ESG commitments drive tenant demand for premium office space: report

The latest data from CBRE Research showed that 66 per cent of the 220 tenant relocations over the last two years moved to a building that commanded a higher market rent than their previous premises.

Conversely, only 24 per cent of the tenants relocated to a building that offered a lower market rent.

According to the report, the trend of premiumisation — where tenants upgrade their office spaces — is gaining traction in the commercial sector. 

“While rent is important, our data suggests other factors are taking precedence in occupier decisions,” Tom Broderick, CBRE’s head of office and capital markets research for Australia, said. 

The report highlighted that CBD occupiers are driving this trend as they place a growing emphasis on attracting talent and promoting employee wellness through the use of these quality offices that have equal or higher market rents. 

But Felicity Tregonning, the associate director of workplace strategy at CBRE, said that there’s more to the premiumisation movement than just the fundamental requisites of a healthy business.

She highlighted that investing in premium office space provides occupiers with an opportunity to align their accommodation strategy with their ESG commitments.

“It’s something that most of these buildings have — green and wellbeing credentials,” she stated.  

Ms Tregonning noted that the changing expectations of the workforce, particularly among younger generations, are contributing to the growing demand for premium office spaces.

“Premium offices can also be a tool to attract and retain talent. Millennials and Gen Z employees, in particular, want to work for organisations that take care of them and their health, and these buildings provide an opportunity for organisations to showcase this,” she explained. 

She enumerated that premium offices can offer a range of features that promote employee wellness, including wellness facilities and programs, end-of-trip facilities, natural light or circadian lighting, better air quality, diverse and healthy food offerings, outdoor space, community integration, and technology such as smart controls that provide a touchless arrival experience.

Ms Tregonning highlighted flexibility as another advantage of premium offices.

This is often evident in the floor layout, which may feature more efficient column grids and sensors to measure occupancy as well as access to third spaces that can cater to ad hoc workspace requirements, she explained.

Leif Olson, CBRE’s director and head of retail leasing Australia, added that office building landlords are increasingly recognising the importance of integrating strategic retail amenities within their precincts, beyond just the office component.

“This helps make the customer become more ‘sticky’ in the area. Whether you want to buy a handbag or an espresso pod, if it’s close by, it will appeal to customers,” he stated. 

While other landlords might not have that much space, she noted that retail’s becoming more important to premium office assets. 

“Even if landlords are able to get an extra dollar or five per square metre from the office leasing, it’s paid for itself by going out to get the best retail operator.

“That landlord’s mindset has changed to make sure they’re now trying to get the best operator that will be there in five years’ time,” he said. 

And while committing to unpredictable economic times may sound counterintuitive to prudent decision making, the experts said that the benefits outweigh the costs.  

“Relocations allow occupiers to move physically closer to their end customers. It allows them to reconfigure workplace design to attract and retain talent while also matching ESG ambitions with energy and wellness offerings in the new premises,” Mr Broderick stated. 

Ms Tregonning believes that an organisation’s biggest expense is “their people followed by their real estate”. 

“Where a premium building can effectively contribute to ESG commitments, talent attraction and retention, and provide more flexibility to better utilise an organisation’s footprint, then this can outweigh the higher market rents. 

Following the rise of hybrid working, she revealed CBRE Research’s observation that a significant number of organisations right-size their workplace and reallocate these savings to higher rent. 

Mr Olson concurred with the other experts’ views, stated the potential of premium retail space in office buildings and simply said, “It pays itself off.” 

“For the office landlord, it’s become less about the return in retail and more [about] the return in the tower. If an office tenant is happy with the café downstairs, they’re more likely to sign on. Having the wellness yoga studio, a gym close by, and services sitting in and around it makes it appealing,” he concluded.