Global Sustainability Perspective: April 2014

Flood Risk –
Response Strategies
Global Sustainability Perspective | April 2014
Global Sustainability Perspective
April 2014 | 2
Editorial
In our previous edition of the Global Sustainability Perspective
we discussed the vulnerability of our cities to extreme weather
events and natural disasters and the need for cities to adopt
resilience planning. In this issue we continue the discussion on
the implications of extreme flooding events and on the reality
of the impacts on investors and occupiers affected around the
world.
As severe floods escalate and their geographical spread
widens, it is clear that related losses and costs will increase if
historic risk management patterns remain unchanged. In
‘Flood Risk – Response Strategies for Real Estate’ we
highlight the critical need for owners and tenants to be aware
of the flood-risk exposure to portfolios and to regularly review
relevant building adaptation methods and business continuity
plans. We also look at how property losses might be quantified
to help investors assess their risk exposure and allocation
decisions and, with rising insurance premiums and uncertainty
over cover, at how insurance companies might react to this
development. For the time being, flood risk insurance cover
remains available for the majority of locations and is still at
acceptable levels; but for how long?
Changing tack, for many investors and developers the case for
sustainability underpinning financial performance is still not
proven, and the ‘short-termism’ view is of it being an inherent
cost to business. However, some forward-thinking property
organisations are identifying sustainability’s true costs and
benefits from a broader set of metrics and leveraging its
commercial advantages and opportunities. In this issue we
assess the question ‘Sustainability: What is it worth?’, look at
what can be learned from others’ initiatives, and identify what it
will take for the property industry to embed sustainability into
mainstream business strategy.
In ‘Productivity and Workplace Economics’ we talk about what
we believe will be one of the big stories for corporate
occupiers in 2014: how sustainable workplaces enhance
employee well-being and productivity. We discuss how our
conversations on space occupancy will increasingly shift from
bottom-line efficiencies to top-line revenues.
Finally in this issue, we reveal the results of our online poll in
which you told us your Sustainable Property Priorities for
2014.
Franz Jenowein
Director, Global Sustainability Perspective
Global Sustainability Perspective
April 2014 | 3
Flood Risk – Response Strategies for Real Estate
In this issue of the Global Sustainability Perspective we continue the discussion on the implications of
extreme flooding events and the reality of the impacts on companies recently affected in Europe, Asia,
Australia and the United States.
Upward Trend in Flood Events and Losses over the
Past Decades
Looking at the period 1970-2013, reinsurance statistics show a
gradual increase of weather-related catastrophe events
worldwide, from 30 annually during the 1970s to 60 annually in
the 1980s, to 110 during the 1990s and over 120 annually
since the start of this century.1
Only a few years after two of the worst extreme weather
events of the last decade - the 2005 Hurricane Katrina in the
United States and the extensive floods in Thailand in 2011 the past two years have seen some of the most unusual
meteorological and hydrological phenomena severely affecting
the U.S. East Coast and Europe.
Global increase in annual weather-related catastrophe events 1970 - 2013
1970s
30
1980s
60
1 SIGMA 2013 - Global Natural Catastrophe Disasters, Swiss Re, March 2014, JLL
Analysis
1990s
2000 - 2013
110
120
Global Sustainability Perspective
April 2014 | 4
Lower Manhattan: Evaluating Hurricane Sandy Impact
Total Losses
Lower Manhattan total office stock
101 million sq ft / 9.4 million sq m
1
3
US$
65bn
Stock out of operation
one week after hurricane Sandy
33.6 million sq ft / 3.1 million sq m
Hurricane Sandy brought devastation to many lives and
homes, and business interruption to large companies in the
New York City area in 2012. One-third of the 101 million
square feet (9.4 million square metres) of lower Manhattan
office space was still out of operation one week after the
hurricane struck. The total economic losses are estimated at
US$65 billion, of which only US$30 billion were insured2.
Central Europe was the centre of historical flooding during
June of last year with property damage alone estimated at
US$24 billion (€17 billion)3.
A recent study5 published by the London School of Economics
managed to isolate the effect of a changing climate and its
impact on property losses The authors of the study showed
that the damages had become higher every year even after
excluding natural growth in population and the increased value
at risk over time. This increase in insured losses through
flooding was evident in the U.S. over the period 1973-2008
and from various weather-related events* in Germany over a
similar period.
Significant natural catastrophes 1980-2012, Munich Re, March 2013
European floods: using lessons learned to reduce risk, Zurich Insurance Group
5 A Trend Analysis of Normalized Insured Damage from Natural Disasters, F Barthel,
LSE, 2012
* Hail storms, local windstorms, flash and general floods, storm surges, heat waves,
etc
Insured losses
US$ 30bn
Large and severe weather events, such as those highlighted
above, are headline-grabbing and, in general, account for a
majority of annual insured losses. However, geographically
widely spread and high-frequency rainfall can also cause
flooding losses comparable to major severe weather events.
