Spending on environmental sustainability is on the rise: what does this mean for property owners?

Over the course of the last decade, we’ve seen corporate priorities undergo a significant shift. Environmental sustainability has taken the lead as a top objective, driven largely by Net Zero targets with rapidly approaching deadlines.

Honeywell’s most recent Environmental Sustainable Index highlighted this trend, showing that over 80% of companies are set to increase their budgets for environmental sustainability goals in the next year. Of the environmental sustainability categories studied, energy efficiency and emissions reduction ranked as the highest priorities. 

This move is more than a response to escalating climate concerns; it’s evidence of the growing need for the built environment to strategically adapt in the face of extreme weather events and a changing regulatory environment. While any budget increase can create unease during a time of economic uncertainty, investing in operational efficiency is a path to achieving two goals in one: reduced energy consumption (and expense) and providing the low-carbon commercial space that is in such high demand.

The business case for sustainability

“The extreme weather events this year have increased the sense of urgency for immediate action at organisations. As a result, we should expect to see more [of them] looking to accelerate their sustainability efforts and, in particular, adopting a technology-driven approach to their energy transition plans.” — Gavin Towler, Chief Scientist for Sustainability and Chief Sustainability Officer at Honeywell

Overhauling a building via plant and equipment replacement is often not a viable option for building owners—at least, not in the near term. But a technology-driven approach, powered by tools like building analytics, often costs next to nothing when offset against immediate returns like reduced utility bills, higher sustainability ratings and low vacancy rates.

While the upfront costs of sustainability initiatives may seem daunting, the long-term financial benefits are substantial. Investments in energy efficiency and emissions reduction lead to significant operational savings over time and directly contribute to increased asset value. As EY recently noted, commercial property owners who prioritise ESG can expect higher rent, tax credits and incentives, and overall higher asset value.

Energy efficient space is in growing demand for a wide range of reasons, including increased employee satisfaction at a time when many companies are struggling to attract workers back to the office. As corporates level up their commitment to achieving sustainability targets, a renewed focus on low-carbon buildings has led to a distinct “green premium” on sustainable office space. In London, office space with a green sustainability certification commands a 20% premium over buildings without. 

Demand for low-carbon offices will soon outpace supply

If the present-day green premiums weren’t motivation enough for REITs and property owners to act now, the widening gap between supply and demand should be. Recent research from JLL shows that soaring demand for low-carbon office space will soon outstrip supply by 75% across major US markets by 2030, with a projected shortage of 57 million square feet of low-carbon office space. 

In New York, where real estate demand is dominated by finance and professional services firms with ambitious sustainability goals, 72% of upcoming requirements are tied to low-carbon commitments. This amounts to 23.3 million square feet of demand, compared to only 8.1 million square feet of potentially suitable space between now and 2030. 

This shortage of low-carbon offices is matched in European markets as well; Savills found that the supply of “green” office space in London, Paris, and Amsterdam is among the lowest worldwide. Combined with the recent decrease in new building development, demand for low-carbon space is expected to be 12 times higher than available supply. There has never been a better time for building owners to invest in energy efficiency, reducing their operating costs and increasing their attractiveness to high-quality tenants. 

Balancing cost and sustainability

For building owners and property managers, the gap between low-carbon supply and demand presents both a challenge and an opportunity. Investing now in sustainable operations and retrofitting existing structures to meet new sustainability standards will attract premium tenants and justify higher rental rates while helping achieve corporate sustainability targets. 

For property owners struggling with high vacancy rates and restricted access to capital, there is light at the end of the tunnel. Owners can start small, focusing on achievable initiatives that offer quick returns on investment. Building analytics technology like CIM’s PEAK Platform is a highly cost-effective way to reduce energy consumption without significant capex outlays. Government incentives and green financing options can also help to offset initial costs. 

To effectively navigate the shift toward a sustainable built environment, building owners and operators must take strategic action at the right time, or they risk stranding assets. This means allocating adequate resources toward effective initiatives and consistently monitoring progress to ensure sustainability efforts pay off as planned. It’s also crucial to stay informed about emerging technologies and practices that can further enhance sustainability efforts. 

Conclusion

As we work toward a more sustainable future, the built environment plays a pivotal role as one of the largest contributors to carbon emissions. As corporate goals increasingly orient toward Net Zero objectives, with executives willing to direct budget toward sustainability as a top priority, REITs and other commercial property owners must invest in efficiency or risk stranding their assets. 

‍Download our free Roadmap to Net Zero for Commercial Property, which includes five top strategies to build a sustainable portfolio.