Deborah Levy and Gemma Peterson University of Auckland, New Zealand

The decision to occupy commercial green buildings: Tenant’s perspectives of the Auckland office market

Deborah Levy and Gemma PetersonUniversity of Auckland, New Zealand

Outline

• Background• Sustainability as perceived by a

tenants• Importance of sustainability in the

location decision of occupying a commercial building

Background• Previous research discussed the impact of

sustainability on commercial property investment in Australia and New Zealand from the perspective of the property investor (De Francesco and Levy, 2008)

• This research is a preliminary study designed to gauge what the key location factors decision makers consider when selecting a commercial office building to locate, in Auckland, New Zealand

• Interviews with large and medium sized tenants located in green/sustainable buildings

Green Building Literature • Three core areas

– Post-occupancy responses– Valuation and investment issues– Demand characteristics

• Traditional Location Decision Literature – Does it align with green buildings?

Post-Occupancy Response• Heerwagen (2000) shows benefits of green

buildings and how it is important for the organisation to be integrated with the system at the start. Need to be aware on how to operate buildings (Edwards, 2006).

• User experience in buildings are shaped by characteristics and quality of space (Brown et al, 2010)

• Comfort and satisfaction levels of green buildings (Paul and Taylor, 2008)

Valuation and Investment• Value of green buildings is higher than non-

rated buildings (Eicholtz et al, 2010) • Sustainability and the role of valuation (Lorenz

and Lutzendorf, 2008) • Cost consultants overestimate capital costs of

energy efficiency and underestimate cost savings (Bartlett and Howard, 2000)

• Ellison et al (2007) Sustainability and investment property worth

• Pivo (2008)

Demand Characteristics• Little literature available• Dixon et al (2009) found that occupiers who

moved to a BREEAM rated building were in business sectors with strong environmental and corporate policies with sustainable emphasis

• Location and availability remained paramount in the location decision

Traditional Location Decision Literature • Do the traditional location factors still

apply to green buildings? – Shift from neo-classical location decision

influence of cost to behavioural influences (Brouwer et al, 2004)

– Lizieri (2003) and Gibson (2003) highlight importance of flexibility

– Prestige of location is important (Sing and Ooi, 2006)

Traditional Location Decision Literature

– Key individuals exert influence over the decision making process (Greenhalgh, 2008)

– Decisions are affected by business objectives and requirements (Nourse and Roulac, 1993; Lizieri, 2003)

• How are these two literature streams linked? What is the relative importance of sustainability to the location decision?

The Tenant Location Decision

Asset users (tenants)

Asset managers (agents)

Owners of capital (investors)

Asset creators (developers)

Asset owners (landlords)

Managers of capital

(funds managers)Investment

environmentBuilt

environmentSUSTAINABILITY

Regulatory environment

Government and related agencies

Industry groups (eg. PCA, BCA)

External environment

Non-Government Organisations

(NGO’s)

Other global influences

Source: CF Research.

Example some of the buildings• 5 Green Star Rated• Premium Grade • Very good location• Speculative development • Finished in the recession, now highly vacant

• Commissioned by corporate tenant and fully preleased

Drivers and Barriers for Sustainable Offices• Evident shift of business practice towards a

green sustainable future • Corporate Social Responsibility (CSR) policies

are important in the real estate decision (Nourse and Roulac, 1993)

• Post-occupancy response of green star rated buildings is positive (Edwards, 2006)

• Cost of obtaining the green star rating is high and therefore means a higher rental for the tenant

Key Issue• Is it imperative that a commercial

building has a green star rating from a tenant’s perspective?

• Level of importance of sustainability relevant to traditional location decision factors

Objective• Market research has indicated occupiers are

demanding ‘green’ space (RICS, 2009) • Little evidence in the literature of what

constitutes the demand for green buildings • Need to improve our understanding of the

demand characteristics of the commercial ‘green’ office market

• New Zealand context

Demand in the New Zealand Context • Contribution to both green building literature

and location decision literature in the New Zealand context

• Interviews with various tenants who are occupying sustainable buildings in Auckland’s CBD to find the factors behind their location decision

• “Sustainable” building in the context of this study, either 4Green Star or substantial “green features”

Methodology• Undertook in-depth interviews (approximately 1

hour) with tenants’ key location decision makers • In establishing who to interview we initially sought

guidance from NZ Green Building Council to determine who were tenants in green buildings in Auckland

• Interviewees:– coverage: 9 Tenants– interviewees: Industry professional who made

the location decision • Results were transcribed and key themes identified

Range of Tenants Interviewed• Financial Institutions

– Retail Banks and Accounting firms • Corporates

– Telecommunications industry– Airline– Multinationals

• Property Companies• SMEs

– Possibility of different important factors to corporates

Methodology- topics covered in the interview• Ascertaining perceptions of respondents in the

following areas:– Why they decided to occupy that particular commercial

building

– If they would be happy to locate in a non-rated building

– Having made the decision to occupy the building – What was the response of staff– Has there been feedback from clients or customers?– Anything they would change?