This was the case in the UK during 2012 with extraordinary
levels of precipitation leading to the second-highest total
annual flood losses since records began, surpassed only by
the 2007 UK floods.6
Flooding from rivers or the sea will be relevant in some
locations and irrelevant in others. What is certain however is
the potential exposure of all regions to extreme rainfall and
surface-water drainage.
2
3
6
The 2012 U.K. Floods, Risk Management Solutions, 2013
Global Sustainability Perspective
April 2014 | 5
Flood damage 1970 - 2010
Flood damage 2050s (estimated)
Increase
x8
€5.5bn pa
€46bn pa
Of the total estimated property losses, 80%+ are attributable to residential and
some 5% to commercial real estate, with the rest impacting industry, agriculture and transport
Future Flooding Losses to Increase
A recent wide-scale study by the European Commission’s
Joint Research Centre provides a glimpse into the future of
river flood losses in Europe: it predicts that from an historical
level of some €5.5 billion per year of flood damages over the
last four decades, the expected annual damage will rise to €46
billion by the 2050s. Of the total estimated property losses,
over 80% are attributable to residential properties and some
5% to commercial real estate, with the remaining percentage
related to industry, agriculture and transport.7
Adaptation and Mitigation are Parallel Strategies
To address climate change and its effects, there are two basic
and complementary strategic approaches:
 Mitigation strategies that target the causes of climate
change, such as reducing carbon emissions, and
 Adaptation strategies that focus on addressing the
impacts and risks that climate change will bring in the
future or that are already with us, such as the redesign
of buildings to deal with hotter and wetter weather.
Climate change mitigation has been addressed through an
array of global, regional and national legal frameworks (e.g.,
Kyoto Protocol, EU Climate and Energy Package, and the
French Grenelle Environmental Law Package) that have
introduced measures to reduce carbon emissions. At the same
7
The Impacts and economic costs of river floods in the European Union and the costs
and benefits of adaptation, European Commission, DG Joint Research Centre,
Geneva, 2012
time, market instruments such as the European Emissions
Trading System have been put in place and provide a price
for, and permit trade in carbon emission allowances.
Mitigation strategies are very long-term measures and are
difficult to put in place, as the slow progress of global climate
summits has proven. Climate change mitigation may or may
not come to the rescue and lessen the negative consequences
on human lives and property resulting from extreme weather
events in the future. Hence there is a clear necessity to
introduce adaptation strategies that can be put in place more
easily and will have a more immediate effect of reducing
climate change induced risks and losses.
Both mitigation and adaptation strategies need to be planned
and implemented in parallel as they complement each other
over time.
Global Sustainability Perspective
April 2014 | 6
Adaptation Pathways for Buildings
Adaption measures can be grouped into categories, which
comprise government policy instruments, building regulations
and standards, building design measures and business
continuity plans for building occupiers. It is crucial to adopt
measures at the right level of responsibility and effectiveness,
examples include:
Planning Control: New building development is
constrained as a function of flood risk. The most radical
and obvious measure to avoid flood risk is not to build in
areas at risk in the first place; a variation to this measure is
for policy to guide new development towards locations that
offer best protection from likely flood impacts. For certain
levels of flood risk, increasing floor levels or introducing
allowances for increased building heights, that can
incorporate podium instead of basement car parking, can
be sufficient.
Flood Mapping and Zoning: Government organisations,
such as the UK’s Environment Agency, have established
extremely detailed and publicly available flood-zone maps
that indicate flood risk categories. Such systems help to
raise awareness of the flood-risk levels for new and
existing buildings and help plan for adaptation measures.
These maps may also identify where sewerage systems
may be under pressure. In the aftermath of Hurricane
Sandy in the US East Coast, the New York City Green
Codes Task Force proposed the creation and use of 2080
Flood Maps based on climate change predictions and
coastal flooding that would ensue.8
Building Regulations/Code: Buildings in flood-prone
areas can be made more resistant to flooding through
measures such as improvements to foundations and subsoil drainage, and the use of non-return valves in drains
and sewers, water resistant materials such as floor tiles,
and mould resistant construction. Complementing these
types of mandatory building regulations, voluntary green
building certification systems have been developed to
encourage flood risk awareness measures, such as
professional flood-risk assessments for new construction
sites (UK BREEAM) or the demand for new construction to
be in low flood-risk zones (U.S. LEED).
