Real Estate/REIT
Increase ROI 5 min

The Business Case for Sustainability in Commercial Real Estate | Fast Company

Sustainability in commercial real estate, once a nice-to-have feature, is now a critical factor in profitability.
Sean Swentek by Sean Swentek Increase ROI 5 min

Sustainability in commercial real estate, once a nice-to-have feature, is now a critical factor in profitability. 

Forward-thinking CRE stakeholders are recognizing the crucial role sustainability plays in business success. According to the CRE Finance Council’s June 2024 member survey, “64% of borrower, lender, and investor respondents have sustainability programs specifically related to their CRE lending activities or investments.” 

CRE firms that are proactively embracing energy-efficient solutions are leveraging incentives that give them both financial and operational benefits, which in turn provide a competitive edge. 

The Financial Benefits of Sustainability Investments

By investing in sustainability, CRE leaders can unlock a series of financial benefits. 

One advantage comes from the Inflation Reduction Act (IRA) and its investment tax credits (ITCs), which have helped CRE firms generate more ROI than ever from sustainability projects. ITCs offer developers immediate financial returns through tax credits for solar power, battery storage solutions, and energy efficiency improvements. For instance, in terms of solar power, the U.S. Department of Energy explains that solar systems “placed in service in 2022 or later and begin construction before 2034 are eligible for a 30% ITC or a 2.75 ¢/kWh5 PTC if they meet labor requirements” or are below 1 megawatt. 

Developers can also get bonus ITCs if they meet certain requirements, such as an additional 10% ITC if they meet domestic manufacturing guidelines. If a CRE developer installs a 200 kW solar system that meets domestic manufacturing specifications, they can claim 40% in ITCs. In practice, this means if the installation costs $400,000, they would get $160,000 in ITCs. If the developer installs a 200 kW solar system that meets those same requirements in nine other buildings, the total amount in ITCs would be slightly over $1.5 million. 

In addition to saving money from the IRA’s ITCs, builders can leverage solar power, battery storage solutions, and energy efficiency improvements to substantially lower operating costs. Referencing data from a Schneider Electric study, the World Economic Forum and PwC noted in a 2024 white paper that important “aspects of green building design” can “additionally reduce building running costs by approximately 40%.” When real estate professionals save money on energy costs, they’ll be able to launch new projects and scale their businesses. 

While the business case for sustainability is clear, CRE firms need to be realistic about implementation hurdles. Even with tax credits, installing solar and storage systems requires substantial capital investment. Many firms are also discovering that utility interconnection processes impact project timelines and ROI calculations. Another big operational challenge is finding and vetting qualified contractors who understand both renewable technology and commercial property operations. Smart firms are addressing these challenges by taking a phased approach, starting with pilot projects to build expertise before scaling across their portfolio.

Sustainability for Reduced Operational Risks and Costs

Sustainability in commercial real estate goes beyond just financial benefits—as the world gets warmer, it also reduces operational risks and costs spurred by climate change.

By climate-proofing buildings, CRE leaders can make their properties more energy-resilient in light of extreme weather events that can cause increased cooling demands, power disruptions, and other factors resulting in high energy costs. 

Proactive sustainability measures can also minimize CRE builders’ liabilities and risk exposure. With minimized risks, developers can secure lower premiums and not deal with as many insurance claims. 

Competitive Advantages in a Shifting Market: Long-Term Property Value and Marketability

Energy efficiency in CRE, through climate-proofing buildings and other sustainability measures, reduces operational costs and can help firms gain a competitive edge in three main ways. 

First, builders can boost their property values. Consider findings from Bentall Kennedy’s portfolio of North American office properties over the span of 10 years: net effective rents averaged “3.7 percent higher in LEED certified properties in the U.S. than in similar non-certified buildings,” occupancy rates were “9.5 percent higher in U.S. buildings with ENERGY STAR certification, than in buildings without certifications,” and tenant renewal rates “were 5.6 percent higher in Canadian buildings with BOMA BESt Level 3 certification than in buildings with no BOMA BESt certification.”

Moreover, with robust sustainability strategies, leading CRE organizations can attract more investors and tenants, as both groups recognize the benefits of this approach. According to CBRE’s 2022 U.S. Investor Intentions Survey, investors are “increasingly adopting ESG criteria for their real estate investment decisions. Approximately 70% of survey respondents said they have adopted ESG criteria, while another 10% expect to do so in the next three to five years.”

As for commercial tenants, JLL notes that for the “growing numbers of companies searching for new spaces to lease, sustainability is now a top consideration,” and “tenants are often prepared to pay more to secure sustainable space.” 

Finally, CRE firms don’t need to center their brands and reputations on ESG goals, but tying their ESG commitments to their broader brand mission and values will only serve to benefit them in the long run. By demonstrating an early commitment to ESG, CRE builders can differentiate their brands from competitors and gain an edge in a challenging commercial real estate market where there are many tenants and investors with a heightened interest in sustainability. 

The Path to Profitability Is Through Sustainability

Now more than ever, sustainability is a path toward profitability in commercial real estate. 

Savvy CRE leaders who treat sustainability as a strategic investment that drives profitability and resilience, rather than as a cost, will enable their firms to gain financial, operational, and competitive benefits—and will most likely play an active role in shaping the future of energy efficiency in the industry as a whole. 

Editor’s Note: This article was originally published on Fast Company.

What's next

Book Consultation