– Any other final remarks on their location decision

What are the important themes arising from the location decision?• Overall, the tenants rated sustainability as

significant however the physical location of the building is still the most important factor in the location decision

• Availability of stock and decision to build is an important issue• Currently the majority of recently built stock in

Auckland is Green Star rated

• Marketing issues and corporate policy is a recurring theme for the larger companies

Important Themes arising from the location decision?• Location

– Proximity to transport routes – Accessible by Staff

• Staff– New building to increase productivity– Accessible to ensure best staff stay with their

company• Building Quality and Design

– Premium Grade– Green Buildings higher grade– Design features– Building Iconism

The important themes arising from the location decision?• Landlord Relationship

– Landlords can influence the decision • Conglomeration

– Tenants’ leases were expiring, allowed them an opportunity to move from many premises to one campus

• Cost– Sometimes an issue for some organisations – Cheaper OPEX

• Flexibility– Space needed to be flexible for requirements

The important themes arising from the location decision?• Culture

– Identity of company with the building – Space reflects company culture

• Specific Requirements– Some companies have specific requirements that

must be met before occupying a space• Influence of Management

– Overseas management may have restrictions or policies that must be followed

• Lease Expiries– Forced to decide between staying or moving – As built or commission a building

What are the important themes arising from the location decision?• Person making location decision

– They personally have a great impact on where they move, depends if they are a sustainability advocate

• Sustainability– Corporate Policy– Marketing – Genuine affiliation with ‘being green’– Is a green star rating necessary?– Would they locate in a non-rated building in the

same location? – Do staff prefer sustainable features?

Key Ideas/quotes reflecting themes• Retaining or obtaining good staff is important,

space must accommodate the needs of staff– ‘Location was all the reasons about your brand,

about your profile, accessibility for clients and accessibility for staff – the move here would be the least disruptive for staff’

– ‘One of the considerations is not moving staff around a great deal’

• Where the building is located is of major importance in the decision– ‘We were looking to occupy space in a premium

building in Auckland’– ‘We still would have moved in because it’s the right

location’

Key Ideas/quotes reflecting themes• The building’s design and profile is important

for marketing reasons and reflecting corporate culture – ‘Where we are positioned in this property sector

reflects where we are positioned in the market’– ‘[The building] is a marketing tool itself’

• Key location decision maker has a great influence on the decision – ‘We love the industrial look of it, just on a personal

level, I love it’– ‘There was a conscious decision of the staff to go

into a 5 green star’

Key Ideas/quotes reflecting themes• Sustainability or Green Star rating

– ‘Corporate responsibility is the principal consideration’

– ‘We wanted to make a very conscious step forward in our carbon footprint reduction and our green commitment to NZ’

– ‘We were looking for a green star rated building if it were feasible’

– ‘The ecos of the building suits what our company is about’

Links Between Themes• Staff and Location• Sustainability and Marketing • Marketing and Building Design/Quality• Decision to Build or select As Built• Consolidation and Staff• Availability and Lease Expiry• Cost and Sustainability• Building Quality and Staff

Key Drivers in the Decision• Availability of Stock

– Majority of new buildings in Auckland have a green star rating

– Either had to choose as built or commission own building

– Decision is influenced by what is available

Key Drivers in the Decisions• Person involved in the location decision

– Influence whether they choose a green star rated building or not

– Own beliefs come into the decision– Align to a certain building – May have to follow certain requirements or answer to

overseas management

Key Drivers in the Decision• Requirements of Corporates

– Overseas management conditions– Need certain floor area– Certain location – Branding through the building

• High profile building to match company brand • Green star rating

– Price range

Key Drivers in the Decision• Different objectives between smaller and

larger organisations– Smaller organisations want to align their business

objectives and culture with the space

– Larger organisations need to commit to their environmental policies for public perception reasons

Economic drivers

– Issue of the Global Economyimpacting on the study

– Commissioning a building or choosing as built space

– Premium rentals of green star rated buildings – Availability of stock

Overall findings• The factors found in this study are similar to

Dixon et al (2009) • Auckland CBD is a small market however

evidence shows that factors such as location and staff are most important in the decision

• Issue of only green star rated new supply is all that is available currently in Auckland

• Sustainability vs. Green star rating – What is more important

Discussion• It is clear that a green star rating is not the

main priority for all companies when choosing an office building in the Auckland CBD

• This may be for a number of reasons:– Traditional location factors are more important – Green star rating is just to comply with corporate

policy– Sustainability is perhaps more important than the

rating • Implications?

Further study• Quantitative study in accordance with a

property company in Auckland• Survey to all occupants in Auckland CBD • Extend our understanding of occupier

requirements and sustainability in the context of commercial buildings