The Increasing Importance of Sustainability in the CRE Sector

In the business world, innovation drives success across all sectors, including commercial real estate (CRE). One of the most pressing concerns in the CRE industry is sustainability, as both investors and tenants increasingly prioritize companies with a demonstrated commitment to environmentally conscious practice. Currently, the CRE industry creates more than 40 percent of the world’s carbon emissions. If the industry hopes to evolve, it must keep up with the demand for sustainability.

According to a 2020 study, more than 40 percent of real estate professionals observed a rise in demand for sustainability among tenants, while 47 percent observed this increased demand among investors. “Sustainability” is a broad term that refers to utilizing resources in a way that preserves them for future generations. Within the commercial real estate context, this might involve retrofitting buildings to be more energy efficient, as well as improving the management of water and waste.

While companies are largely responsible for creating an internal culture focused on sustainability, external requirements are likely to increase over time. Currently, multiple states require that commercial buildings meet certain green building criteria, and California has taken these requirements a step further to require that all new buildings utilize solar power.

For owners of older commercial properties, this means competition with solar-powered buildings that are more appealing to new tenants. Some sustainability measures charge large fines to property owners who do not comply with environmental standards. As the business and real estate world adopt increasingly ambitious sustainability goals, commercial real estate owners will have to keep up to maintain the profitability of their investment.

Commercial property owners should look at sustainable building developments and upgrades as wise investments in their long-term financial health. Beyond their clear benefits to the environment, such practices carry key economic advantages. For example, green buildings incorporate elements such as smart LED lighting and energy-efficient heating and cooling systems to reduce utility expenses for tenants and owners. Overall, buildings that utilize such systems consume about 29 to 50 percent less energy and 40 percent less water than conventional buildings, in addition to producing 50 to 70 percent less solid waste. Such reductions in energy consumption equate to substantial financial savings.

Green buildings also retain their value longer, making them more attractive to investors and tenants. According to the World Green Building Council, buildings with sustainability credentials such as the Leadership in Energy and Environmental Design, or LEED, designation command high market rental rates and achieve lease-up rates up to 20 percent above average.

Additionally, vacancy rates for green buildings are approximately 4 percent lower than for non-green properties. From an investor standpoint, green building credentials provide an internationally recognized framework that includes built-in management practices that can increase asset value and reduce operating costs, in addition to protecting the health and safety of tenants.

Tenants that rent in green buildings can leverage these practices as part of their brand identity, positioning themselves optimally for investment from funds with a focus on environmental, social, and governance factors.

While regulatory policies for sustainable building typically apply only to new construction, commercial property owners may also gain financial advantages from retrofitting old buildings to reduce carbon emissions. In many cases, financing incentives such as tax credits may help fund the adoption of energy-efficient appliances or the installation of solar panels. While they require a large up-front investment, research indicates that such retrofits can increase property market value and lower long-term operating costs.