8
Building Resiliency Task Force, Urban Green, NYC Building Resiliency Task Force,
13 June 2013
Building Design Measures: Raising essential
infrastructure (building services equipment,
telecommunications, electricity backup generation sets,
building management systems and any other critical
electrical installations) above the flood-prone areas is one
of the most effective measures that help protect the
operational capacity of a building during flooding. To a
certain extent, Sustainable Drainage Systems (SuDS),
which are well established in many countries, can help
manage rainwater run-off on roofs and other surfaces and
its impact on nearby sites. SuDS control the flow rate and
surface run-off volumes to reduce the risk of flooding and
water pollution, and also reduce pressure on the sewerage
network. Linked to SuDS is the design of gutters and
downpipes, which will need to be able to absorb increased
rainfall.
Leasing Check List: For tenants in search of new
business space, their checklists need to contain an
assessment of a building’s capacity and its management
processes to cope under various degrees of flooding. For
example, as data centres play an increasingly important
role in modern business infrastructure, it is critical to
provide a flood-proof environment for such installations.
Business Continuity Planning (BCP) Measures:
Location and building-related adaptation measures will
never eradicate flood risks completely. It is therefore
necessary for tenants whose premises are exposed to
flood risk to prepare business continuity plans to be ready
for the worst case scenario if an occupied building is hit by
flooding.
Global Sustainability Perspective
April 2014 | 7
As JLL has learned over the recent series of natural disasters
in the Asia-Pacific region, the best practice for BCP a few
years back was planning to get staff back into physical
premises and to get the business operations and normal work
routines re-established as soon as practicable. Today,
companies are, instead, more focused on returning staff to
productivity through advances in mobile technology, such as
remote connectivity, smartphones and other mobile digital
devices.
In parallel, the physical work environment needs to be brought
back into operation. As the majority of essential services are
dependent on electricity, tenants should methodically review
and agree backup solutions for each of these services. Part of
this review should include an audit of where essential building
services are located to identify whether they could be better
situated to lessen the impact during critical incidents.
Adaptation Measures Beyond Buildings
Flood zoning, town planning and building specific measures
allow protection against flooding to a certain extent. Ultimately,
however, it is down to the wider public infrastructure to provide
city-wide defences against river or coastal flooding. One of the
best known technical flood-defence systems is the Thames
Barrier located downstream of central London, protecting
property estimated at £200 billion9 and shielding 40,000
commercial and industrial properties and over 500,000 homes
and their inhabitants from tidal flooding - the coast is only
some 50km from London.10 Its value was clearly demonstrated
recently during the UK’s wettest winter in recorded history,
when the barrier was closed 20 times in February 2014
compared to only four times during the entire 1980s, when it
was originally built.11 This increase in closure frequency is
another symptom of the growing flood-risk exposure of
property in London.
However, with ever-rising sea levels driven by climate change,
even these large structures will not be sufficient to protect lives
and property indefinitely, and adaptions to these systems are
already under discussion. London is looking at the possibility
of another tidal barrier situated further out on the Thames
Estuary, and the Netherlands is modifying its existing system
of keeping water out of low-lying land by allowing areas of its
land to flood in the future.
How Commercial Real Estate Markets React to Flood
Risk
Flooding in Thailand and its impact on the local
property market - Industrial real estate, Bangkok
area
In 2012, one year after the devastating flooding of large parts
of Thailand, JLL’s Bangkok office stated13 that prices of
industrial land in low flood-risk areas had been pushed up by
10-25%. Today, more than two years after the catastrophe,
prices for warehouses in low flood-risk areas are some 10%
higher than before the flooding. Meanwhile, rents for industrial
properties in flood zones, even where they benefit from
protective measures, are still about 15-20% below rents for
comparable premises in low-risk areas.
For companies impacted by the floods and operating in floodaffected industrial estates the financial factor plays the biggest
role in any relocation decision, as acquiring land and building
new facilities represents a significant investment. In addition,
these companies have prepared themselves to handle floods
more efficiently, developing more robust business contingency
plans, including readiness to quickly secure temporary
warehouse and logistics facilities should there be any new
flooding.
By far the most well-known flood protection system in the
world is the system of dams and dunes that protect the
Netherlands from tidal flooding and the 70% of the country’s
GDP that is generated in areas that lie below sea-level12. Part
of the system is the Delta Works, which were constructed
between 1950 to 1997 and are the planet’s largest flood
barrier system, measuring a combined length of 25km.
