Hosted by Amanda Steele, guests include Davina Rooney, Ruben Langbroek and Emma McMahon
Thursday 3 September 2020
AS:
Welcome to Talking Property with CBRE, a podcast in which our team of experts share their commercial real estate insights and industry leading perspectives. My name is Amanda Steele, I'm Executive Managing Director of Property Management for CBRE Pacific and I'm your host for today's episode.
In our last episode, we talked about the future of sustainability and how Australia, as a global leader in sustainability, can drive change in the future and why technology is one of the major driving forces behind this change. We also covered off why responsible investment is good for business and how the digitisation of sustainability can drive the green recovery.
In today's episode, we speak with Emma McMahon, National Sustainability Director here at CBRE, to discuss the impact COVID-19 has had on key environmental measures such as NABERS ratings, energy prices and the climate change conversation and answer some questions from our listeners also.
When COVID hit four months ago, there was that real pressure around how we would manage assets and Emma, your team and the broader team at CBRE were responsible for really working with our clients around what the impacts of reduced occupancy would look like in the sustainability space. So, I guess now that we've got four months behind us, what impacts are we seeing more broadly around our broader managed portfolio from a sustainability perspective?
EM:
Yeah absolutely, it posed quite a challenge, but also an opportunity to really squeeze out as much energy out of those buildings and our portfolios that we manage as much as possible. When COVID kicked off, I guess a couple of months ago, NABERS which we apply to a number of buildings that we manage across Australia, released a number of new rulings on how to provide advice to assessors and two landlords and how the ratings will be conducted and for our team of assessors, it included removing the requirement for an actual on site visits, so allowing for virtual site visits to happen. Not ideal but still allowing those site visits to occur and allowing landlords to renew their rating as they wanted to on an annual basis but also put a moratorium on the use of data during what NABERS termed a ‘COVID effected period’. So, a period between March and June, which was specifically impacted by reduced occupancy during that time.
That moratorium though has since been lifted, meaning that NABERS ratings can be conducted in I guess a relatively similar way to what they had been before. Unless, of course, you've received written evidence or an agreement between tenant and landlord that there's been a change in the service positions due to reduced occupancy.
So, in terms of energy savings during COVID and over the last number of months, our original expectation, I think, was that there will be significant energy savings and there absolutely have been in a number of cases. We've seen anything vary between a 10-50% energy saving, but in reality, it has actually been very varied. Less people in the building doesn't always translate to less energy use necessarily. You know, we are tied to lease conditions that dictate the certain internal conditions that are expected to be maintained in a building. But it's absolutely an opportunity for our facilities, managers and our property teams to identify opportunities that they wouldn't have otherwise looked at to squeeze out more energy.
What we are seeing though, well, interestingly, is that the energy that we're saving in the CBD buildings is now actually being transferred to our homes. There was a report issued in April that looked at the major lockdowns and when the closures began, that total electricity consumption was just 2.5% lower than the equivalent periods in 2019 and 2018 which was really interesting. So, you know while absolutely, we're saving energy in the CBD locations in the commercial towers we’re still working and using energy in other places and in our own homes. So there actually hasn't been overall a significant energy shift, as I think we originally expected there to be.
AS:
And Emma is that because we're all baking sourdough or is it because our homes are less efficient, I think that's the answer isn’t it?
EM:
Yeah, absolutely. I think that's something I think Davina and Ruben would agree with as well is that there hasn't been as big a focus on residential in Australia as there has been in the commercial market for sure. But I think with people working at home, there's a bit more of a realisation about how much energy we do actually use when we are at home. How much waste that we are throwing out to land fill as well because we're paying for it ourselves, we’re not relying on our organisations to pay for that energy usage as much. I know I got a bit of a shock when my bill came through last month so yeah, our homes are a lot more energy inefficient than our commercial towers typically are.
AS:
Yeah, fascinating. I guess one of the benefits of COVID is that we have seen a drop in energy prices, which has been fantastic. Do you think that will remain?
