JLL identifies $1 trillion is
needed to revitalize office space at risk of
obsolescence as part of shaping a more resilient built
environment
CHICAGO, Nov. 19,
2024 /PRNewswire/ -- The global commercial real
estate market continues to rapidly evolve as shifting preferences
for how space is used and where development takes place conflate
with tightening sustainability requirements, strained national and
local finances and infrastructure. JLL's (NYSE: JLL) latest
research "Opportunity through obsolescence," is the first in a
series of articles exploring the multifaceted opportunities found
in assessing existing challenges in the built environment –
including age and design, regulatory pressures and location – and
turning them into value and returns.
JLL finds that of the 776 million square meters of existing
office space across 66 markets globally, about half of that space,
or 322-425 million square meters, is likely to require substantial
investment to remain viable in the near term – an investment of
approximately $933
billion-$1.2 trillion in
spending. Proactive engagement to retrofit and update existing
assets will be key to unlocking opportunities for value creation
through strategic investment and adaptation, particularly in the
U.S. and Europe, where 78% of
office product and 83% of necessary capex is found.
"The commercial real estate landscape is at a turning point as
property owners and cities look to establish long-term viability of
existing buildings and districts, in the face of evolving
experiential and spatial preferences, increasing regulatory
pressures, climate risk and changes in real estate demand," said
Cynthia Kantor, CEO, Project &
Development Services, at JLL. "By proactively assessing and
addressing outdated and at-risk buildings, owners can unlock
significant value, create a more sustainable, resilient built
environment and drive future returns."
"The full potential of existing assets, both those nearing the
end and earlier in their lifecycle, can only be realized through
collaboration between stakeholders and by considering how various
levels of obsolescence interact," said Phil Ryan, Research Director at JLL. "Owners and
cities should assess how their portfolios holistically fit into
their respective built environments and how a variety of factors
contribute to their ability to respond to changing locational
preferences and new sustainability and development regulations to
create future value."
Considering the risks and opportunities of building age and
design
Although there is no one measurement to calculate near-term
stranding risk, building age tends to correlate best with the
ability to meet tenant, investor and sustainability requirements
along with the rate of occupancy and rent growth. In addition to
significant capital needs, building age also contributes to an
uneven distribution of capital investment required to keep at-risk
buildings viable. Forty-four percent of projected obsolescence is
likely to be in the U.S. given higher levels of structural vacancy,
along with an additional 34% in Europe, as flight to quality in select
segments leads to a smaller but still significant amount of vacant
product. This disconnect also exists in New York, Washington
DC, Paris, Chicago and London, accounting for $242 to $320
billion of necessary global capital expenditures.
Meeting Sustainability and Regulatory Requirements
The built environment accounts for up to 42% of global emissions
annually, driving pressure from the public and private sector onto
building owners to decarbonize properties. Even with the rate of
building emissions beginning to flatline, to meet net-zero targets,
the scale of retrofitting will need to accelerate to address the
more than 86 million square meters of office product in need of
near-term capex across the top eight markets for regulatory
stranding risk due to tightening compliance standards alone.
While sustainability requirements also incur upfront expenses,
there is an impressive return on investment over an asset's
lifecycle. Whole-building retrofits involving a 40% to 65% energy
use reduction have an average savings of $31 per square meter per year. If applied under a
medium scenario for global at-risk office product in the eight
highest-risk markets for stranding, this would yield $2.7 billion in annual energy savings alone for
institutional office owners, all while tenant and investor demand
for low-carbon buildings continues to increase.
Considering the geographic concentration of emissions, the
rewards from decarbonization scale rapidly as well. For example,
over 52 million square meters of current office assets across
Boston, Washington DC, Paris, London, Seoul
and Tokyo are likely at risk of
functional obsolescence, but over 60% of emissions in these areas
originate from the built environment, creating momentum to
accelerate wholesale retrofitting and meet net-zero targets.
Even with asset classes earlier in their life-cycle journeys,
such as data centers, sustainable solutions will be important given
the sectors' significantly higher site energy use intensity, as
compared to other, potentially older asset classes.
Accounting for Locational Considerations
Along with the asset- and regulation-driven stranding risks, is
the growing demand for cohesive, amenitized and balanced spaces
that are attractive to all potential stakeholders, from residents
to workers and visitors. Local leaders and cities shifting focus to
both high-level regeneration and smaller reparative approaches to
reflect such spaces are already beginning to see the benefits.
Strategies for repurposing and retrofitting buildings vary
widely across markets, with U.S. cities increasingly opting for
large-scale conversion of office product to residential, hotel, lab
and other uses. In Europe on the
other hand, where structural vacancy is lower, targeted
interventions for specific buildings can help to achieve
overarching goals from city authorities to improve the public realm
and enhance placemaking initiatives aimed at attracting workers
back to office-heavy business districts and create inviting
neighborhoods for visitors and residents.
About JLL
For over 200 years, JLL (NYSE: JLL), a leading global commercial
real estate and investment management company, has helped clients
buy, build, occupy, manage and invest in a variety of commercial,
industrial, hotel, residential and retail properties. A Fortune 500
company with annual revenue of $20.8
billion and operations in over 80 countries around the
world, our more than 111,000 employees bring the power of a global
platform combined with local expertise. Driven by our purpose to
shape the future of real estate for a better world, we help our
clients, people and communities SEE A BRIGHTER WAYSM.
JLL is the brand name, and a registered trademark, of Jones Lang
LaSalle Incorporated. For further information, visit jll.com.
Contact: Allison Heraty
Phone: 1 312 228 3128
Email: Allison.Heraty@jll.com
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SOURCE JLL