Winter Floods Statement, UK Government, 6 February 2014
Waterproof – flood risk and due diligence for commercial property investment in the
UK, Marsh, 2011
11 ‘The Day after Tomorrow’ in: Building Magazine, UK, 4 March 2014
12 Dutch Expertise in Water, in: Holland Real Estate Yearbook 2008
9
10
13
One year on, and companies are starting to move to higher ground, JLL Thailand,
25 October 2012
Global Sustainability Perspective
April 2014 | 8
2011 Brisbane floods and their impact on the local real
estate market
A few months after the historic flooding of Queensland and its
capital Brisbane, JLL Australia commented in a report14:“There
are likely to be longer-term planning implications for markets,
including locations where development can be approved,
allowable heights and the location of building services within
developments.” Despite the extent of the floods, the Central
Business District (CBD) office market only had a dozen
buildings with flooded basements, and the market impact was
expected to be minimal; three years later, we can report that
none of the tenants in the CBD have prematurely terminated
their leases. Planning certainly played a role in reducing
damage in 2011 as not too many commercial office buildings
were situated on the river. But waterfront sites, however,
remain desirable premium locations within Brisbane
The Fringe office market was more affected by floods but,
similar to the CBD office market, the impact on market
dynamics was fairly minimal, with very few occupiers walking
away from lease obligations.
14
Brisbane’s floods – Three months on, what are the implications for commercial
property?, JLL Australia, April 2011
Some industrial occupiers in hard-hit locations did suffer and
have chosen to move, but many office tenants are remaining
in situ due to limited available space options and the value for
money they are receiving in their existing rented offices where
the business risk is worth accepting. Insurance cover was
another reason that flood damage and losses could be
absorbed by affected businesses.
Looking at the last major flood event in Brisbane, dating back
to 1974, it took the market some 10 years to recover. This time
around the recovery was much faster and an improving
economy gave the market an additional boost.
Global Sustainability Perspective
April 2014 | 9
Industrial Real Estate Investor Example
Prologis, Inc. is a leading global owner, operator and
developer of industrial real estate. An integral part of its
development strategy is to carefully select land through indepth risk assessments. As Richard Redstone, Head of
Investment Services & Valuations, Prologis, Amsterdam,
explains: “Our site risk assessments not only review flood
risks, taking into account existing flood defences, but also
assess flood mitigation initiatives should any residual flood
risk exist.” In addition, flood risks are part of the global
insurance cover that Prologis is able to procure on favourable
terms due to its diversification of assets across its worldwide
portfolio. Internal processes make sure that flood and other
risks are regularly reviewed. The result of this careful floodrisk management has been that no Prologis buildings have
been significantly affected by the severe flooding events that
have hit Europe over recent years.
Tenant Reactions – Sentiment Plays Key Role
Looking at how tenants reacted to the flooding produced by
Hurricane Sandy in the New York metropolitan area, a report
by the Alliance for Downtown New York, a multi-stakeholder
organisation for New York’s Lower Manhattan area interests,
revealed that no office tenants had cancelled their existing
leases in Lower Manhattan following the ‘superstorm’ and,
more importantly, that 10 office tenants from outside Lower
Manhattan had signed to move into the district.15
The New York and Brisbane examples show that many, if not
most, commercial tenants are choosing to remain in flood risk
areas, even after floods have affected their office premises
and even though they may be affected again in the future:

For many professional services businesses, location
trumps any other building characteristics

For certain well-priced areas, the business risk is worth
accepting given a relatively low probability of another
flood in the immediate future

Mitigation measures - both at a building and broader
public-sector level – may lead tenants to assess reduced
levels of risk. And sentiment also plays a key role: time
and fading memories will see risk premiums slowly
disappearing.
It seems that businesses have very short-term memories, as
flood risk does not seem to be at the top of the mind of major
tenants relocating to Lower Manhattan. Lower leasing costs for
commercial buildings and access to next generation talent
seem to outweigh the higher exposure to potential losses from
flooding.
Quantifying Expected Property Losses
The Economics of Climate Adaptation working group16has
produced a robust methodology and applied it to a number of
geography-based natural hazard risks in order to assess costs
and benefits of adaptation measures. And to calculate flood
vulnerability of coastal cities, the University of Leeds in the UK,
sponsored by the Government of the Netherlands, has
developed a methodology that calculates a Flood Vulnerability
Index, which incorporates 19 elements such as exposure,
susceptibility and resilience to flooding.17
However, real estate investors need a more granular level of
analysis that is asset or portfolio-based. The German Ministry
for Transport, Construction and Urban Development, under the
project leadership of Sven Bienert, professor of sustainable
real estate at the University of Regensburg, Germany,
developed a comprehensive asset based natural hazard loss
analysis tool, ImmoRisk. It combines natural hazard,
vulnerability and cost data for buildings. Based on a detailed
asset profile and its location, ImmoRisk’s software produces
estimated annual losses per type of hazard for the current and
the expected exposure until the end of this century.
