Dive Brief:
- Amid changing demand for space, sustainability imperatives, resource shortages and financial and infrastructural constraints, the scale of potentially obsolete assets is receiving heightened attention, according to a JLL report released this month.
- Upwards of $1.2 trillion in global capital expenditures may be needed to retrofit aging office assets to meet current standards, with 78% of office product and 83% of necessary capital expenditure concentrated in the U.S. and Europe, JLL says. However, the current discourse around obsolescence “does not reflect the opportunities found in turning challenges into values and returns,” driving a need for owners to adapt to prioritize retrofits in strategic investments in markets like New York and Washington, D.C., the report says.
- The upfront capital costs of retrofitting “should be thought of with respect to the longer-term ability of the asset to compete in a market where other owners are increasing their investments in new technologies and user experience,” said Phil Ryan, research director at JLL.
Dive Insight:
Of the 776 million square meters of existing office space in 66 global markets, about 322 million to 425 million square meters are likely to require substantial capital expenditure to remain viable in the near term, with 44% of projected obsolescence likely to arise in the U.S. in the near term due to higher levels of structural vacancy, the report says.
The report identifies three overlapping factors, whose convergence points can inform direction for building owners and cities — age and design, regulatory pressure and locational effects.
JLL recommends building owners evaluate the future of assets, with a focus on site-specific enhancements, and aligning portfolios with expectations of tighter ESG and building standards requirements. “In the case of regulatory demands, being able to retrofit top-of-the-line HVAC and other mechanical systems can meet more stringent sustainability requirements while also addressing wellbeing and health,” Ryan said, noting that these measures can “ensure continued viability as an investment” and provide a buffer against increased operational expenses.
The real estate services firm also calls for building owners to prioritize assets at the “highest risk of stranding” — or the potential to lose value — based on age and regulatory concerns.
While there is no single measurement to calculate near-term obsolescence or stranding risk, building age tends to correlate best with its ability to meet tenant, investor and sustainability requirements, alongside occupancy rate, rent growth, and the feasibility of retrofitting “at pace,” the report says.
Upfront capital expenditures can come with longer-term benefits to operating costs over an asset’s lifecycle, JLL says. For example, whole-building retrofits that involve reducing energy use by 40% to 65% can save $31 per square meter on average. Such a strategy would yield $2.7 billion in annual energy savings for institutional office owners when applied under a medium scenario for global at-risk office product in the eight markets at highest risk of stranding, JLL estimates.
These savings not only reduce operating expenses, but also enhance asset attractiveness to sustainability-focused tenants and investors, per the report.
Sustainability and regulatory changes can affect asset classes at varying rates, with “significant” implications for capital costs, portfolio optimization and stranding risk, the report says. For example, while most sectors have a typical site energy use of 800 to 1,550 kilo British thermal units per square meter, the energy intensities are higher for data centers and labs — more than 2,400 kBtu per square meter for data centers and about 3,500 kBtu per square meter for lab space, JLL notes. This heightened energy usage makes electrification and decarbonization particularly important for both sectors, according to the report notes.
“Data centers are also susceptible to heat and water stress,” Ryan said.
Outside of wholesale retrofits, other pathways to avoiding stranding risk involve adaptive reuse projects, incremental built environment investments to increase attractiveness and large-scale rethinking of neighborhoods in terms of purpose and design, JLL says.
Building owners and developers can assess where building-specific improvements — such as enhanced commercial offerings and public realm upgrades — are most likely to meet their submarket and cities’ needs, Ryan said.