EM:
Yeah, good question, that was one of the unforeseen benefits I guess of COVID on the empty buildings in CBD locations around the country was a drop in energy prices. Wholesale electricity and gas prices have experienced a massive drop since the pandemic began, with buildings empty social restrictions in place but no shortage in supply. It’s led to a drop between 10-40% in some cases, depending which state you're in and depending on the contract terms you had with your existing retailer. But interestingly, renewable energy is now cheaper than electricity from new coal and new gas stations in Australia and even wind energy for example is 14% cheaper in a number of cases.
So where we've explained those stats to clients they’re certainly more open to looking at renewable energy options when they're renewing their contracts, where before for them commercially it didn’t really make a lot of sense, but now because we're seeing renewable energy as a cheaper than in other cases new coal and new gas so it's absolutely part of the conversation.
AS:
Yeah, fascinating and I guess Emma, the energy conversation is one that we can continue with for a long time to come, and renewable energy will, I think, emerge from this crisis is as a real focus for a lot of our investors, most definitely. If we can remember before COVID and there was actually a period before COVID and there was some devastating bushfires in Australia which really shone a lens on the importance of climate risk and I know that a lot of your clients were focusing on that climate risk. Have you seen that retract with COVID? Are you seeing that our clients and investors are moving away from that climate risk or is it still a focus in the Australian market?
EM:
Yeah, it's definitely been mixed and you're right that conversation around bushfires feels like six years ago in about six months with the year that we've had. I think in January and February it took up, I would say 90% of the conversation that I was having my clients. It brought to the forefront the realisation that this is not something that we need to deal with in 2030/2050. This is happening now.
We're seeing and feeling the effects of it right now.
In particular in the buildings that we manage, where we have to deal with, I guess managing the indoor environment quality of the spaces that we occupy, where everyone was choking on smoke outside we wanted to make sure that the indoor environment quality was still maintained, so that people could work comfortably and safely in their office environments. But the property sector is a capital intensive industry with long life assets and significant supply chain, so it's absolutely vulnerable and at risk of using premium tenants, increasing vacancy rates and loss of property value if climate risk isn't addressed and to Ruben’s point, it's something that the investor conversation and investor table is not going away. Investors absolutely do want to understand what that risk looks like, how it materialised and how their clients are looking at ways to mitigate that risk. So now that I guess you know we're starting into his new normal, I think the climate risk conversation is absolutely emerging again because again, it's not going to go away. It is something that we do need to address and put some plans in place around.
In terms of whether our clients are a bit more hesitant to look at what those risks might be, especially now, because it is a very cash poor environment we have a lot of landlords, very reluctant to spend a lot of CAPEX on any project and there's a bit of a misconception I think that investing in or investigating climate risk on your property on your portfolio means that you have to spend money right now. That's not necessarily always the case. There's some really clever operational improvements that you can make to your operation of you H-VAC system, emergency preparedness plans if they are in place already updating those, you know, we're actively using a lot of those right now with the pandemic response but how do they translate to an extreme flood or making sure that we do maintain business continuity in another extreme weather event. So, there's a lot of misconception around what climate risk assessment may mean to a landlord should they look at it right now, but it is that long term plan, and it's looking at the long-term goals as well.
We actually did an occupier survey at CBRE as well and there are a number of occupiers across the Australian market and asked a number of sustainability questions last year for the first time. The top three things that occupiers were really keen to see and were noticing as trends in this space were around, you know, waste management, energy efficiency and eco cleaning practices but climate risk actually did make it to the top 10 of that list as well, with one and three off are occupier clients, wanting to understand what landlords are doing around climate risk.
While I was initially surprised to see that high number, I guess you look at what's happening in social media at the moment and around the time of bushfires, schools going on strike and you have social and public figures like Greta Thunberg taking social media by storm talking about is topic. These are the people that were going to be employing in organisations in the near future as well. They are the people who are going to be leading our country. So, it's absolutely something that the nation does care about and people want to see more policy and action around. So, the real estate industry has a really interesting and really exciting opportunity, I guess, to lead the way in that space as well.
AS:
Talking about climate risk Emma, we've had some questions come through and I'll ask them to the panel and one is relevant, particularly around climate risk and water. So, of course, the bushfires were, as a result, off significant drought and lack of water, Australia being a very dry continent and yet water still isn't a focus for a lot of the strategies around sustainability, people gravitate to energy. The questions have come through around why, that is, and when it will change when we actually focus on our most precious resource and value it properly?
