Navigating modern leasing requirements in the built environment

In recent years, leasing requirements for commercial buildings have changed dramatically, influenced by evolving sustainability standards, tenant expectations and investor pressure. In jurisdictions around the world, regulatory requirements dictate minimum performance criteria that must be met before a property can be leased.

These building performance frameworks aim to enhance the sustainability and energy efficiency of commercial buildings, helping property owners and tenants reduce greenhouse gas emissions and work toward net zero targets. While they also place significant pressure on property owners to invest in energy-efficient property upgrades and initiatives, the cost of non-compliance can include hefty fines and decreased marketability, making it imperative for building owners to stay ahead of these requirements.

In this post, we’ll explore how global leasing requirements have evolved and why they present risks to commercial property owners who fail to adapt quickly. We’ll also dig into what property owners can do to keep their portfolios attractive and command premium rates.

Australia

Australia has made international headlines with NABERS, a suite of benchmarking assessments that measure a commercial building’s performance in terms of energy, water, indoor environment and waste, among other voluntary metrics. NABERS rates buildings on a scale of 0 to 6 stars, with 6 representing exceptional sustainability performance and resource efficiency.

Australia has also adopted Commercial Building Disclosure (CBD), a programme that requires commercial property owners to provide prospective buyers and tenants with energy efficiency details.

The federal government has also taken significant steps toward Net Zero; as of 1 July 2024, all government property-related procurements will consider environmental credentials. In 2025, leases will require a minimum 5.5-star base building NABERS Energy-rated office space, with a view toward making all office leases fully electric by 2026.

United Kingdom

Commercial lease agreements in the UK are subject to Minimum Energy Efficiency Standards (MEES), which place energy efficiency requirements on commercial buildings. Most properties must have an Energy Performance Certificate (EPC), which designates a property’s energy efficiency rating from A to G. 

For new commercial leases, landlords must provide tenants with an EPC for the property or risk financial penalties. In 2024, the minimum rating for new leases is E, meaning that property owners cannot legally lease assets rated F or G until baseline energy efficiency requirements are met. Other rating systems gaining momentum in the UK are NABERS and BREEAM.

North America

The US and Canada have also taken steps to hold property owners to increasingly high performance standards. The aptly named Building Performance Standards (BPS) are designed to reduce carbon emissions in buildings by improving energy, gas, and water use. 

In the US, the Energy Star program and local ordinances such as New York City’s Local Law 97 are also driving improvements in building efficiency. Penalties for non-compliance vary by state, but some jurisdictions have imposed financial penalties for properties failing to meet carbon reduction targets based on energy consumption over a 12-month period.

Risks of sustainable leasing requirements for property owners

With increasingly strict global leasing requirements, property owners must adapt quickly to attract and retain tenants. In Canberra, Australia, approximately 70% of the commercial real estate market is leased to government tenants on long-term leases. This market, for example,  is highly exposed to leasing risk, given the strict government requirements for building performance.

As governments and private companies worldwide commit to net zero targets, they are increasingly seeking office spaces that align with their sustainability goals. Buildings that fail to meet baseline criteria risk reduced rental incomes and strict performance penalties. Outdated buildings with high operating costs and frequent equipment failures are also less attractive to current and potential tenants, further exposing property owners to vacancy risks.

B-grade asset owners should take prompt action, especially with federal mandates like those in Australia looming closer. According to APS reports, only 13.2% of total tenancies met the 5.5-star performance benchmark in 2022, leaving a significant performance gap ahead of the government’s 2025 objectives.

What can property owners do to mitigate risk?

Improve energy efficiency

Improving energy efficiency is critical for meeting regulatory standards and attracting sustainability-focused tenants with net-zero targets of their own. Property owners can achieve this through relatively low-cost technology upgrades like LED lighting or building analytics (discussed below). As older HVAC systems age into retirement, replacing them with electric and high-efficiency systems is also an efficient use of capex. 

Optimise performance with building analytics

Capex isn’t necessarily required to improve the energy efficiency of existing building stock. One of the most effective ways to improve building performance is through the use of advanced building analytics platforms such as CIM’s PEAK Platform, which leverages data from existing building systems to provide real-time insights into energy usage, equipment performance, and overall operational efficiency. 

By identifying inefficiencies in real-time and providing actionable steps to correct them, building analytics platforms helps extend equipment lifespan, reduce maintenance costs, and optimise performance without negatively impacting tenant satisfaction.

Provide easy access to ESG reporting

With regulators increasingly focused on data-driven performance targets, tenants are looking to property owners for sustainability and environmental, social, and governance (ESG) metrics reporting on their assets. Such reporting also satisfies investor requirements for data and demonstrates progress toward sustainability targets for ‘green’ financial arrangements such as sustainability-linked loans.

Acquire energy performance certifications

Performance certifications such as NABERS and LEED can help attract premium tenants while also satisfying leasing requirements for building performance, whether driven by regulators or market demand. As more jurisdictions adopt minimum performance requirements for new leases, building owners who have already taken the time to certify their buildings will be a step ahead of their competitors. 

Prioritise the tenant experience

Emphasising tenant experience is crucial for retaining existing tenants and attracting new ones. This requires more than maintaining high energy performance standards, as outlined in the section above; attention to detail and responsiveness to tenant needs such as thermal comfort and indoor air quality are also critical. Using data-driven insights to address tenant complaints promptly and effectively can lead to higher satisfaction rates and longer lease terms.

Conclusion

The shifting landscape of leasing requirements presents both challenges and opportunities for property owners. By leveraging advanced building analytics platforms like CIM’s PEAK Platform, optimising building operations, and prioritising tenant experience, property owners can mitigate leasing risks and enhance the overall value of their portfolios.