Flood Risk Response Strategies. Global Sustainability Perspective April 2014

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1 Flood Risk Response Strategies Global Sustainability Perspective April 2014

2 Global Sustainability Perspective April 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? 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 Franz Jenowein Director, Global Sustainability Perspective 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.

3 Global Sustainability Perspective April 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 , 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 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 s 1980s 1990s SIGMA Global Natural Catastrophe Disasters, Swiss Re, March 2014, JLL Analysis

4 Global Sustainability Perspective April Lower Manhattan: Evaluating Hurricane Sandy Impact Total Losses Lower Manhattan total office stock 101 million sq ft / 9.4 million sq m US$ 65bn 1 3 Stock out of operation one week after hurricane Sandy 33.6 million sq ft / 3.1 million sq m Insured losses US$ 30bn Hurricane Sandy brought devastation to many lives and homes, and business interruption to large companies in the New York City area in 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 insured 2. 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 study 5 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 and from various weather-related events* in Germany over a similar period. 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 Significant natural catastrophes , Munich Re, March 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 6 The 2012 U.K. Floods, Risk Management Solutions, 2013

5 Global Sustainability Perspective April Flood damage Flood damage 2050s (estimated) 5.5bn pa Increase x 8 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. 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. 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

6 Global Sustainability Perspective April 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 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. 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

7 Global Sustainability Perspective April 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 billion 9 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 stated 13 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-level 12. 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. 9 Winter Floods Statement, UK Government, 6 February Waterproof flood risk and due diligence for commercial property investment in the UK, Marsh, The Day after Tomorrow in: Building Magazine, UK, 4 March Dutch Expertise in Water, in: Holland Real Estate Yearbook One year on, and companies are starting to move to higher ground, JLL Thailand, 25 October 2012

8 Global Sustainability Perspective April 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 report 14 : 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 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. 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

9 Global Sustainability Perspective April 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 group 16 has 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. 15 Back to Business: The State of Lower Manhattan Four Months After Hurricane Sandy, The Alliance for Downtown New York, 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

10 Global Sustainability Perspective April 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 Owner liability Property flood damage Insurance cover Absorbed by owners through excess and capped claims payments 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

11 Global Sustainability Perspective April 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. 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? 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 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.

12 Global Sustainability Perspective April 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.

13 Global Sustainability Perspective April 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. 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 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.

14 Global Sustainability Perspective April 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 energy 18. 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 pressure 19, 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 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 review article published in the Asia-Pacific Journal of Health Management 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.

15 Global Sustainability Perspective April 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.

16 Global Sustainability Perspective April 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 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 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 17 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 Julie Hirigoyen UK Head of Sustainability Peter Hilderson Asia Pacific Head of Energy & Sustainability Services Franz Jenowein Director, Global Sustainability Perspective COPYRIGHT JONES LANG LASALLE IP, INC All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means without prior written consent of Jones Lang LaSalle. It is based on material that we believe to be reliable. Whilst every effort has been made to ensure its accuracy, we cannot offer any warranty that it contains no factual errors. We would like to be told of any such errors in order to correct them.

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