Asset-level loss quantification analyses will help investors
assess their exposure against adaptation or insurance costs
and, going forward, potential ‘future loss’ transparency may
support asset owners in their geographic allocation decisions.
The ECA working group is a partnership between the Global Environment
Facility/UNEP, McKinsey & Company, Swiss Re, The Rockefeller Foundation,
ClimateWorks Foundation, the European Commission and Standard Chartered
Bank.
17 A flood vulnerability index for coastal cities and its use in assessing climate change
impacts, SF Balica et al, in: Natural Hazards, May 2012
16
15
Back to Business: The State of Lower Manhattan Four Months After Hurricane
Sandy, The Alliance for Downtown New York, 2013
Global Sustainability Perspective
April 2014 | 10
The Role of Risk Transfer Mechanisms
Real estate owners are able to transfer flood risk and damage
to the insurance sector and, indirectly, through the recovery of
insurance premiums, to tenants. Where flood risk cover is
available at commercially acceptable rates this does not seem
to be a problem; for large real estate property portfolio owners,
natural disaster risk diversification across a large number of
different building types and locations assures this cover.
Meanwhile, insurers have their own fallback mechanism in the
form of reinsurance companies who cover high-severity but
low frequency weather events. Furthermore, over the past
decade, the Capital Markets have added natural catastropherelated insurance capacity, for example through so called CAT
(Catastrophe) bonds. And if all commercial risk transfer
mechanisms fail, governments step in with their role of
‘rescuer of last resort’. In the extreme case where no cover
exists, the only silver lining on the horizon may be in the tax
advantages that exceptional equipment write-offs provide.
Property Flood Damage: Risk Transfer Mechanisms
Property flood damage
Owner liability
Absorbed by owners
through excess and
capped claims payments
Insurance cover
Absorbed through
loss claims
Indirect transfer to tenants
Government
rescue schemes
Reinsurance cover
Through the recovery
of insurance premiums
In exceptional cases where
no commercial cover exists
For extreme but low
frequency weather events
Global Sustainability Perspective
April 2014 | 11
This system has worked well in the past decades with flood
risk cover often being ‘thrown in’ with global insurance cover.
However, as the frequency and intensity of extreme weather
events and floods change age-old probability patterns,
insurance premiums may become far more expensive and, in
some circumstances, cover may not be available at
commercially accepted rates while government finances may
be too stretched to help.
As a consequence, the insurance sector and governments are
waking up to these changing risk patterns and the sheer
volume of damage that can occur with more frequent and
more extreme natural hazard events. Insurance companies
are beginning to review their flood risk exposure, which may
lead to the pricing of insurance cover being more closely
matched to the actual risk to commercial real estate. Even if
insurance cover can be obtained, in certain countries, such as
the Netherlands or Germany, excesses may be very high and
insured loss limitations capped at relatively low levels
compared to the overall value at risk.
To improve insurance cover conditions, large real estate
investors are providing detailed technical analyses of their
portfolios and deeper documentation of their buildings’
resilience against potential damage. Additional disclosure is an
effective way of managing insurance expenses, as it provides
insurers with transparency across key characteristics of a
portfolio, such as age profiles of buildings and the quality of
the land on which they are built.
One example of better flood-risk exposure information
covering insured losses and disaster losses is a database
service run by Perils AG, a Switzerland-based company, in
conjunction with some of Europe’s major reinsurance and
insurance companies. Recently the company has begun the
sourcing of flood event data in collaboration with the European
Space Agency, a new initiative that will provide detailed
satellite-based flood footprints after major events across core
European markets. These types of improved information tools
will allow insurance and reinsurance companies to better
manage and price flood risks in the future.
Elsewhere, Congress and the federal government in the
United States have reviewed national flood insurance
programmes and premiums and started passing legislative
reforms in 2012. Despite the reforms being recently somewhat
weakened through amendments, the direction is clear:
insurance premiums will have to more closely reflect the real
flood-risk exposure of a property, and more accurate flood risk
mapping needs to inform town planning in order to reduce the
risk exposure in the first place.
Conclusion
As extreme flooding events are on the increase and as their
geographical spread widens, related losses will increase if
historic risk management patterns remain unchanged. As
owners or tenants of commercial property, it is important to be
aware of the flood-risk exposure of your real estate portfolio
and to regularly review flood adaptation measures and
business continuity plans. For the time being, flood insurance
cover for commercial real estate generally remains available
and insurance premiums are still at acceptable levels; but for
how long?
Global Sustainability Perspective
April 2014 | 12
Sustainability: What is it worth?
