Carbon-neutral office: Rating systems and long-term value

By building a carbon neutral office, owners are future-proofing their assets and the good news is that doesn’t cost as much you’d think.

In the second part of our series on the carbon neutral office we look at the different building performance rating systems, the cost and value proposition of more sustainable assets.

Green buildings not only sell for a premium, but less widely known is that these assets only cost between 1-3% more to build, according to Davina Rooney, chief executive officer of Green Building Council of Australia.

“Currently between the GBCA and NABERS we have certified nearly 100 carbon-neutral office buildings,” Ms Rooney added.

“But we have over 2,500 assets registered for the World Green Building Council’s Net Zero Carbon Buildings Commitment.”

NABERS v GreenStar, WELLS Certified and the Living Building Challenge: which rating tool should I use?

In Australia, a NABERS rating is often used to measure the performance of a building for specific impacts such as energy and water.

A Green Star performance rating gives a holistic review of performance across all sustainability areas and covers nine comprehensive categories: management, indoor environment quality, energy, transport, water, materials, land use and ecology, emissions and innovation.

Internationally, both the Living Building Challenge and WELL Certified push the certification sector to include a building’s operational output and take into account holistic outcomes to boost health and wellbeing, bolstering traditional tools like BREEAM from the UK and LEED from the US.

The mass timber building being built on top of St.LukesHealth’s Launceston building, aims to be the first Australian building to have a zero carbon footprint. Picture: TERROIR and St.Lukes Health

Dr Trivess Moore, a senior lecturer at RMIT and expert in building said there were a number of different ways that buildings could achieve a carbon-neutral, or a low-carbon or a low-energy performance outcome.

He said voluntary Green Star ratings as a design tool had been the go-to for a number of years by those at the top-end of the market while NABERS is more about the performance of the actual building.

“The tools aim to do slightly different things although with Green Star now there is an ‘As Built’ component and you can continue to get that performance certification as well,” he said.

“NABERS is mandatory for buildings over a certain size as well so it’s more of a whole industry type of tool. It really provides that base level of information to people who might be renting or owning space in terms of how it is performing but ‘what are our opportunities to improve?’.

“Whereas Green Star really is about trying to lead and innovate, a really clear holistic framework to try and address not just carbon, or operational energy performance, but also those sustainability considerations across the whole building which may or may not be picked up in that NABERS assessment.”

He said WELL and The Living Building Challenge both set higher standards for wider social considerations that push the design and construction of buildings to go “significantly further”.

Are carbon-neutral buildings more expensive to build or rent, but cheaper to run?

Experts agree the cost of a carbon neutral building may be slightly higher, but not as high as you’d expect, with costs estimated at between 1-3%, according to Ms Rooney.

Green Star-rated office buildings delivered a 4.3% ‘green premium’ at the time of sale, a 13% higher return, Ms Rooney said, referring to investment research firm Morgan Stanley Capital International and Property Council of Australia research.

“Tenants stay longer and that the assets are vacant far less often, with a 25% longer weighted average lease expiry as well as a 56% lower vacancy rate.”

Dr Moore said the short answer was “yes” carbon neutral buildings cost more, but savvy consumers were increasingly thinking about how to reduce their overall costs, and understood the benefits particularly when it comes to staff retention.

“It’s moving beyond just ‘Oh this will save our energy bills’ to actually improving occupant moral or health and wellbeing, to have spaces that people want to work in, that will lead to this increase in productivity… and reduced time off the market in-between rentals and selling, increased sales and rental premiums.”

“We end up being at the bottom line further ahead but we also have a happier, healthier, more connected workforce, which is really important.”

Building F at Rhodes Corporate Park was the first office to be certified as carbon neutral in Australia. Picture: realcommercial.com.au/for-sale

Dr Moore said different technologies, materials and designs being pushed in the commercial industry were to blame for higher upfront costs.

“But those costs are continuing to decrease as more of these buildings come to market,” he added.

Michael Di Russo, a director at Clean Energy Finance Corporation said it was “a bit of an urban myth” that carbon neutral buildings cost more to build and these structures  “go an extra step beyond standard energy ratings to recognise the other sources of carbon emissions created from the building operations.

“It’s about thinking about the whole life cycle of the building. As well as the benefits to tenants and asset owners,” he said.

“Green buildings are already getting higher returns to owners and attracting premiums from tenants.”

How Australia leads the global ‘green premium’ trend

Green-rated office buildings in Melbourne and Sydney are selling for an 18% premium, while in London the figure is 10% more, according to Knight Frank research.

This suggests Australia is ahead of the global curve, the company’s 2021 Active Capital report found.

Sydney and Melbourne office buildings with a NABERS Energy rating of up to 4.5 stars benefit from an 8% premium on sales price compared to unrated buildings, while those with very high ratings of 5, 5.5 or 6 stars attract an 18% premium, it found.

Furthermore, Knight Frank forecasts commercial real estate investment volumes into Australia will grow by 25% in 2022, compared with last year.

Australia is already a world leader in sustainable commercial buildings and has topped GRESB and the Dow Jones Sustainability Index for property in the last decade.

PropTrack’s Anne Flaherty said sustainable buildings increasingly outperform.

“Owners of less sustainable buildings are, and will continue to feel, growing pressure to upgrade their assets to increase their value and achievable rent,” she said.

“Over the last three years there has been a substantial jump in the price differential between buildings with a NABERS rating of 4-6 compared to those with a rating of 5 or below, according to Real Capital Analytics,” she added.

“More tenants are also implementing environmental targets, meaning buildings with high sustainability ratings are achieving higher rents and increased tenant demand.”

Going beyond carbon-neutral to carbon-positive

The ratings tools will continue to evolve and progress to higher standards, but Mr Di Russo said carbon positive was where it’s at next.

“It has been about getting to a carbon-neutral position, but as the market achieves that, there’s always something on the horizon and another thing that’s coming though… and that will be carbon-positive,” he said.

“And also casting the net a bit wider in terms of its broader ESG impacts — not just from an energy and emissions perspective, but also social aspects.”