ALARMING OBSOLESCENCE WILL REPRICE U.S. OFFICE PROPERTIES DUE TO ESG & TENANT HEALTH DEMANDS

LOS ANGELES, March 9, 2022 /PRNewswire/ -- A new economic analysis of the state of U.S. office buildings reveals that as much as 70% of the total inventory faces an alarming period of repricing due to fast-paced obsolescence, accelerated by COVID but exacerbated by evolving environmental and health standards. The underlying factors, that will get stronger over the long-term, are strict new government standards for energy efficiency and growing tenant demands for healthy, safe, and energy efficient office environments with ample modern amenities.

"Obsolescence already has created a 'green' premium of 6% for leases in sustainable buildings that can meet government energy standards and achieve carbon neutrality. In addition, tenants are now willing to pay a 'health' premium, significantly pushing rental rates up over other office space, separate and apart from the green premium," according to Dr. Randall Zisler, a real estate economics expert, who authored the study and is the chair of Zisler Capital Associates. 

"While waiting for the pandemic to end, many investors don't recognize that obsolescence is devouring billions from office building values," states Dr. Zisler. 

"If investors act now, they may be able to avoid this tsunami that is sweeping across the U.S. moving from Europe on its way to Asia," he adds, noting that the U.K. has barred leasing of offices that don't meet energy efficiency metrics by 2023. 

Dr. Zisler advises investors to conduct obsolescence audits of their buildings to determine which should be held, sold, or retrofitted based on whether they can meet the standards now demanded by the market and government. He believes that it may not be economically feasible to bring as much as 30% of the inventory up to evolving standards due to building age, size, location, and other factors. Another 40% of the office building inventory is marginal. Many of these properties will be sold at such low prices that buyers may be able to justify large capital improvements to bring them up to current standards. 

The remaining roughly 30% of U.S. office inventory conforms to evolving energy efficiency and healthy building standards or can be easily and economically retrofitted. Since these desirable properties comprise only a small subset of the entire office inventory, the resulting supply/demand imbalance will drive up their prices by as much as 20%, while the rest of the inventory suffers, Dr. Zisler says.

COVID has played a role in accelerating the pace of office obsolescence, motivating employees to demand healthier and safer workplaces in order to return to work. COVID is a transient shock exposing the obsolescence, but obsolescence is a long-term, insidious problem that will challenge office investors, especially institutional investors with fiduciary responsibilities, says Dr. Zisler. 

"Energy Star ratings and LEED certifications are just check-the-box marks today in corporate leasing decisions," Dr. Zisler points out. "Employees are also insisting their companies take actions that combat climate concerns. In many industries, there is a war for talent today. Therefore, buildings with the systems and technologies that help companies fulfill their carbon neutrality goals as well as recruit and retain topflight talent will be rewarded with higher rents and values."

Healthy buildings now in demand by workers have sophisticated technologies and comprehensive operating protocols for improved ventilation, air quality, water quality, noise and lighting. "Many of these technologies can provide virtually hospital grade air quality in offices, eliminating most pathogens," says Dr. Zisler. 

While energy efficiency and health are not the same, they are related. Landlords will find it extremely difficult to operate a healthy building without having installed modern, energy efficient systems.

Costs of these technologies and systems can be justified by the higher rents tenants are willing to pay for healthy, carbon neutral buildings. In turn, tenants will receive significant financial benefits from improved employee health and productivity, often increasing their bottom lines by 10% or more, Dr. Zisler emphasizes.

There are several well-regarded third-party organizations that employ science-based testing to certify healthy buildings including USGBC, UL, ISSA GBAC, and WELL Building, according to John Sischo, co-founder and managing principal of Coretrust Capital Partners.

"Independently verified and monitored healthy buildings give employees assurance that it's safe to return to the office," Sischo concludes.

The study was commissioned by Coretrust Capital Partners, a 8-year-old Los Angeles-based start-up that is an accredited leader in creating sustainable, healthy environments in its large buildings in Los Angeles, Philadelphia, and Pasadena. Dr. Zisler is a former professor at Princeton University, where he taught economics, planning and finance, and head of real estate research for Goldman Sachs and Nomura Securities. 

Interested readers may download the full study at the following address: www.coretrustcapitalpartners.com/research.

Contact:
Randall Zisler, Ph.D.
Chairman
Zisler Capital Associates, LLC, presenting Outsourced Research
 +1.310-560-1192 | [email protected]

SOURCE Zisler Capital Associates