The 2013 CEO survey conducted by UN Global Compact and
Accenture revealed that 93% of Executives believe
‘sustainability is key to the success of their business’. Such
surprisingly high acceptance levels leave no doubt that
sustainability is now a mainstream board consideration with
the attention of the C suite. While sustainability has long since
been on the business radar for industries with significant
environmental and social impacts, its systematic integration
into business as usual for property investors and developers is
relatively recent. In fact, some might argue, it’s not even
happening yet. So why the disconnect between executive
beliefs and business practices in the property sector?
The answer may be that, despite a widely held belief that good
sustainability performance should underpin financial success,
evidence to this effect remains challenging to compile. One
can, of course, point to generic studies that track the
performance of sustainability indices against the main stock
market constituents and in most cases point to
outperformance. But then again, is it any surprise that
companies attentive to these issues are inherently well
managed, and forward-thinking, and therefore more likely to
demonstrate consistently strong performance all round? It is
also possible to point to certain studies that link rental values
or capital values with strong performance against one or more
sustainability impact areas. But increasingly the debate has
moved away from discovering an elusive ‘green alpha’ and
towards an inexorable ‘brown discount’ if certain assets don’t
meet the market norms.
The reality is also that the investment case for sustainability is
one of the hardest to defend. Boardroom decisions rely on
financial tools and metrics that measure return on investment
against typically short-time horizons (e.g. less than 3 years).
Such tools help quantify the direct impact of an investment on
the bottom line, making it easier to prioritise initiatives.
However, conducting cost benefit analysis for sustainability
initiatives is not that straight forward. Many of the quantifiable
benefits are likely to be on a longer-term horizon (e.g. more
than 5 years), and many more still are of a more intangible
nature. Examples of these would be enhanced brand value,
improved stakeholder relations, continued licence to operate,
and differentiation from market peers. Some of these, such as
continued licence to operate, are indeed very significant for a
property developer seeking approval for a scheme from a local
planning authority. But, unfortunately, few such benefits are
being measured or tracked by property investors and
developers. This means the sector is still at the strategic
stage of considering sustainability as an inherent cost to
business rather than as a source of commercial advantage
and opportunity.
Global Sustainability Perspective
April 2014 | 13
What might the property industry learn from other sectors in
this regard? The retail industry is an interesting one, as a
number of retailers have pioneered different methodologies to
quantify the value they derive from sustainability. M&S, for
example, has estimated a cumulative net benefit of £320m
over the last 6 years by simply measuring capital costs against
operational savings for each and every one of the hundreds of
sustainability initiatives outlined in their Plan A. The
multinational company Kering (whose brands include Puma
and Gucci to name but a few) has adopted a sophisticated
Environmental Profit & Loss accountancy framework which
places a monetary value on each of its environmental impacts,
covering water use, waste, greenhouse gas emissions and
land use. This has enabled Kering to drill deep into the supply
chain, and to challenge pre-conceived assumptions of where it
should prioritise sustainability investments across different
product categories.
In the past eighteen months in the UK, we have witnessed a
number of property investors and developers aiming to capture
their total impact on the economy, society and the
environment. For instance, Hammerson and British Land have
both made public statements around the social return on
investment (SROI) of some of their retail schemes. More
recently, The Crown Estate launched its ‘Total Contribution’
framework to assess the impact of its business in terms of
number of jobs created, contribution to the UK economy,
enhancement of personal wellbeing and net emissions averted
through activity on their portfolio. Such initiatives suggest that
momentum is building for the measurement and articulation of
total value to society, economy and environment from real
estate businesses.
However, until socio-economic and environmental
metrics become fundamental components of every
property investment proposal, capex decisions are
unlikely to be aligned with sustainability objectives.
When these factors (which have hitherto been
treated as externalities) are firmly integrated within
discounted cashflow models, ROI appraisals, and
CBA (Community-Based Adaptation) frameworks,
the industry will have begun to embed sustainability
into mainstream business strategy, rather than
considering it a separate strategic focus area.
Article first published in Building Magazine, UK, 7March 2014
Global Sustainability Perspective
April 2014 | 14
Let’s change the conversation
As the economic recovery drives a renewed focus
on business growth, productivity and retaining
talent, we expect there will be an explosion of
interest from corporate occupiers in programmes
designed to promote employee well-being. We
predict that this is the year when a compelling story
will be told about how sustainable workplaces
enhance employee productivity.
There has been a long-term trend towards greater employee
density and space optimisation in offices, driven by a
corporate focus on bottom-line efficiencies around rent and
running costs. While important, this has meant that some
companies have been missing the opportunities for the far
more significant positive impacts to their top-line revenues that
could be achieved if they concentrated on staff productivity
instead. Put into perspective, when looking at running costs
office-based organisations tend to spend around 90% on
personnel compared to some 10% on rent and energy18.
