Insights

With the European energy crisis set to deepen this winter, newer, greener buildings with smaller energy footprints are becoming more attractive to occupiers as they become relatively more affordable on an overall cost-of-occupancy basis.

Originally published in September 2022

Written by Adrian Benedict, Head of Real Estate Solutions, Cian O’Sullivan, Analyst, and Nina Flitman, Senior Writer

With rising gas and electricity prices now rarely out of the headlines, businesses everywhere are increasingly focused on how to reduce the amount of energy they are using to contain costs, and the real estate choices they make are becoming ever more important. The chart above illustrates how, despite generally commanding higher rents, newer “green” offices can actually be the cheaper option than 20-year-old buildings on an overall cost-of-occupancy basis once the savings to be made on energy bills are factored in. 

This finding is based on an analysis comparing the office occupancy costs of green structures (assumed to be rated BREEAM Very Good and with an EPC score of B) versus unrenovated 20-year-old buildings in various regions around the U.K. It takes actual average costs in 2021 from real estate agency Lambert, Smith, and Hampton as a baseline,¹ and compares them with projected figures for 2023 that include a 400% increase in energy prices (an illustrative figure that assumes a scenario where no price cap is put in place), a 10% increase in other costs (roughly in line with inflation) and no increase in rental rate. 

Comparing the costs of newer, green offices and 20-year-old, less sustainable buildings in two big U.K. markets, the data concludes that, in London next year, occupiers of green buildings can expect to spend 6.6% of their total occupancy costs on energy, compared to the 14.9% spent on energy by those in older buildings. 

In Manchester, the amount saved on energy bills by 2023 could actually mean it becomes slightly cheaper on an absolute basis to occupy a green office than a 20-year-old building, even though the rent for a new building – the most significant component of all costs – will be higher. The study projects that occupiers of older Manchester offices are likely to pay total building costs of £96.266 ($107.74) per square foot (psf) in 2023 (of which £27.12 psf is the net effective rent and £24.10 psf is energy costs), while renters of green buildings will only pay a total of £95.186 psf (of which £33.69 psf is rent but only £13.45 psf is energy costs). 

These figures do not illustrate the most extreme savings potentially available on energy costs. 

Finding offices with a smaller carbon footprint is becoming increasingly important to all sorts of companies, from start-ups to blue chips. Not only can a green office help a company’s progression toward net zero, it can improve its corporate image, and even help it retain staff. But it’s increasingly clear that embracing sustainability is not only about being a good corporate citizen, but also about making real monetary savings. That includes future-proofing financial decisions against regulatory changes and energy price fluctuations. 

Issued by Fidelity Investments Canada ULC (“FIC”). Unless otherwise stated, all views expressed are those of Fidelity International, which acts as a subadvisor in respect of certain FIC institutional investment products or mandates.

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¹Lambert Smith Hampton Total Office Cost Survey, 2021. https://www.lsh.co.uk/total-office-cost-survey.