The growing influence of ESG on the office sector

Environmental, Social and Governance (ESG) factors have moved from being a “nice to have” consideration to a key driver of office market performance. Across Australia, tenants and investors are increasingly prioritising highly rated ESG buildings, with Newcastle emerging as a strong example of how these forces are reshaping leasing dynamics and investment strategies.

Government mandates, corporate sustainability targets and public sector requirements are reinforcing this demand, creating heightened competition for A grade and ESG certified stock. Locally, approximately 35,000sqm of new office space is either nearing completion, under construction or planned for delivery in the coming year. While this additional supply has contributed to elevated vacancy, it has also accelerated the flight to quality, with tenants shifting towards premium, sustainable assets (Property Council of Australia, 2025).

The role of NABERS in sustainable office performance

The NABERS rating system has become the benchmark for ESG performance in office buildings. Nationally, more than 80% of Australian office stock is now NABERS rated, with over 50% achieving 5 star+ performance. This reflects a structural shift where ESG credentials are no longer an add on, but a defining measure of building quality.

Newcastle’s A grade sector illustrates this trend. Vacancy decreased from 17.9% to 16% in early 2025, supported by 7,509sqm of net absorption, as tenants actively sought higher performing assets (Property Council of Australia, 2025). In contrast, D grade stock recorded a rise in vacancy to 9.3%, highlighting the growing challenge for secondary assets that lack the ESG performance demanded by modern occupiers.

How ESG is influencing office investment strategies

Investor sentiment is moving in the same direction as tenant demand. A recent survey of Asia Pacific investors revealed that 56% plan to acquire or develop green buildings, making this the leading ESG initiative ahead of retrofitting. Retrofitting remains important, particularly in office markets where extending the life and efficiency of existing assets is often the most practical approach. However, the survey also highlighted that investors are increasingly motivated by regulatory pressures, net zero targets and the opportunity to enhance asset performance, which is directing more capital towards ESG-compliant new developments.

This reflects a broader shift where sustainable buildings are no longer considered optional but essential for maintaining competitiveness in both leasing and investment markets. ESG assets are viewed as lower risk, more resilient and better positioned to deliver stable long-term returns. For office landlords, this creates a dual opportunity to secure premium rents and occupancy in ESG-certified buildings, while also exploring upgrade pathways to reposition older stock.

How ESG demand is shaping Newcastle’s office market

The Newcastle office market provides a cross section of these broader national trends. With vacancy across the city falling from 16.4% to 14.9% in the year to January 2025, the strongest demand was concentrated in A grade space, reflecting tenant preference for ESG credentials and modern fitouts. Meanwhile, larger occupiers in secondary grade buildings are expected to remain subdued until backfill opportunities emerge from tenants relocating to new ESG aligned stock.

The influence of ESG is becoming highly significant in shaping both tenant strategies and investment allocations. For landlords and developers, this underscores the importance of embedding sustainability outcomes at every stage of the property lifecycle, whether through new construction, retrofitting or asset repositioning.

ESG is now a key consideration for investors

ESG is no longer a secondary factor but a primary driver of office market performance. In Newcastle, as across Australia, NABERS ratings, tenant mandates and investor expectations are aligning to reshape the market. Those assets that can demonstrate high ESG performance are positioned to capture tenant demand, attract capital and achieve stronger long-term returns.