Weighing new regulations and tax incentives, many pros say sustainable practices can be worth the investment.
city and trees double exposed
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Whether building from the ground up, managing existing assets or preparing them for sale, commercial real estate professionals are feeling the pressure to invest time, energy—and, yes, money—into sustainability considerations.

These days, environmental, social and governance represent much more than a collection of feel-good words. Various market drivers provide the impetus for setting ESG goals, with both pushes and pulls from various stakeholders.

Pushes on the environmental side include a growing suite of regulatory initiatives at the federal, state and local levels to build green and retrofit existing assets to prevent and adapt to the growing threats of natural disasters, rising seas and more. But don’t disregard the pulls, industry watchers say. Investing in energy and water-use efficiency, using renewable energy, and reducing waste can pay off in myriad ways, from financing to leasing success to operational profitability.

In its 2024 Emerging Trends in Real Estate, the Urban Land Institute notes that “Sustainability performance [is] now tightly linked to the quality and financial returns of real estate assets.” The threats from record heat and increasing natural disasters are one reason, but not the only one, the authors say. “Rising insurance costs and their implications for property owners and tenants are catalyzing an urgent reevaluation of strategies.”

This awareness is starting to take hold across the industry, though acceptance is not universal. A 2023 survey of National Association of REALTORS® members in commercial real estate found:

  • A majority of commercial agents and brokers (65%) said that energy efficiency promotion in listings was very or somewhat valuable.
  • 39% of REALTORS® said buildings with green certifications, such as LEED, Green Globes, or the Living Building Challenge, had increased commercial property values.
  • 52% of respondents were extremely comfortable or comfortable answering clients’ questions about building performance, while 17% said they were uncomfortable or extremely uncomfortable.

Brad Dockser, CEO and co-founder of GreenGen, a global sustainability solutions firm, urges real estate professionals to shake off any reluctance and embrace green solutions as central to their business model.

“We unequivocally think that addressing climate and clean energy transition is profitable,” Dockser says. “So much of the world thinks about regulation and how much it will cost to comply. That’s the wrong question. The right question is, ‘How much value will it create?’

“We think assets will be worth more, energy and operating costs are lower, and they can lease at a higher rate. And, with the increasing green incentives, you can get better terms on debt.”

In 2023, the federal Inflation Reduction Act reinforced various green building tax incentives, such as the 179D Energy-Efficient Commercial Building Tax Deduction and the 45L Tax Credit.(See “Putting Tax Incentives to Work")

The Regulatory Push

In a shifting regulatory environment, there are costs to avoiding sustainability investments. “Where five years ago we were talking about a strategy to decarbonize, today those requirements are going into place,” Dockser says. “Almost every major city, for example, has some level of carbon reduction and/or clean energy requirement.”

Why the regulatory focus on buildings? For one, they represent about 35% of total U.S. energy-related emissions, split roughly evenly between commercial and residential, according to data cited by the National Building Performance Standards (BPS) Coalition, a nationwide group of state and local governments launched by the Biden administration in 2022. Addressing emissions from the built environment is central to meeting a U.S. goal of reducing emissions to half of 2005 levels by 2030. “Tackling climate change and meeting our goals can only be achieved with significant emissions reductions from buildings,” according to the BPS Coalition.

While building green according to standards such as LEED has been on the rise for several years, regulators increasingly focus on retrofitting existing buildings, recognizing that the built legacy represents the lion’s share of consumption. The BPS Coalition is working to implement “building performance standards,” laws that require existing buildings to achieve minimum levels of energy or climate performance. While establishing mandatory efficiency levels, the rules permit flexibility in the measures owners use to comply and allow for more time based on age and other factors.

NAR supports voluntary, performance-based incentives to save energy and make buildings resistant to climate change. NAR encourages policies and programs that prioritize climate resiliency and adaptability, while also providing for robust real estate development.

On March 6, the U.S. Securities and Exchange Commission voted to approve a significantly scaled-back proposal to require publicly traded companies to disclose a variety of climate-related information, including details about the climate risks they face, the costs of severe weather events and, in some cases, their greenhouse gas emissions. The agency most notably dropped its so-called Scope 3 disclosures, which would have required certain large companies to provide data about the emissions generated by their suppliers and customers (their “value chain”). NAR opposed the provision because it risked roping in private companies that supply publicly traded ones, such as NAR members who are independent contractors but are affiliated with large real estate companies.

Melting frozen lake and snow covered mountains
Traveling Cooking / 500px / Getty Images

SEC Approves Climate Disclosure Rule

For additional information, see the Washington Report: SEC Approves Climate Disclosure Rule.

A Glimmer of Hope for Office ROI 

In today’s world of flagging office values, properties with high performance ratings and strong environmental commitments tend to outperform others, particularly in the Class A market, according to analysis by real estate services firm Cushman and Wakefield. Immediately after the pandemic’s onset, the firm produced a report titled “Green is Good” that set out to answer: “As demand for ESG-committed assets has grown … do these assets perform better than their non-ESG peers? If so, is it possible to quantify this difference?”