For example, in a compact office layout, a typical office rent in
the Waterloo and Southwark area of London equates to an
annual cost of about £3,420 per desk space. Hot-desking at a
ratio of six desks to ten employees can reduce this to £2,050
per employee. The saving amounts to £1,370 per employee.
But at what cost? Research studies that have analysed openplan offices link them to health problems such as stress and
high blood pressure19, and have also shown that high levels of
home-working can reduce team cohesion.
For an employee generating £100,000 per year or more of
company revenues, the space efficiency saving identified
above is not worthwhile if it negatively impacts their
productivity by just 1.5%. And conversely, even modest
improvements to staff health and productivity can have a
dramatic impact on organisational profitability.
At JLL we want to change the conversation
What if the goal of minimising rental cost per employee was
transformed into maximising labour productivity per rented
space? Taking this argument seriously means that we would
expect to see the real estate professionals’ current focus on
evaluating cost per square foot slowly shift towards increasing
productivity per employee.
2007 data from the National Institute for Building Sciences, Carnegie Mellon
University, US, showed that for a typical office-based organisation, their running costs
break down roughly to: 1% energy, 9% rent and 90% personnel.
19 2009 review article published in the Asia-Pacific Journal of Health Management
19
The question then is: What features in your space will
positively influence your productivity?
In 2013 the World Green Building Council (WGBC) produced
the report ‘The Business Case for Green Buildings’. The
research gathered in the report strongly suggests that green
design features can positively enhance the health, well-being
and productivity of people using those buildings – with studies
indicating up to 11% gains in productivity from improved
ventilation and up to 23% from improved lighting design.
However, the WGBC makes it clear that further work is
required. The real estate sector needs to see the evidence
base and the translation of promising academic research into
robust information that can inform business decision-making
by developers, landlords and occupiers.
In March 2014, the WGBC launched a new global
research project seeking to develop common
metrics to measure productivity and well-being, as
well as looking to generate guidance for the
property sector on the type of green building
measures which support good performance against
these metrics. JLL experts now sit on the Steering
Committee of this project and are heavily involved
with its Technical Working Groups. Even at this
early stage, we are excited to see the huge amount
of expertise and research connecting specific
building factors to productivity improvements.
Some large companies are already connecting workplace
design and sustainability with improved employee productivity,
developing their own internal business case for real estate
decision-making. The use of sustainable fit-out guides and
selection criteria is already in evidence in the market. The Cooperative Group in the UK is one example of a company that
has sought to occupy space with the highest BREEAM label of
‘Outstanding’, in part to enhance employee productivity and
retention. Meanwhile, Lend Lease has laid out its London
headquarters with workplace well-being and productivity at the
forefront of its thinking, with well-designed breakout areas and
over 3,000 plants to improve indoor air-quality.
Fascinating stories that further demonstrate this trend have
been bubbling up over the past two years from JLL’s own
experiences in supporting corporate location moves and
workplace design. One such story is of the leading UK
pharmaceutical company, AstraZeneca.
Global Sustainability Perspective
April 2014 | 15
Case study
AstraZeneca provides a great example of this new attention to
workplace design. Firstly, one of the CEO’s three strategic
priorities is that the company should be a great place to work,
and he is focused on making the workplace new, fresh and
exciting. Secondly, the company’s corporate strapline of
‘health connects us all’ means that health and wellbeing is a
major motif of the brand and of the working culture of the
company.
In response to these twin drivers, the workplace and change
management team at AstraZeneca have formalised a global
workplace strategy covering a number of major components
including people, culture and health. The detailed guidelines
include several criteria indicated by many research studies to
improve our well-being and productivity; for example, all
workstations should be within the first 6 metres of the
windows, so that all staff can work in daylight and with outside
views.
In 2012, when AstraZeneca decided to relocate its R&D
Information team of 150 people next to the R&D staff that they
supported, the workplace team carefully designed the space to
support vibrant collaborative working practices and employee
well-being, as well as increased occupational density. Pre- and
post-move evaluations revealed how effective the strategy has
been: productivity has increased by 20%, while running costs
per occupant have dropped by 40%.
While the largest leading companies are already embracing
this new agenda (where they have the opportunity and the
control over the space to do so), the challenge for developers
and landlords will be to keep up with market trends. Landlords
will need to react flexibly to existing occupiers’ requests for
changes, and occupiers in the market for new space will begin
to demand a variety of different working environments,
depending on their sector, tailored towards the specific wellbeing requirements of their employees. We note that some
developers are already responding to this shift - Land
Securities plans to design its Zig Zag Building, a 188,000 sq ft
office scheme in London’s Victoria district, in ways that ensure
the happiness and well-being of future occupiers.
