With the skyrocketing inflation and energy costs, real estate investors, office landlords and occupiers have to rethink their strategies. Ryan Wray MRICS, Managing Director and Principal at Avison Young, Czech Republic and Stefan de Goeij MRICS who leads AY’s Czech and Slovak Sustainability and Property Management business, talk about the necessity of looking at the whole picture alongside numerous economic and market indicators to define a strategy that makes sense over the medium to long term.
With peaking energy prices, many occupiers are in for an unpleasant surprise over the coming months. What role will less energy-efficient buildings play in their strategic decisions?
Ryan Wray: “Occupiers will place a greater focus on some fundamentals of the occupancy cost structure within the lease agreement. They will seek to understand in detail their indexation clauses, how/when it is applied and calculated. There will be higher scrutiny of service charge budgets, what they include, how the budget is set, and the efficiency of the building. Efficiency can be related to the performance of the technologies, or the proportion of common areas in relation to exclusive areas (the add-on factor). So, Landlords that can demonstrate both energy efficiency and gross to net efficiency will be the winners.
However, everybody needs to accept inflation has also effected fit-out costs. Therefore occupiers can expect substantial increases in relocation costs. In some cases expansion within current premises might be more affordable than relocation to a new, even more efficient building.
We see the foresightful occupiers pushing their landlords to improve the building’s efficiency through operations and upgrades, and negotiating harder to reduce potential shocks in operating costs and rental increases. In light of rising rental rates and occupancy costs it is paramount for Occupiers to carefully review the terms of any new lease agreements. At Avison Young we are here to help guide clients through this process and use our expertise and best practice to negotiate the best available terms today.”
Can underutilisation of office space due to home office and rising utility bills lead to downsizing?
Ryan Wray: “The focus on office efficiency will be combined with a re-evaluation of how much permanent workspace is required and how much common or break-out space is required. Occupiers will seek to utilise fewer exclusive premises in an effort to be more efficient themselves. Shared break-out areas and facilities within buildings are extremely attractive today, as tenants can then reduce the sqm they lease exclusively and contribute proportionately to the shared facilities that are only needed for use on a more ad-hoc basis.
It is true a percentage of tenants are already downsizing, however most occupiers are actually realizing they need to use the space they occupy differently. If the building does not offer shared break-out facilities, the occupier is re-drawing its own space plan with less focus on fixed workstations to create space that can be a social hub for its employees.”
So how will the pressure on ESG compliance and rising energy bills impact the market?
Ryan Wray: “ESG and energy efficiency are distinct but interrelated clearly. Energy efficiency is a must; it can be measured and therefore it is the first port of call in the application of an ESG strategy. It also benefits occupiers’ bank balances, so it’s a win-win.
The market is already rapidly adopting ESG as a fundamental part of real estate strategy. We are in the process of conducting numerous ESG Audits on existing buildings for our clients; the result is an output for the landlord which shows the current status of the property from a best-practice perspective. We can then plot a clear step-plan for the building manager to improve the property’s ESG credentials. These form what we call “Quick wins”; those easy actions that are low cost and actionable in the immediate term, but just are not being carried out by the operations team today. Then we have medium to long-term actions, often these involve Opex and Capex planning; usually they dove-tail with prudent and proper building operation and maintenance, so they are not tasks that only serve to be ESG-friendly, but actually provide a multitude of benefits to the landlord and the operation of the building.
There are EU grants available for certain works, this also lightens the burden; and the implication of EU Taxonomy means that the property that has an efficiency and ESG plan in place will be future proofed against significant taxation that is expected to arrive in the coming years.
Impact on the market? More energy efficient buildings, more socially conscious landlords and more business decisions focussed on long-term stability rather than short-term gains.
Landlords are often reluctant to invest in strategies with a long-term return that’s often difficult to quantify. Are there any instant solutions they can implement in their existing properties?
