Understanding sustainability's positive impact on building value

The real estate industry is facing three tidal waves forcing it to decarbonize, none of which are because it's the "right thing to do."

While real estate is responsible for 40% of global CO2 emissions , and it does happen to be "the right thing to do" for the planet. But that's not the point to be made here. I want to talk about why real estate is being forced into decarbonizing itself by a tidal wave of forces outside of its control:

• Tenant demand: As the largest companies in the world (Apple , Microsoft , Amazon , Google , Meta etc.) look to decarbonize their entire supply chain, they are going to look to decarbonize their entire supply chain. That means looking for energy-efficient commercial buildings with renewable energy, on-site energy storage, EV charging, etc. These companies have net zero pledges to meet as soon as 2030. The industry's largest tenants are demanding sustainable real estate in order to fully decarbonize their emissions across Scope 1, 2, and 3. If you're in the real estate business, and you can't lease space to Amazon...that's a huge deal, and bad business.
• Local regulation: In my native New York City, building operations are responsible for 71% of greenhouse gas emissions. New York City's Local Law 97 , or Climate Mobilization Act, establishes fines on buildings that do not meet energy efficiency requirements—starting in 2024. The largest cities, like the largest companies, have net zero pledges to meet, and mayors see real estate regulation as their most powerful tool in decarbonizing their cities.
• Capital markets: The largest capital allocators on Earth—BlackRock and company—are saying, "We'll preferentially deploy capital to real estate with a low carbon footprint." Real estate is a business driven by cost of capital, and this is a significant trend driving behavior on the capital markets side.

"Going green" pays for itself in real estate

A 2022 report from EY unpacks why investment in green buildings, a historically intimidating and expensive expenditure for real estate owners, is actually a financially savvy decision. They found "landlords who prioritize ESG at their properties can expect higher rent, tax credits and incentives, and overall higher market value of their real estate investments."

There is value in retrofitting:

EY found that sustainable real estate is able to charge higher rent, has lower vacancy rates as well as lower operating expenses, which in turn translates to a higher property value.

• Green buildings can be worth 10–21% more than inefficient buildings
• Regulatory and legislative environment favors sustainability: Climate-related SEC disclosures, the Inflation Reduction Act, Local Law 97 in New York City (and similar legislation in other major cities) all point to regulations around real estate's emissions and sustainability increasing in the future
• Green building investment grows revenue (2.5–5% higher) and lessens operating expenses (2–4% lower) on an efficient property's P&L sheet today…and as the cap-rate spread between efficient and inefficient buildings widens in the future, which will likely happen with additional regulatory penalties, then a green building’s value would continue to increase exponentially

It’s going to cost an estimated $18 trillion dollars to decarbonize the global real estate industry, and 80% of 2050’s building stock has already been built—this means that decarbonizing real estate is largely a retrofitting problem. But I hope it’s clear after reading this that the upfront cost of a retrofit will pay for itself.

If you're interested in reading more about this topic, I also covered it in a recent LinkedIn post about the positive value of sustainable office real estate in London.

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