We hope to see much more of this type of thinking in the real
estate sector going forward, supported by the results from the
WGBC project which we will be helping to disseminate
amongst the sector in the Autumn. We look forward to the shift
in our conversations from bottom-line efficiencies to top-line
revenues.
“The vision is for the space to match the excitement
of our work. We fully expect to learn as we adapt to
working differently.”
Global Sustainability Perspective
April 2014 | 16
Sustainable Property Priorities for 2014 –
Online Poll Results
In our November 2013 poll we asked you to tell us which
sustainable property priorities you had identified for your
organisation in 2014. The poll’s final result shows energy
savings in buildings to be by far the most popular issue you
planned to tackle.
Energy savings in buildings
Sustainable procurement
Employee well-being
Renewable energy installations
Community engagement
Carbon data mgt & accounting
Green construction
Green fit-out
Integrated reporting
Other
Note: Poll based on 77 votes cast between November 2013 and March 2014
With almost one-third of participants’ votes, energy savings
in buildings clearly tops the sustainable property agenda for
2014. Energy conservation was mainly introduced through
legislation in commercial real estate after the oil price shock hit
the advanced economies in the early 1970s; with escalating
energy costs ever since and, more recently, increasingly
stringent carbon emissions reduction obligations in many
countries, it has continued to be a primary area of concern.
For many companies around the world however, achieving
and maintaining energy savings represents an uphill battle as
rising energy tariffs frequently cancel out energy consumption
savings (kWh) achieved through no and low-cost initiatives.
The next three priorities received similar attention, although
each focuses on a very different sustainability aspect.
Renewable energy installations can be seen in the light of
organisations needing to find additional energy cost savings
that are still supported by attractive subsidy schemes, such as
the Feed-in-Tariffs typically available in European countries.
Such installations also contribute to improved building energy
performance ratings and are a component of green building
certification schemes. Sustainable procurement has been
gaining growing attention from investors and tenants as
sustainability scrutiny, which started on the energy supplyside, is now being systematically extended to other types of
procurement and also the sustainability credentials of supplier
companies and contractors. More difficult to manage and
measure, employee well-being is being increasingly identified
by organisations as a key contributor to staff and overall
business productivity. Testimony to this trend is the recently
announced study by the World Green Building Council on the
connection between green buildings, occupier well-being and
productivity. JLL is a sponsor and active contributor to this
research effort and the results of the study will be announced
in the second half of this year. With 10% of your votes is
community engagement, which is indicative of the
importance that many organisations now attach to stronger
links with the immediate community and wider society. Many
companies have established community commitment
programmes and report their charitable contributions,
employee volunteering days or in-kind contributions to major
local events or aided relief efforts across the globe.
Towards the bottom of your concerns for this year are carbon
data management, green construction and green fit-out. A
probable reason for this ‘deprioritisation’ is that issues such as
carbon data management and accounting have become
embedded in mainstream management activity. Likewise,
green construction, at least for larger assets and institutional
investment grade projects, has become an accepted approach
and needs less prioritised attention. Moreover, the green
building certifications schemes around the world linked to
construction and fit-out (LEED, BREEAM, HQE, Green Star,
etc.) have become a standard feature for many government
buildings and an integral element of Grade-A rated buildings.
Propping up the poll is the integrated reporting of an
organisation's strategy, governance and financial performance
with the social, environmental and economic context in which it
operates. We have been covering this topic in the Global
Sustainability Perspective since 2011 and JLL itself is part of
the International Integrated Reporting Council. A framework of
principles was published at the end of last year, however
progress in its application by companies and a rise up the
priority list will certainly take more time.
17
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Global Sustainability Perspective April 2014
Content Contributors
Key Contacts for this issue:
Flood Risk – Response Strategies
Dan Probst
Global Chairman & Americas Sustainability Services, USA
Sustainability: What is it worth?
Julie Hirigoyen
UK Head of Sustainability
Productivity and Workplace Economics
Beth Ambrose
Associate Director, Upstream Sustainability Services, UK
Poll Results Sustainable Property Priorities for 2014
Franz Jenowein
Director, Global Sustainability Perspective
Third Party Contributors
Richard Redstone
Head of Investment Services & Valuations, Prologis Inc., The Netherlands
Sven Bienert
Professor of Sustainable Real Estate at the University of Regensburg, Germany
Global Energy and Sustainability Services Contacts:
Dan Probst
Global Chairman & Americas Head of
Sustainability Services
+1 312 228 2859
[email protected]
Julie Hirigoyen
UK Head of
Sustainability
+44 207 399 5330
[email protected]
Peter Hilderson
Asia Pacific Head of Energy
& Sustainability Services
+61 2 9220 8735
[email protected]
Franz Jenowein
Director, Global
Sustainability Perspective
+44 203 147 1752
[email protected]
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