Sustainability is a hot topic these days, and it’s no stranger in the commercial real estate industry. As the world increasingly turns towards sustainable practices, investors are using Corporate Social Responsibility (CSR) and Environmental, Social, and Governance (ESG) to assess the value of their investments beyond financial gains – they are now, considering:
- The energy efficiency of buildings
- If the building can bring social benefits
- And more
In fact, incorporating both into your CRE plan helps you as an investor stay timely, and helps uphold the value of your commercial property.
Let’s discuss why sustainability matters in commercial real estate.
Relationship Between CRE and Sustainability
CFA Institute measures the environmental factors in ESG as “conservation of the natural world” in areas including:
- Water scarcity
- Energy efficiency
- Waste management
- Deforestation
- Biodiversity
- Climate change
- Carbon emissions
- Air and water pollution
When it comes to the environment, CRE is a direct contributor – it creates one-third of greenhouse gas emissions and 40% of global energy consumption.
Interest and monetary investment menus behind ESG have peaked over the past seven years, as seen in the trend graph below.
To meet the regulations set in place as part of the Paris Climate Agreement, “the global average building energy intensity per unit of floor area needs to be at least 30% lower in 2030 than its current levels.”
A challenge to this quota is an expectation that “global building floor area will double by 2050, increasing energy demand and related GHG emissions for construction.”
Why Should You Care?
More and more cities and countries are pledging to reach net-zero Carbon by 2050. Learn more about net-zero buildings here.
Since the CRE industry is such a large contributor to the sustainability imbalance, there is higher pressure on the industry to become ‘green’ faster. This means the CRE industry and its 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:
- 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
- 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
Sustainable buildings reduce environmental risk and exposure to the elements, which are increasing in intensity– think extreme weather like fires and hurricanes– which make the CRE property more valuable.
How does a building that is not sustainable put your property at more risk?
A building without sustainable regulations in place can actually decrease the value of your commercial real estate property, and increase risk in three main areas:
- Physical risk: As previously mentioned, increases in extreme weather are physically damaging, and financially impactful. Climate changes can lead to higher insurance premiums, higher capital expenditures, operational costs, and decreased liquidity of the value of the building.
- Regulatory risk: Sustainability is not going away. Energy inefficient CRE may become subject to fines and penalties for not meeting new sustainable standards.
- Economic risk: The more sustainable the building, the less associated risk there is for an investor. It’s easier for buildings with ‘green’ credentials to be more desirable for both investors and tenants. These credentials tend to better serve lease renewals and satisfaction.
Planning ahead to implement green building certifications for your CRE property sets you up to avoid the risks associated with a non-sustainable property.
Businesses and Buildings That are Doing it Well
Now that you know why it’s important to have sustainable commercial real estate, let’s take a look at some examples of who is already implementing these practices well.
1. Austin, Texas Central Library
This library was designed with an almost 400,000 gallon rainwater harvesting system that waters their rooftop garden– which attracts important pollinators – and is designed with an atrium that fills the building with natural light. Even more, they achieved the highest rated LEED’s green building certification.
2. U.S. Land Port of Entry in Columbus, New Mexico
The design was built with the natural landscape, culture, and habitat as a forefront in its development. The building is equipped with solar panels that power the building, and native plants that support the growth of native animal species.
3. Etsy Headquarters in Brooklyn, New York
Etsy’s headquarters was built with sustainability at its core. Employees are encouraged to bike to work– with 65% of their workforce biking to work during warmer months. The rooftop is covered by solar panels and native plants to provide renewable power to the building. They also used as much local material as possible, and strategically left as much of the original infrastructure in place as possible.
4. Upcycle in Austin, Texas
This company transformed a vacant recycling center into their office space. They added skylights for natural light and an updated ventilation system that dramatically reduced the need for air conditioning, even throughout hot Texan summers. The site is almost completely built on reused and renovated items. Overall, the building saved around 1,824 metric tons of CO2 during its creation.
5. Marine Education Center at the Gulf Coast Research Laboratory
In 2005, the original education center was destroyed by Hurricane Katrina. The new building was carefully designed to sit on higher ground – about 20 feet above sea level– and uses trees to its advantage. They used a canopy of trees to serve as a wind buffer, and have smaller energy-efficient buildings in the surrounding forest to preserve as much of the natural landscape as possible.
Curious about other trends commercial real estate investors should keep an eye on? Read our article about the top 10 things to watch this year, here.