EM:
Yeah, I think it's an interesting once. It has been the poor cousin for a long, long time and because it is cheaper. But interestingly, even during this time there has been a lot of instances where we've advised clients around water saving initiatives that they can look at now because there is that opportunity for that shorter investment. There's a number of tax breaks that the government have applied to certain assets in a building, water efficiency and fixtures and fittings is one of them. So, by investing in those types of technologies and upgrades now, you get a shorter payback. Typically, that payback will be longer because water is cheap. So, it's something that I think there's a level of interest to investigate now, especially during a pandemic.
AS:
Ruben, Davina?
DR:
Well, I think one of the things is with many climate crises often the break point is when there's no water. So we've seen this over the summer, where there isn’t water in in town, we've seen it internationally and so I think the real focus on resilience is going to bring water back into the forefront because if you look at straight financial returns, eco efficiency as Emma’s indicated there haven't been the first financial opportunities to be taken. But when we look at broader resilience, long term government studies show that you get a $7 return for every dollar you spend in resilience.
So you know, or as my Nanna used to say, you know, a stitch in time, measure twice cut once. Whichever way you look at it, thinking up front, making a plan makes a phenomenal difference. I think using climate risk and its impact to draw water in as one of those key mega trends that we see that impact how these situations play out. I actually think having that other mega trends really that resilience, trend push as we think to really bring water into the forefront.
AS:
Yeah great, Ruben are you seeing investors focusing more and more on water or is it just not as important?
RL:
I wouldn't say less important, it's certainly within a sort of materiality matrix it's certainly one of the risks that we look at, which is also why we include it in risk assessments. That's a large part of the GRESB assessment.
I think both Emma and Davina already said it, it's probably very much linked to say the financial business case, again looking at risks and opportunity return. We've seen across the globe, countries where energy is still subsidised or it’s very cheap where there is very little incentive to take action unless there's a very clear business case. In my years having talked about sustainability in general, the most asked questions I have received after I why sustainability is good was “well, that's great. I want to be green, but what's in it for me?” And I think it’s a very logical question to ask, if you’re an investment management indeed, one of your purposes is to show what return you’ll get. So, I think, showing the business case, you know what you just mentioned - every single dollar gets return off $7 multiple. I think that's crucial to understand for commercial property owners that any investing in resilience is not just say CAPEX and that's it, it enhances the value of assets and your business model.
So if we can make the business case more clear, more aware, I think that's where you will see the movement. Sometimes you need a stick, sometimes you need a carrot, I think for water we need a larger carrot.
AS:
We've got another question here that's an interesting one that's coming up quite a bit around agile working. So, the question around sustainability in that 360 agile working, the hot desking that we all have experienced over the 15 years probably. Of course, the original focus for that there were many benefits, and one was sustainability. So, what do you think will be the impacts of us retreating from that agile working environment, Davina?
DR:
Well, I think it's again looking at what’s the pivot and what’s the rebound in this? You know, for the GBCA we were an entirely agile organisation, in our return to work plan we are allocating desks that are distanced for individuals who are coming back, which is unsurprising. But I think when we look in the recovery phase, we have to look at what is it that’s going to bring people back to the office? You know, so the idea that if you're doing task based work that you need to be in an office that has been fundamentally broken by the pandemic and a lot of people are very comfortable all the surveys showing working 1-2 days a week at home, so I think we've got a look at what people are going to come back into the office for, and it's going to be the events, the engagement, the brainstorming. You can't read a virtual room in quite the same way. Importantly, you can't disagree in large groups well, then regain consensus or as we brainstorm and drive strategy together. So, I think one of the things that we have to do is not just look at the binary - what are we going to lose and gain? But, you know, look at how to reimagine what that future state is. It's kind of like what we've been doing in retail in the last five years where we talk about experiential retail, where people can shop online so you’ve got to create an experience for them to come. That's going to be the new normal for the office place as we start to rebound out of this.
AS:
Emma, anything?
