Sustainable buildings are no longer a futuristic or experimental concept. Green buildings are a mainstream occurrence.
According to the 2021 Institutional Investor Study by Schroders, more than half of global investors want to have a positive impact on society and the planet through their sustainable investments.
In this article, we’ll discuss why CRE investors should prioritize sustainability. Let’s dive into some benefits of green buildings.
What Does Sustainability Mean in the Commercial Real Estate Industry?
Sustainable real estate includes investing in buildings built with environmentally-conscious techniques, materials and technologies.
Commercial buildings are one of the main sources of energy consumption, and can become green in aspects such as heating, ventilation, air-conditioning, lighting, solar, and water conservation.
If a CRE investor doesn’t purchase a building that was built sustainability, there are steps they can take to retrofit an existing property. These improvements may include:
- LED lighting
- Improved air quality
- Solar panels and/or solar design
- Dual plumbing systems
- Upgraded heating and cooling
- Smart glass
Why Should CRE Investors Care About Sustainability?
CRE Investors Should Prepare for Future Regulations
An increasing number of cities and countries are pledging to reach net-zero carbon by 2050. The commercial real estate industry is a large contributor to carbon emissions – nearly 40% of global carbon dioxide emissions come from the real estate sector, in fact,– there is pressure for CRE to become “green.”
Investors who prioritize sustainability in their CRE investments are simply being proactive about the upcoming regulations and standards that will enforce sustainability practices in the industry.
CRE investors must take a closer look at ESG and CSR efforts.
Here are a few ESG trends the Global ESG Real Estate Investment Survey found among global real estate investors who represent over $1 trillion in U.S. assets that are happening now:
- 83% have experienced an increase in investor demand for sustainability disclosure.
- The top ESG targets are environmental concerns: energy, waste, and water reductions.
- 91% are using sustainability disclosure frameworks in contracts
- 93% include ESG criteria in investment decisions
- 90% plan to further analyze ESG criteria over the next 12 months
- 85% are highly or very highly motivated to use ESG criteria to lower risk
Prioritizing Sustainability Helps to Mitigate Risk
Buildings without sustainable regulations can be exposed to the following risks:
- Physical risk: Climate change can lead to higher insurance premiums, higher capital expenditures, operational costs, and decreased liquidity of the value of the building.
- Regulatory risk: Energy inefficient properties may become subject to fines and penalties for filing to meet new sustainable standards.
Benefits Investors Experience From Prioritizing Sustainability in Commercial Real Estate
Green Buildings Attract and Retain Clients
Research proves that many Americans value efforts to take social, environmental or political stands.
According to a survey,
- More than half of Americans believe it’s important for companies to take a stand on key social, environmental, and political issues.
- 70% of Americans believe it’s “somewhat” or “very important” for companies to make the world a better place.
In committing to such efforts through investments prioritizing sustainability, investors are more likely to attract clients to their projects. Let’s take a look at some statistics.
Green Buildings Have Lower Operating and Maintenance Costs
In the United States, Energy Star-certified buildings consume 35% less energy than non-certified properties. What does this mean for CRE owners? Green buildings require lower operating and maintenance costs. In fact, LEED buildings have reported nearly 20% lower maintenance costs than typical commercial buildings. Additionally, sustainability building retrofits generally reduce operation costs by almost 10% in as little as a year.
Investors with Sustainable Buildings Increase Profit Margins
Green buildings have, on average, higher rent than properties with weaker environmental performance. Why? Buildings with strong environmental performance are typically newer and have premium assets. These features allow CRE owners to charge a higher rental premium for green buildings.
For example, according to Globe St, “Since 2015, rents for LEED-certified buildings have averaged 11% higher rents than non-LEED properties. LEED-certified assets outperformed their non-LEED counterparts in the first three years of life, averaging about 29.6 higher percentage points of RevPAF growth.”
Additionally, the rental premium is particularly high for LEED Platinum-certified office buildings.
Investors Prioritizing Sustainability Are Being Proactive About Legal Regulations
Through investing in sustainable projects, investors can help keep their businesses legally secure from increasing environmental regulations.
Sustainable Practices Enhance Business Branding
Commitment to sustainability can improve the branding and reputation of an investor’s business. Whether the CRE owner focuses on long or short-term real estate investments, their business can gain a competitive advantage through efforts to sustainability. Why? Renters and buyers are more likely to opt for modern, innovative enterprises.
The Rising Property Value of Green Buildings
Owners of green buildings are experiencing an increase in asset value. According to Construction, a rising number of green building owners are seeing a “10% or greater increase in asset value. The percentage of owners reporting that level of growth has nearly doubled since 2012.”
The Bottom Line
More commercial real estate investors are thinking green and experiencing benefits such as increased profit margins, rising property values, and enhanced branding for their businesses. Learn more about businesses and buildings excelling in sustainability practices, here.
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