Sydney CBD office: flood of supply, then drought

After an influx of new stock comes to market in 2024, JLL is projecting no new office stock until 2027.

October 31, 2023

India’s Grade A office market reached a significant milestone this year, as the green penetration for office assets is estimated to have crossed the 50% mark as per JLL India Research. Green penetration is the area under green certification as a proportion of total Grade A stock, which, about a year and a half ago, was around 42%. At the end of H1 2023, of India’s office stock c.779 mn sq ft across the top seven cities, 404.7 mn sq ft is green-rated (~52% of total).

Leading the charge of green buildings are institutional owners, large domestic landlords and REITs. JLL data shows that nearly 100% of all listed REIT assets have sustainability ratings. In fact, across all REITs, USGBC LEED Platinum is the most common rating, with the lower-rated stock already planned to move to higher green certifications. The green penetration is also a sizeable 86% in office stock, held by institutions either in single ownership or through partnerships with large developers. On the other hand, green penetration remains low for strata-titled projects.

An interesting trend is that most of these sustainability ratings are O&M (operations and maintenance) led, indicating that older projects have been quite active in trying to minimise their operational carbon footprint. A peek into the future also shows that sustainability has become mainstream as over 63% of all upcoming Grade A supply out to 2027 is already pre-certified as green.

There is also a clear shift towards higher sustainability standards. LEED Platinum, with enhanced zero carbon features, has seen a significant ramping up. Its active footprint has risen 1.6 times since 2021 to currently over 145 mn sq ft. USGBC Gold is still the most prevalent rating, accounting for 169 mn sq ft of the current green footprint.

Figure 1: Higher Sustainability Ratings see bigger growth

Source: JLL Research and Real Estate Intelligence Service, H1 2023

Undoubtedly, considerable value is derived from upgrading and futureproofing commercial assets. Asset obsolescence is a key factor that will impact occupancies and asset values.

In India, we see an average 13% rental premium for such green-certified assets. Notably, most well-performing assets in key office clusters are already green-certified and market leaders in maintaining their asset relevance through appropriate interventions. Hence, the rental premium is further magnified for them. Moreover, we continue to see higher occupancies in such buildings, with REIT and institutionally managed buildings currently at 88-90% occupancy levels. the rest of the assets are comparatively lower by 300-400 bps, while strata-titled buildings struggle more with identity and relevance issues.

Sustainability ratings are becoming a character certificate for an asset, attesting it to be responsible real estate, which plays a big part in such developments staying relevant as well. The movement towards making buildings zero carbon is gaining momentum. Over the next few decades, even tenants will likely demand their real estate to contribute towards their net zero journey more actively.