Because U.S. Green Building Council data and progress reporting were readily available, researchers chose to examine LEED-certified projects delivered from 2010 to 2020, says Jacob Albers, a report co-author who is now head of alternatives insights for Cushman & Wakefield. “We found that on average, LEED-certified buildings received higher rents than otherwise comparable buildings at the cost of somewhat lower occupancy,” the report notes. Measured by revenue per available square foot, “LEED-certified buildings have generated greater cash flows on average.”

“We found that on average LEED-certified buildings received higher rents than otherwise comparable buildings at the cost of somewhat lower occupancy.”
–Jacob Albers

Jacob Albers headshot

“Today, more than 30% of the office inventory is obsolete,” Albers says. “In the upper tier, sustainability commitments are not a nice-to-have, but a need-to-have for trophy assets that are still performing well.”

Increasingly, he adds, newer buildings in the top echelon are built to the exacting standards of LEED Platinum. “Tenants in those buildings have their own ESG commitments, and they want to be in that kind of asset. Developers are following on with what tenants are saying, but they are also following capital. Investors are increasingly wanting to support projects with sustainability commitments. Since 2021, this has become more and more ubiquitous.”

Environmental performance is important for older buildings, too, but with caveats, Albers says. “For Class B and C assets that are losing tenants, a lot of things need to be done beyond green upgrades. But if you are coming up to a big lease renewal or for-sale, bringing your asset up to higher [sustainability] standards could help get the sale over the line.” 

Multifamily, meanwhile, is on a different trajectory, says Sam Tenenbaum, head of multifamily insights at Cushman and Wakefield. In high-demand urban areas—and even in some that are less so—multifamily construction is surging, while the uptake of sustainability commitments has been slower than for office, he says.

“The relative rent premium you’re able to command as green-certified isn’t substantial—3% or so in our research,” Tenenbaum says. While office and institutional tenants are insisting on clean-energy commitments and performance tracking, “multifamily tenants don’t have as much leverage, because renters care more about price than they do anything else. Green amenities such as bike storage are important, but they aren’t the whole deal.” 

Other factors are prodding apartment and condominium projects into going green: “The big push is on the finance side, coming from the government entities, Freddie Mac and Fannie Mae,” Tenenbaum says. “They offer incentives that give you more points on your financing for ESG commitments. Green upgrades are increasingly part of a strategy of how you perform better in your market and compete for loans for acquisition and for reinvestment in your property.”

Local regulations, too, are driving a green trend, as Dockser indicates, but there are strong cautionary flags where housing is concerned, notes Tenenbaum. “For ground-up construction, communities are balancing how much housing they want with that regulation. Many recognize that any impediments we throw in the way need to be balanced with the urgent need for more housing.”

“The relative rent premium you’re able to command as green-certified isn’t substantial—3% or so in our research.” –Sam Tenenbaum

Sam Tenenbaum

Creating Value Through Retrofits

“Certifications like LEED are important for new construction, but there is so much more to be done with existing buildings,” Dockser says. Buyers are looking for climate-ready buildings. “More and more, if someone is selling a building, the buyers want to know how much it will cost to meet the regulations. We see more sellers doing a certification before they sell, including an audit of how the asset can be improved to meet requirements. Buyers and lenders are correlating the certification to a better asset.”

Energy efficiency saves on operating costs, thereby boosting profitability, says Nicholas Stolatis, a 40-year veteran of property management across global portfolios. Stolatis in 2007 inaugurated TIAA’s global sustainability platform, benchmarking the energy performance of the giant financial services company’s massive real estate portfolio under the EPA’s Energy Star rating system. That sustainability later grew to include water efficiency and waste reduction, he says. His philosophy: “As a fiduciary, I’m not looking to put money into something that feels good unless there is a return.” 

Major upgrades to high-performance HVAC or other systems can pay off over time. However, he says, “Before a property [makes] high-performance investments, it should first find and implement as many nocost and low-cost operational improvements as possible. These offer [faster] payback and continue to generate positive financial impacts.”

As an example, he cites TIAA’s decision to replace incandescent lighting with compact fluorescent lightbulbs throughout its portfolio. The bulbs used less energy and lasted for years rather than months. And TIAA saved on labor costs from frequent bulb changes. “We recovered the cost after the first year.”

Tools such as the Energy Star Portfolio Manager tool, which is used by 25% of U.S. commercial buildings, enable an asset manager to benchmark their energy use and calculate their return on investment.

If you’re focused on the bottom line, you have no choice but to be concerned about environmental sustainability, Stolatis says. “To be competitive you have to operate efficiently. Real estate is a long-term business and investment class, and sustainability is about taking longterm impacts and costs into account.”

Those who are known for doing good also tend to do well, he adds. “Reputation is a huge part of this business.”

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