How Green Pays Off

A Glimmer of Hope for Office ROI 

In today’s world of flagging office values, properties with high performance ratings and strong environmental commitments tend to outperform others, particularly in the Class A market, according to analysis by real estate services firm Cushman and Wakefield. Immediately after the pandemic’s onset, the firm produced a report titled “Green is Good” that set out to answer: “As demand for ESG-committed assets has grown … do these assets perform better than their non-ESG peers? If so, is it possible to quantify this difference?”

Because U.S. Green Building Council data and progress reporting were readily available, researchers chose to examine LEED-certified projects delivered from 2010 to 2020, says Jacob Albers, a report co-author who is now head of alternatives insights for Cushman & Wakefield. “We found that on average, LEED-certified buildings received higher rents than otherwise comparable buildings at the cost of somewhat lower occupancy,” the report notes. Measured by revenue per available square foot, “LEED-certified buildings have generated greater cash flows on average.”

“We found that on average LEED-certified buildings received higher rents than otherwise comparable buildings at the cost of somewhat lower occupancy.”
–Jacob Albers

“Today, more than 30% of the office inventory is obsolete,” Albers says. “In the upper tier, sustainability commitments are not a nice-to-have, but a need-to-have for trophy assets that are still performing well.”

Increasingly, he adds, newer buildings in the top echelon are built to the exacting standards of LEED Platinum. “Tenants in those buildings have their own ESG commitments, and they want to be in that kind of asset. Developers are following on with what tenants are saying, but they are also following capital. Investors are increasingly wanting to support projects with sustainability commitments. Since 2021, this has become more and more ubiquitous.”

Environmental performance is important for older buildings, too, but with caveats, Albers says. “For Class B and C assets that are losing tenants, a lot of things need to be done beyond green upgrades. But if you are coming up to a big lease renewal or for-sale, bringing your asset up to higher [sustainability] standards could help get the sale over the line.” 

Multifamily, meanwhile, is on a different trajectory, says Sam Tenenbaum, head of multifamily insights at Cushman and Wakefield. In high-demand urban areas—and even in some that are less so—multifamily construction is surging, while the uptake of sustainability commitments has been slower than for office, he says.

“The relative rent premium you’re able to command as green-certified isn’t substantial—3% or so in our research,” Tenenbaum says. While office and institutional tenants are insisting on clean-energy commitments and performance tracking, “multifamily tenants don’t have as much leverage, because renters care more about price than they do anything else. Green amenities such as bike storage are important, but they aren’t the whole deal.” 

Other factors are prodding apartment and condominium projects into going green: “The big push is on the finance side, coming from the government entities, Freddie Mac and Fannie Mae,” Tenenbaum says. “They offer incentives that give you more points on your financing for ESG commitments. Green upgrades are increasingly part of a strategy of how you perform better in your market and compete for loans for acquisition and for reinvestment in your property.”

Local regulations, too, are driving a green trend, as Dockser indicates, but there are strong cautionary flags where housing is concerned, notes Tenenbaum. “For ground-up construction, communities are balancing how much housing they want with that regulation. Many recognize that any impediments we throw in the way need to be balanced with the urgent need for more housing.”

“The relative rent premium you’re able to command as green-certified isn’t substantial—3% or so in our research.” –Sam Tenenbaum

Creating Value Through Retrofits

“Certifications like LEED are important for new construction, but there is so much more to be done with existing buildings,” Dockser says. Buyers are looking for climate-ready buildings. “More and more, if someone is selling a building, the buyers want to know how much it will cost to meet the regulations. We see more sellers doing a certification before they sell, including an audit of how the asset can be improved to meet requirements. Buyers and lenders are correlating the certification to a better asset.”

Energy efficiency saves on operating costs, thereby boosting profitability, says Nicholas Stolatis, a 40-year veteran of property management across global portfolios. Stolatis in 2007 inaugurated TIAA’s global sustainability platform, benchmarking the energy performance of the giant financial services company’s massive real estate portfolio under the EPA’s Energy Star rating system. That sustainability later grew to include water efficiency and waste reduction, he says. His philosophy: “As a fiduciary, I’m not looking to put money into something that feels good unless there is a return.” 

Major upgrades to high-performance HVAC or other systems can pay off over time. However, he says, “Before a property [makes] high-performance investments, it should first find and implement as many nocost and low-cost operational improvements as possible. These offer [faster] payback and continue to generate positive financial impacts.”

As an example, he cites TIAA’s decision to replace incandescent lighting with compact fluorescent lightbulbs throughout its portfolio. The bulbs used less energy and lasted for years rather than months. And TIAA saved on labor costs from frequent bulb changes. “We recovered the cost after the first year.”

Tools such as the Energy Star Portfolio Manager tool, which is used by 25% of U.S. commercial buildings, enable an asset manager to benchmark their energy use and calculate their return on investment.

If you’re focused on the bottom line, you have no choice but to be concerned about environmental sustainability, Stolatis says. “To be competitive you have to operate efficiently. Real estate is a long-term business and investment class, and sustainability is about taking longterm impacts and costs into account.”

Those who are known for doing good also tend to do well, he adds. “Reputation is a huge part of this business.”