Implementing ESG principles in office buildings raises costs for developers and tenants

The introduction of green building rules, such as the recent European regulation prohibiting the use of natural gas thermal power plants from 2040 onwards, forces additional expenses on developers and office owners. Installing heat pumps and photovoltaic panels, removing stale air from the building and bringing in fresh air or even replacing glass with more efficient materials are just a few of the things that office building owners must accomplish in the coming years.

By Aurel Dragan

Antoniu Panait, Managing Director at Vastint, explained during BR’s recent Working Romania conference that his company was already working on buildings from which fossil fuel power sources have been eliminated completely. “We used heat pumps and photovoltaic panels on the buildings at Timpuri Noi Square, which is in the second stage of development. The stale air we remove from the building is utilised to heat the incoming air pipes.”

This demonstrates that Environmental, Social, and Governance (ESG) principles are no longer merely a trend or a buzzword, but rather becoming the norm on the Romanian real estate market. In an era marked by heightened environmental consciousness and regulatory scrutiny, the real estate sector faces a pivotal moment in which stakeholders must shift focus towards measurable and quantifiable ESG performance. Moving forward, Colliers consultants point out that buildings that are not sustainable and fail to meet the new ESG criteria will have minimal chances of attracting major tenants, securing bank loans or garnering interest from prominent investors.

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“The real estate sector finds itself at a critical juncture as it navigates the imperatives of ESG. With 2023 marked as the hottest year on record, the call for corporate and government action on climate change has reached unprecedented levels, propelling ESG activities to the forefront of all stakeholders’ agendas. One of the primary catalysts driving this shift is the evolving regulatory landscape. From January 1, 2024, the EU’s Corporate Sustainability Reporting Directive (CSRD) requires large public-interest organisations with more than 500 employees to report according to strict sustainability rules. These regulations encompass a broad spectrum of ESG factors, ranging from greenhouse gas emissions to human rights and biodiversity. ESG due diligence is becoming standard practice in investment decisions and property selection, while tenants are increasingly taking ESG considerations into account when choosing their future locations,” explains Tamara Dogariu, Senior Sustainability Consultant at ESG Strategic Advisory, detailing the context in which investors, banks, and tenants are exerting increasing pressure on the real estate market in order to align with ESG principles.

“Amid mounting pressures, the focus is shifting to measurable and quantifiable ESG performance. Stakeholders must prioritise investments in digitalization and automation for greenhouse gas emissions measurement, alongside implementing energy consumption reduction strategies. As we approach 2030, the imperative to reduce emissions by 55% to comply with the EU’s Fit for 55 regulations and the Paris Agreement’s 1.5°C warming limit intensifies, underscoring the urgency of decarbonising the property sector. With 80% of today’s buildings expected to persist until 2050, retrofitting and repurposing existing structures for energy efficiency and sustainability are pivotal in tackling the climate emergency,” highlights Roxana Isopescu, Senior Sustainability Consultant at ESG Strategic Advisory.

Green certifications remain an indispensable benchmark within the evolving ESG regulatory landscape, signalling a commitment to sustainable practices in the built environment. Investment in green certifications reflects a proactive stance towards meeting stringent regulations, bolstering credibility and attractiveness to stakeholders.

Romania experienced another successful year in 2023 in terms of LEED, BREEAM, WELL, and Access4you certifications. The trend can be attributed to industrial, logistics, retail, and office portfolios seeking certification. Compared to previous years, particularly the pre-pandemic period when most green certificates were obtained by office owners, 2022 and 2023 had a more balanced and diverse distribution. Approximately 40% of the green, health, and wellbeing certifications achieved last year were related to office projects, which continue to account for the largest share of the total. At the same time, around 33% of applications were for industrial projects, while over 20% were for the retail sector.

Rising costs

New conditions mean higher costs for developers as well—and unfortunately, these are not the only reasons for the rising costs. For example, management and maintenance costs for the office buildings in Colliers Romania’s Asset Services portfolio increased by 9% last year compared to 2022. Higher costs for services in general, including higher salaries, and an increased presence of employees in the office in 2023 were the factors driving this trend.

Colliers Romania manages some 680,000 sqm of modern leasable real estate projects (encompassing 590,000 sqm dedicated to office spaces, with the remaining area allocated for industrial warehouses), making the company’s figures for administrative costs quite representative for the whole market. As utilities are not always included in service charges collected by landlords, but paid directly by tenants, Colliers did not include these costs in the analysis to maintain cost comparability. The largest increase in office building management and maintenance budgets occurred within the domain of waste-related costs: 40% compared to 2022. This is largely due to higher staff presence in office buildings, which increased from a portfolio average of 40% at the start of the year to 55% at the end of the year. There were also significant increases in security and fire costs (12%), while cleaning costs rose by 11%, mainly as a result of the two minimum wage increases in January and October 2023.

Currently, the company has a total of approximately 400 tenants in buildings it manages in Bucharest, Cluj-Napoca, Timisoara, Brasov, and Arad, and the value of the properties in its portfolio exceeds EUR 1 billion. Regarding utility costs, international markets have witnessed successive declines in electricity and gas prices, returning to pre-crisis levels, resulting in lower bills in 2023 compared to 2022. Specifically, in December 2023, the unit price of energy (in kWh) was on average around 15% lower than in January 2023 across the Colliers portfolio, with the trend maintaining a downward curve. There was also no significant difference in gas prices in 2023. Furthermore, considering all market factors, the budgets for management and maintenance costs have been constructed based on an average increase of 13% in 2024, according to Colliers consultants.

“Starting next year, we are expecting to see a significant increase in property taxes, according to the information circulating in the public space. This cost category is essential, as the property tax represents between 30% and 40% of a normal budget for the management and maintenance of an office space,” says Ștefania Baldovinescu, Senior Partner in Asset Services and Land Agency at Colliers Romania. Colliers Romania annually manages Service Charge budgets totalling over EUR 26 million and optimises costs for companies that have opted to outsource property management. Contracting Asset Services underlines the professional approach that developers and owners of office and industrial space take towards their tenants, generating economies of scale and benefits such as a significant contribution to the implementation of environmental, social, and governance (ESG) commitments, the integration of optimised software and applications, and unified reporting of financial data related to the operational status of the site.