Green Buildings – Good for the Environment and the Bottom Line

State and local governments are embracing new building performance standards to combat climate change. Given that buildings are currently responsible for 39% of global energy related carbon emissions, building owners are facing increased pressure to improve energy efficiency and create more sustainable buildings⁽¹⁾. Green buildings are perceived to cost significantly more than conventional buildings. However, construction costs are only 2% higher on average and green buildings save 14% to 19% in operating expenses⁽²⁾.

Building operations make up 28% of a building’s carbon emissions and are responsible for the most amount of energy consumption. Therefore, improving a building’s water efficiency, energy, and waste management is crucial to reduce carbon emissions and operating expenses. Green buildings typically consist of a sustainable HVAC system, energy efficient lighting, good insulation, and passive design elements that enhance the building’s efficiency. These energy efficient measures can save between 25% – 50% of energy, 10% – 40% of water consumption, and reduce maintenance costs by about 12%. All of these factors combined can lead to a reduction of operating costs of about 19% to 34% less CO2 emissions⁽²⁾.

Source: Financial Benefits of Green Buildings – Are They Expensive? – Smart CRE (smart-cre.com)

Sustainable properties are increasing in popularity due to rising interest in ESG compliance by companies and overall demand from tenants. According to JLL research, 79% of surveyed corporate tenants say carbon emissions reduction will be part of their corporate sustainability strategy by 2025, and 42% of corporate occupiers believe their employees will increasingly demand green and healthy spaces⁽³⁾. Buildings that are more sustainable tend to command higher rents and have higher occupancy rates than in non-green buildings. A study conducted by KnightFrank found green buildings can increase the asset value by 7% – 18% due to high demand and relatively low supply⁽²⁾. Health certified spaces transact between 4.4-7% more per square foot than their nearest non-certified neighboring peers. Currently, green buildings represent only 5.4% of commercial office stock, but they have a value premium, ranging from 13.3-36.5% on transaction prices⁽⁴⁾.

Source: 201214_Healthy-Buildings_Paper_V2.pdf (mit.edu)

As companies reevaluate their spaces and find ways to entice workers back to the office, sustainable buildings are often considered safer and healthier than traditional buildings. Studies have shown that employees work more efficiently when their workplace has improved daylighting, thermal comfort, and indoor air quality. The benefits of higher ventilation rates alone are estimated at $6,500-$7,500 per person per year in employee productivity⁽⁴⁾. Ensuring the comfort of tenants improves productivity and results in higher occupant satisfaction.

The current national office vacancy rate sits at 19.2%, and the vacancy rate for buildings constructed since 2010 was 14.4% in Q2 2023⁽⁵⁾. Older buildings with outdated amenities, poor indoor air quality, and poor energy efficiency will likely struggle to attract and maintain tenants. As building owners upgrade their systems to comply with building performance standards, extra consideration should be given to improving the daylighting, indoor air quality, and climate controls. Sustainable buildings tend to possess higher occupancy rates, command higher rents, and have lower operating expenses, all adding up to a strong business case for embracing sustainability.

 

References:

1. Embodied Carbon – World Green Building Council (worldgbc.org)
2. Financial Benefits of Green Buildings – Are They Expensive? – Smart CRE (smart-cre.com)
3. The ‘Green Lease’ Is The Next Phase Of Built Environment Sustainability (forbes.com)
4. 201214_Healthy-Buildings_Paper_V2.pdf (mit.edu)
5. U.S. Office MarketBeat Reports | United States | Cushman & Wakefield (cushmanwakefield.com)

 

The views expressed herein are presented for informational purposes only and are not intended as a recommendation to invest in any particular asset class or security or as a promise of future performance.  The information, opinions, and views contained herein are current only as of the date hereof and are subject to change at any time without prior notice.