, electrified and powered by clean energy is in growing demand, not only because it’s resilient to changing regulation but it’s also an attractive proposition to employees, and meets near-term corporate sustainability targets.

Research from JLL shows that demand for high quality, low carbon workspace is set to outstrip supply by 75%, across major U.S. markets by 2030. This equates to a projected supply shortage of 57 million square feet of low carbon office space in the next few years.

Supply and demand dynamics vary significantly between major cities depending on factors such as the main type of industry and corporate space requirements as well as property features of existing stock. Washington, D.C., for example, has a higher imbalance than many other cities due to the large presence of government agencies with stringent sustainability targets to hit. Combined with the recent decrease in development activity, the resulting demand for high-quality, low carbon space is set to be 12 times higher than available supply.

The Chicago market is heavily undersupplied due to inefficient existing stock and an especially constrained development pipeline, as well as a lack of available clean energy, among other factors.

New York, meanwhile, is dominated by finance and professional services firms with ambitious targets of their own. Across the leased footprint of the top 100 occupiers in the city, 72% of upcoming requirements are tied to a carbon commitment this decade, amounting to 23.3 million s.f. of future demand. This compares to a shortage in the current development pipeline which is set to deliver only 8.1 million s.f. of potentially suitable space between now and 2030.

Across six major U.S. markets, only about 43% of existing Class A office stock will meet demand, suggesting the premium for this space should increase. JLL is seeing evidence of this playing out in the more advanced European markets such as London and Paris, where low carbon prime offices are beating historical rental highs this year, despite reduced transactional activity.

Many corporate occupiers are reassessing their office footprint with sustainability credentials quickly becoming top of mind, along with hybrid working, collaboration space and amenities. Leasing low carbon spaces and decarbonizing their real estate operations are easier wins compared to tackling Scope 3 emissions across their supply chains.

On average, three out of every four new lease requirements among the top 100 office occupiers in major U.S. markets will be tied to a carbon commitment between 2023 and 2030, according to JLL.

Green certifications remain popular among investors and occupiers as a mark of sustainable buildings. However, most only focus on the design and construction of a building and its assessment in a single moment in time. When it comes to a building's emissions, its entire lifecycle must be considered - not only how it is built but also how it is used.

As a result, today’s sustainability-focused corporates are becoming increasingly diligent in looking at building performance, seeking real information on energy efficiency, electrification, and clean energy procurement – the crucial elements of low carbon spaces.

Occupier demand for low carbon space will be the biggest driver of the market but city regulations are also disrupting the landscape.

Currently, there are 48 benchmarking policies and eleven building performance standards in place across the U.S. By 2024, there will be over 35 jurisdictions with building performance standards, showing the shift in city policy from measurement to management.

If every premium office building analyzed in this research across six major U.S. markets were to face New York’s Local Law 97 emissions limit in 2030, only 25% would comply. Only 36% would comply with Boston’s 2030 emissions limit and only 43% would comply with Denver’s 2030 energy efficiency requirement.

The increasing demand versus supply gap makes the commercial case for investment in making buildings more sustainable. Owners that take the necessary action in a timely manner can enjoy financial benefits through higher rents, cheaper debt, and the chance to attract or retain high quality tenants.

At the same time, the risk of inaction is growing, whether the migration of tenant demand or the cost of increased regulation diminishing net operating income (NOI).

Partnership models through green leases and other forms of collaboration are also a growing area. The supply-demand imbalance for low carbon space will force owners and occupiers to collaborate on reducing emissions from the buildings they use – and share both the costs and benefits.

As the office sector feels both the pressure of a cyclical downturn and the impact of hybrid work on lease renewals, rolling out effective decarbonization plans offers building owners a real opportunity to stay ahead of the curve and keep buildings in their prime.