The current flight to quality was prompted by the rapid adoption of digital technology due to the COVID-19 pandemic, which led to changes in the functions expected of offices. Hybrid workstyles combining working in the office and working from home have become established, with offices now viewed as increasingly vital places for facilitating communication among employees. In addition, we have seen a growing emphasis on aspects of offices that had not attracted much attention previously, such as equipment for holding online meetings and break spaces for employees to refresh themselves. On the flip side, it is no longer necessary to install desks for every employee or large cabinets to store paper documents. In these ways, the pandemic greatly changed what is expected of offices.

Buildings That Consider the Environment and the People Who Work in Them Are Tenants’ First Choice

Another factor driving demand for higher-quality spaces is “sustainability”. The trend for environmentally friendly buildings, which had been progressing steadily for several years, shot to prominence following the pandemic. With many companies and organizations adopting sustainability policies, it is natural for office buildings that consider the environment to be tenants’ first choice. Major companies in particular, including foreign-owned ones, increasingly demand green building certification as a prerequisite for their office environment. The trend for well-equipped offices to be tenants’ first choice is also picking up momentum, reflecting an emphasis on ensuring the well-being of office workers. A [recent] survey found that buildings with modern amenities, such as lounges, rooftop terraces, fitness facilities, and day care centers, have higher rents and lower vacancy rates. In addition, measures to maintain the physical and mental health of those who work in office buildings—such as greening the inside of offices, creating café areas and spaces for employees to refresh themselves, increasing the number meeting spaces, and designing offices with spacious layouts—have become an increasingly important factor for office spaces. Amid acute labor shortages, there is a keen awareness that employee-friendly offices are essential for attracting outstanding talent, including those in the older demographic and those raising children.

Meanwhile, government efforts to reduce greenhouse gas (GHG) emissions and address climate change are intensifying. In Europe, which has taken the lead in this field, buildings in various countries must obtain Energy Performance Certificates, and moves are underway to restrict transactions—including buying, selling, and leasing—based on rating level. In the United States, GHG emission standards in Manhattan, New York, for example, are becoming progressively stricter and new buildings must install solar power systems and take greening measures under city regulations. In Japan, the Cap-and-Trade Program, which is based on the Tokyo Environmental Security Ordinance, mandates approximately 1,200 businesses to reduce their overall CO2 emissions. Consideration for the environment is therefore becoming a requirement for the continued existence of buildings.

In short, the flight to quality is not simply a phenomenon driven by a shift in tenant needs to buildings with expensive rents. Rather, buildings that consider the environment and the people who work in them are becoming tenants’ first choice.

JRE’s Cutting-Edge Initiatives for Promoting Sustainability

In 2018, we established our ESG Office (currently, Sustainability Management Department). This was a pioneering move in the industry as a J-REIT asset management company. Thereafter, we have advanced the following initiatives.

2018

• Becomes a signatory to the PRI^*1

2019

• Becomes the first J-REIT to disclose information based on TCFD^*2 recommendations

2020

• Announces environmental KPIs, including CO2 reduction targets

2021

• Discloses results of qualitative analysis of financial impact assessment as part of TCFD scenario analysis

2022

• Institutes an upward revision of environmental KPIs (with FY2019 as the base year, targets 80% reduction in CO2 emissions by FY2030 and net-zero emissions by FY2050)
• Obtains the SBTi^*3 near-term target approval
• Becomes the first J-REIT to join RE100^*4

2023

• Discloses results of quantitative analysis of financial impact assessment as part of TCFD scenario analysis
• Obtains the SBTi net-zero target approval

In a recent initiative, as of the end of March 2024, we have acquired certification for four buildings under the zero-energy building (ZEB) certification program^*5, which seeks to achieve net-zero energy consumption at buildings. Meanwhile, in terms of financing, we have proactively adopted sustainability-linked loans (SLLs), whereby interest is linked to the achievement of sustainability performance targets. In fiscal 2023, we established a Sustainability-Linked Loan Framework for the purpose of flexible SLL implementation. Based on this framework, we have adopted 10 SLLs, double the number of the previous fiscal year.

With these measures, JRE has gained strong recognition from stakeholders as the front-running J-REIT in promoting sustainability initiatives.

Pursuing the Best for All Our Fellow Stakeholders and Maximizing Unitholder Value

Until a few years ago, we were often asked how these proactive initiatives to enhance our sustainability would lead to economic returns. Recently, however, we are asked this less and less. This change highlights that the times have caught up with our initiatives.

At the beginning of my message, I stated that one of our core missions is to provide high-quality office space. Another core mission is to maximize long-term returns for unitholders by offering long-term investment opportunities. We aim to pursue the best for all our fellow stakeholders, including tenants of buildings, those involved in property management, neighboring communities, and colleagues who lead the management of our assets, by enhancing sustainability in relation to our business activities, which will, in turn, maximize unitholder value.

Our ESG website provides detailed information on JRE’s initiatives, which are based on such principles. I hope it will help all our fellow stakeholders deepen their understanding of our endeavors.

• The United Nations Principles for Responsible Investment
• The Task Force on Climate-related Financial Disclosures (TCFD) was established by the Financial Stability Board, an international institution
• The Science-Based Targets initiative (SBTi) is an international initiative promoting the establishment of targets based on scientific grounds
• RE100 is a global collaborative initiative comprising companies aiming to source 100% of the electricity used in their operations from renewable energy
• The ZEB Certification program defines the energy performance of buildings based on a third-party certification program led by the Ministry of Land, Infrastructure, Transport and Tourism, which focuses on energy savings.