How the conversation around green real estate is changing

  • The reasons to act to reduce carbon emissions from real estate are now far more important than the reasons to do nothing.
  • Studies of the value of the “green premium” in green real estate have shown that green certifications yield a 6.0% rent premium and a 7.6% sales premium.
  • It will take $5.2 trillion over the next decade to decarbonize the built environment and green real estate.

As the business world wakes up to the urgent need to reduce carbon emissions in commercial real estate, we are increasingly seeing these shifts in attitude reflected in the financial value of the buildings around us.

In recent years, real estate has debated the “green premium,” where sustainability-focused companies pay a higher price to lease or buy buildings with certified sustainability credentials that align well with their values. There’s been a lot of research on how to quantify this green premium – and a lot of discussion about whether it’s really worth it for owners and developers.

In fact, analysis of 42 studies on the value of green conducted by Dalton and Fuerst in 2018 showed that green certifications yielded a rent premium of 6.0% and a sales premium of 7.6%.

Green real estate moves up the list of business priorities

JLL’s “Decarbonizing the Built Environment” report found that 63% of top investors strongly agree that green strategies can lead to higher occupancy, higher rents, better retention of tenants and a higher overall value.

Image: JLL

Today, the green premium is still relevant, but creating sustainable spaces is no longer just about valuing them. We are quickly reaching a tipping point as sustainability moves up the corporate priority list. Attention is now turning to preserving the value of buildings to avoid the risks of inaction.

More and more, conversations about commercial real estate are peppered with the term “brown shed”. Basically, buildings that do not meet the highest environmental standards will be considered less valuable. We only see signs of it in the market, but the size and magnitude of brown discounts will increase rapidly in the years to come.

This ties in with the evolving idea of ​​a “first-rate building”. The focus shifts from a prime location with stunning views from upper floors to promoting net zero carbon, promoting health and wellbeing, and building resilience to climate change.

If these buildings are gradually increasing in number, they are still very much in the minority. Around 70% of the building stock in many major global cities today will still exist in 2050. This is a significant and costly problem.

According to Vivid Economics, it will take $5.2 trillion over the next decade to decarbonize the built environment. To be compliant with the Paris Agreement and maximize our chances of limiting temperature rise to 1.5°C, the built environment must aim to reduce emissions by 50% by 2030 and be zero carbon by 2050 at the latest.

This means companies, investors and developers need to act sooner rather than later – and preferably now.

Those who wait to address these structural changes will arrive too late and may well have to catch up significantly in the years to come. In some cases, decisions to act could be taken away from them, with access to loans increasingly dependent on a net zero plan.

Principles of green real estate

So what can we do? Modernizing real estate will be essential to meet the demand for net-zero carbon space and upcoming regulations. In London, for example, regulations on the energy performance of buildings will tighten in 2023 and currently only one London office in 10 meets the standards to come in 2030.

As in many other cities, a significant number of buildings will need to undergo deep energy renovation as part of broader net zero plans across all building portfolios. However, the current rate of renovation – around 1 to 2% in mature cities – is nowhere near fast enough.

There is no doubt that this is a complex, fast and expensive process that requires significant expertise. As a roadmap to help occupiers and investors bring their real estate portfolios to net zero, JLL has partnered with the World Economic Forum to create the Green Building Principles.

Global economies are already absorbing the costs of climate change and an outdated business as usual approach. Scientific evidence and the dislocation of people highlight the urgent need to create a sustainable, inclusive and climate-resilient future.

This will require nothing less than a transformation of our current economic model into one that generates long-term value by balancing natural, social, human and financial conditions. Cooperation between different stakeholders will be essential to develop the strategies, partnerships and innovative markets that will drive this transformation and enable us to raise the trillions of dollars in investment needed.

To meet these challenges, Financing sustainable development is one of the four focus areas of the World Economic Forum’s 2019 Sustainable Development Impact Summit. A series of sessions will highlight innovative financial models, pioneering solutions and scalable best practices that can mobilize capital for the Sustainable Development Goals around the world. It will focus on the conditions that public and private institutions should create to enable large-scale financing for sustainable development. It will also explore the role that governments, businesses, investors, philanthropists and consumers could play in coming up with new ways to finance sustainable development.

Still, the benefits of transitioning our buildings to low- and no-carbon versions of themselves are significant. They also go well beyond the financial. Ensuring a more sustainable built environment – ​​which accounts for up to 70% of total carbon emissions in cities – can bring significant improvements to air quality, reduce chronic disease and improve the health of people living nearby. Companies that take up the challenge can help rebuild the trust of communities and society at large who feel that companies are only acting in their own interests.

The reasons to act to reduce carbon emissions from real estate are now far more important than the reasons to do nothing. Although we are far from quantifying the true impact of healthy spaces, carbon emissions and climate change on the value of buildings, it is clear that asset tie-ups and brown sheds will become significant if owners do not manage the risks.

The next decade will be crucial if real estate is to truly play its part in a more sustainable, fair and equitable future – a net zero future. The conversation around green real estate continues – and real estate that doesn’t keep pace will become irrelevant. Future years will show that while a green premium is a temporary add-on, a brown discount will have a much more material impact on a building’s financial performance.

Melvin B. Baillie