EM:
Yeah, I think, and maybe to build on that conversation around sustainable digitalisation, I think this is a perfect example of that unintended consequence, I guess of us using technology to connect as opposed to that in person and face to face time, which is absolutely what I think the office place is best used for in a number of cases. Again, you can't read the room in the same way as you can when you're on Zoom.
While absolutely, it has some really great benefits being online on doing virtual meetings. We can connect really, really well to our teams and really well globally, much easier than we ever have before without having to travel and that lost productivity time but the benefits that you get from actually connection and that social connection with people is absolutely a benefit I think getting into that office. Which I think is, you know, one of the unintended consequences, I guess, from that sort, sustainable digitalisation piece to use your terms Reuben.
RL:
Yeah, I think in the end we’re all social beings, right? So even though there is a chair between us – social distancing, it's still good to be in one room. I think, if anything, the pandemic has sort of removed stigma of working from home because we have been announcing breakthrough of the industry for at least a decade and now we've shown, even, let's say, the most pessimistic, reluctant manager in the organisation that it's possible. But yeah, I think it's about how we ensure proper health and wellbeing and not just in the office but in places where we shop, throughout the supply chains and so on. Again, I think there are some great initiatives being on launched currently, but my expectation is that we will indeed slowly move back, if everything goes well COVID wise, to the offices and as Emma said the offices will probably be used as a meeting place as opposed to a working place but it will not lose its functionality.
AS:
It's fascinating. I have been delighted to see that in the early days of the pandemic, when everyone was on Zoom that people didn't realise just how quickly you could pick up on an eye roll and I think people are used to that now, we’re able to manage our facial expressions a little better which is great.
I have one final question and it’s for you Davina, it’s come online as well. So, regarding new commercial and industrial construction projects, do you see it as being critical that we put a bigger focus on control design rather than grouping it under mechanical services package of the project. We find far too many cut and paste specifications on new projects, which results in buildings running at only a fraction of what is possible and, in extreme cases, needing to completely change the control strategy to achieve energy targets. I know that that is a topic that is near and dear to your heart Davina.
DR:
A long-term passion of mine. How do we take the vision at the start of a project, actually deliver it and then live it every day and you're right the DNC models with sub sub-contracting of packages has sometimes led to cost cutting processes that deliver anything but value.
The reason why I think we need to demystify net zero buildings, highly efficient buildings run by renewables is I think it gives us the time and space to bring back effort focus and value to where it’s needed most. That's often in unique special bespoke thinking about how buildings are going to work, I think you know the example that Emma gave in COVID time, the fact that these buildings aren't necessarily designed to stage down. The fact that in the bushfire crisis there was a base assumption in controls packages that outside air was always better than inside in. So, if you got a little bit of bushfire smoke, sometimes it would open your building up and suck in all that air because there wasn't the flexibility in the design.
So I think, actually, by simplifying terms and bringing group strategy closer to building strategy, in my view, it makes space for the you know, it's far sexier to have a building that’s zero then uses energy efficiency which is less and my hope is by selling these sexy zero buildings it creates the space to focus on what have been the fundamentals for 30 years but haven't been interesting enough to come to the board table, which is how do we do less better and how do we really optimise that. But I think it's the role of all of us professionals to say there's certain things that we've actually joined the dots on, but there's still a piece of complexity to work through that has really huge value to the long term owner of an asset, and how do we get really excited about watching the procurement in particular of mechanical specifications, so they deliver long term values in portfolio.
My favourite question of the day.
AS:
Great, thank you, Davina. I love that you're bringing sexy back to sustainable buildings, I would expect nothing less. It's been a great discussion, we're one minute from finishing so thank you so much to my panellists, it was a really interesting conversation and I've learned a lot. I'm sure that people have joined us have as well, we've talked a lot about the value of sustainability and how important it is going forward after COVID and during COVID. I think also that what we’ve really learned during this process in the pandemic that what's important to us now and going into the future is what was probably most important to us before the pandemic. It's risen to the fore and I think our culture and our need for a more sustainable future is more important than ever because we want it to be better. So, thank you all for joining us. It's been a great conversation and have a lovely day.
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Thanks for listening to Talking Property with CBRE. Until next time.
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