The E Gap in CRE

The E Gap in CRE

Following last week’s CREview, we had great feedback from a highly respected colleague in the market. They disagreed with our predictions of negative net absorption and now we realise why. Our views are compiled on a whole of market basis. Theirs was focused on the top end of town. The hint was the repetition of the words, “flight to quality”.

This got us thinking about the E (environmental) in ESG and the E gap in CRE markets. This is the gap between those who have the resources to focus on environmental initiatives and those who don’t.

In 2008, I spoke at an RICS forum about the E gap. It was still early days and only some of the biggest tenants and landlords were making a real effort, but the rest of the market was unable to. On top of that, the GFC took the gloss off the E initiatives as everyone focused on getting through tough times.

Today, 15 years later, the desire of CRE tenants to commit to E initiatives is greater than ever; and for good reason. As CRE tenant advisers, our concern is that it is getting harder for many of them, and the E gap is widening. Why?

The biggest buildings with the best ratings have the highest rents. These rents have now become prohibitive for many. Many tenants won’t be making the flight to quality.

At the same time, the smaller, older buildings have not had to, wanted to or, been able to afford to improve the quality of their buildings. Many are going to be left behind as vacancy remains high.

The issue is how do we bridge the gap so many tenants wish to cross. So many are stuck in lesser credentialed buildings because of budgets.

The only answers are to reduce rents or increase the credentials. The better stock is not considering such a reduction yet, but incentives are helping. Much of the lower end is not thinking about increasing credentials but something will have to happen.

Perhaps that is where the real opportunity lies in this ever changing market. Everyone talks about the bifurcation of the market. Perhaps this is now the start of the convergence of the market.