Stefan de Goeij: “My advice would be to start with understanding landlords’ overall strategy for the asset and how long are they willing to hold before they exit. To future proof an asset you have to implement measures today which will make it attractive in the year you are planning to exit. A simple example to put this in context would be electric car charging… Looking back at how much demand there was for electric cars five years ago. Back then it was a luxury and hence you didn’t see EV charging stations everywhere. Where are we now and where are we heading? EV demand is going to explode and Governments across the EU want to push EV in the mainstream while reducing dependence on traditional fossil fuels. Our research tells us that the next big thing in the property space would be getting properties to Net Zero Carbon. Here we see that the investors are changing their traditional ways of thinking, they are thinking long term and keeping their eye on the future.
What are some of the instant fixes that can be applied? What we advise our clients and deliver, is to begin with reviewing of energy, water and waste across your site(s), basically they are the E components in ESG. To conduct a formal energy audit and technical assessment to ascertain what changes can be implemented within the acceptable payback times. Proceeding to S – what is being done at the site to help local communities and what more can be done given the space you have? Engaging with tenants and communities to understand their expectations and aspirations will be a good starting point. Finally, the G – those responsible for running the asset should set clear objectives and targets acting as a roadmap for everyone involved.”
How can landlords balance costs related to achieving ESG goals with the long-term benefits of such investments?
Stefan de Goeij: “The balance lies in landlords aligning their investments with their own ESG policies, KPIs, targets and objectives. There will always be the age-old conflict of landlords installing energy efficient equipment and the tenant making the most in terms of benefits derived by reduced consumption and costs.
Tenant engagement would be another avenue where the landlord can realise the benefits of ESG investments.
For example, in case of an industrial asset the landlord goes ahead and installs solar panels on the roof. Then enters into a power purchase agreement to supply the tenant with green electricity generated from the panels. The benefits are twofold; tenant procures clean green electricity and the landlord is able to negotiate the lease for a longer term.
There is a belief that ESG costs money but in fact the opposite can be true. When we consult on ESG, this is always a factor we explore and advise on.”
What is your role as consultants in making the real estate sector more ESG compliant?
Stefan de Goeij: “For me this is a journey from compliance to commitment.
We are in a unique position to help those who are beginning their journey and are apprehensive about what this means for them and how they can stay on top of trends whilst remaining profitable and relevant.
At the same time those players who are mature in terms of their ESG approach, we are here as a critical friend to advise, manage and oversee the implementation. A beautifully worded ESG policy on paper is very different to an actual physical asset and we can help guide at every step to make their objectives and policies come alive when the physical asset is ready and run day to day.
ESG compliance is a very different thing all together. It is about following the law of the country and ensuring when the asset is being let, acquired or managed the regulatory and compliance checks are being met and carried out. There is never a real question of more or less compliant…it is all about your intention of either just meeting the bare minimum or going above and beyond…”
Ryan Wray MRICS – BIO
Ryan is a leading real estate advisor and capital markets expert in the CEE Region with a reputation for sourcing, managing and executing complex real estate transactions. He has worked in the CEE region for 16 years and his transactional experience spans the Czech Republic, Poland and Slovakia. Ryan’s clients regard him as operating with the highest levels of integrity and professionalism, he is an active member of the RICS, an RICS Registered Valuer and an accredited RICS Assessor. His focus upon best practice, innovation and client service perfectly complements the Avison Young vision and profile which aims to create economic, social and environmental value as a global real estate advisor.
Stefan de Goeij MRICS – BIO
With over 20 years of real estate experience, Stefan became a director at Avison Young CZ in 2021, where he leads AY’s Czech and Slovak Sustainability and Property Management business. Prior to joining Avison Young, Stefan has been CTP’s Property Management Group Director & Group Sustainability Officer, where he was responsible for management and sustainability of the existing CTP portfolio in the CEE, representing a total rental area of 5.5 million square meters. He studied civil engineering / architecture in Den Bosch and later Real Estate Management at Hague University. Stefan is a member of IFMA, a lecturer at the MBARE at Prague University of Economics, a RICS qualified FM professional and Interim Chairman of the Advisory Board of RICS Czech Republic.