Against the backdrop of challenges such as high interest rates, rising energy costs, and the re-set of property values, sustainable innovation in commercial real estate is more necessary than ever for firms to remain competitive. CRE leaders who embrace this innovation now will better prepare their organizations for the future, while also positioning them to thrive in a rapidly shifting market.
Here are five main reasons CRE leaders should begin innovating by adopting sustainability measures.
Reason #1: Rising Energy Costs and the Need for Energy Independence
For starters, energy prices are drastically climbing. According to Reuters, forward markets for Henry Hub futures, the benchmark U.S. natural gas price, “indicate that prices will average $3.20 per million British thermal units (mmBtu) in 2025, compared to an average of $2.22 so far this year, data from LSEG shows.” As energy prices rise, additional pressure is put on operational costs, such as heating, cooling, and climate control. Over time, those increased costs can threaten real estate firms’ profitability.
However, forward-thinking CRE firms can mitigate those costs by leveraging innovations such as solar, battery storage, and energy efficiency. In the process, these firms can also take greater control of their energy usage to ultimately become more energy-independent.
Moreover, thanks to current investment tax credits (ITCs) that were introduced by the Inflation Reduction Act (IRA), those savings are multiplied. By climate-proofing their buildings, CRE leaders can also lower their insurance costs and claims across their portfolios.
Reason #2: Stay Ahead of Regulatory and ESG Compliance
In addition to saving on energy costs and becoming energy-independent, CRE firms that embrace sustainability can proactively navigate regulatory and ESG pressures on the horizon and position themselves as leaders in sustainable strategy.
For instance, in California, the Climate Accountability Package (SB 253 and SB 261) was signed in 2023. As explained by the global law firm Sidley, under these two bills, U.S. public and private companies that conduct business in California and earn specific amounts will have to comply with new reporting requirements, such as “the submission of a biannual climate-related financial risk report to the California Air Resources Board (CARB) (applicable to companies with more than $500 million in total annual revenue) starting as early as January 1, 2026, for calendar year 2025.”
The CRE organizations that start innovating today can stay ahead of ESG regulations that pertain to them and minimize their risk profiles.
Reason #3: Enhance Property Value and Marketability
Alongside lowering risks and ensuring their firms remain compliant, CRE leaders can embrace sustainability incentives (such as ITCs) to get a headstart on enhancing their property values. Innovative upgrades, such as energy efficiency in CRE and climate-proofing buildings, can boost property values and attract more investors and tenants.
Class-A buildings with sustainability features are currently in high demand. A 2021 report by Knight Frank that examined “prime office buildings in London, Sydney, and Melbourne” revealed “an 8%-18% sales price premium for green-rated buildings compared to equivalent buildings without a BREEAM or NABERS rating across these markets, depending on the level of green rating.” The CRE firms that innovate early will be able to command premium rents and boost their asset appreciation in the long term.
Reason #4: Reduce Operational and Climate Risks
Another long-term benefit of embracing sustainable innovation now is mitigating the growing risks associated with climate change, such as extreme weather events, which threaten property operations and hinder tenants’ business continuity.
Microgrids, battery storage solutions, and solar panels can help buildings continue to run in worst-case scenarios. For instance, during Hurricanes Helene and Milton in Florida, the lights remained on at Hunters Point, a storm-proof community running on solar power and battery storage.
By keeping lights and power on during severe weather events, CRE firms can better serve their tenants. They can reduce complaints, repair needs, and ultimately keep their reputations intact.
Reason #5: Remain Competitive in a Rapidly Evolving Market
Finally, in a rapidly evolving market, CRE firms that don’t take steps to innovate now risk falling behind competitors who can offer tenants and investors more attractive, resilient properties. Innovation is crucial for keeping up with firms that are already leveraging energy efficiency, smart technologies, and sustainability to stand out to investors and tenants in a crowded competitive landscape.
Forward-thinking CRE firms will be able to meet tenants’ increasing demands for sustainability. A report published in 2023 by CIM, “Tenant Preferences in the UK Office Market,” surveyed “200 UK directors and senior personnel involved in key real estate decisions from companies that were large tenants of office space.” Of those decision-makers, 53% indicated that lowering “day-to-day operational and energy costs would significantly impact their decision on new office space.” Additionally, 41% of decision-makers said they would be willing to pay 10% to 14% more in rent for a green office space.
As for investors, the Association for International Real Estate Investors’ (AFIRE) 2022 “Annual International Investor Survey” noted that given that “investors account for heightened concerns related to the environment, affordability, and corporate behavior, their consideration of environmental, social, and governance (ESG) criteria in decision-making will become increasingly critical, with eight in ten viewing it as very important in the next few years.”
Final Thoughts
Sustainable innovation in commercial real estate is a necessity for survival, and is the path to long-term success.
By implementing sustainability measures, CRE leaders should focus on progress over perfection. They don’t have to implement every measure immediately. Instead, they should assess their unique situations and then form strategic plans for which innovations to pursue.
With every step they take in embracing innovation, real estate firms can protect their assets, improve operational efficiency, and secure their competitive position in the market.
Editor’s Note: This article was originally published on Fast Company.
