Based on 2024 data, the impacts of carbon commitments will increasingly materialize in lease markets, creating a tipping point in the near future where investments in low carbon buildings will start to pay dividends.

• Corporate occupiers must ensure their next lease allows them to show material progress on their goals – yet they will face challenges as low carbon supply struggles to keep pace with demand.

• Tenants are prioritizing buildings that are energy efficient, free from onsite fossil fuels and powered by clean energy. For construction projects, occupiers are beginning to focus on lower embodied carbon designs.

• This shift is creating both urgency and opportunity for investors who seize this moment and can communicate measurable progress around a building’s carbon performance.

The state of play is clear: corporate occupiers must show proof of progress in their commitment to operate more sustainably, and buildings need to catch up.

From carrots to sticks

On the regulatory side, mandates driving decarbonization are building across all levels of government. The world’s largest economies including the U.S., California, Canada, UK, EU, Australia and, most recently, China, have implemented or proposed mandatory ESG disclosure rules, with first reports due by 2026 or earlier. These rules aim to improve transparency and accountability for the biggest companies around the globe while promoting the transition to a net zero economy.

Policy directly requiring emissions reductions from buildings is ramping up. For example, over 30 U.S. cities have committed to passing a Building Performance Standard (BPS) by 2024, like New York’s LL97, requiring building energy use or emissions reductions. In Europe, the EU agreed in December 2023 to reduce the emissions and energy use of buildings by developing minimum energy performance standards. Some 16% of the worst-performing buildings will need renovating by 2030 and 26% by 2033.

Other factors are also converging to bring greater overall market stability by 2025, with global economies set to recover in 2024 and many countries emerging from major elections. For many corporate leaders, 2025 will bring more clarity and certainty around what’s required to meet carbon commitments.

2025: an inflection point for low carbon requirements

The world has less than seven years to halve emissions in line with the Paris Agreement. CRE stakeholders – from governments to corporates – need to act on net zero carbon (NZC) targets, and the built environment presents viable means to show proof of progress. While some corporate lease demand is already shifting based on ESG requirements, the next 12 to 24 months will bring widespread change. By 2025, 30% of market demand for low carbon office space will not be met - creating a tipping point for NZC target penetration in lease markets.2 Moreover, 1 out of every 3 leases tied to a carbon commitment will expire in less than 24 months. In the U.S., Canada, Europe and Australia, average lease terms are 7 to 10 years; many leases signed today will collide with the first important checkpoint of halving emissions by 2030.

By 2025, low carbon space requirements will no longer be a small subset of lease markets. Building owners will have to respond. Inaction over decarbonizing real estate will lead to their economic obsolescence sooner than most investors realize. According to GRESB, the average stranding year for GRESB-submitted buildings, covering 150,000 assets, is 2024.³

Energy efficiency, electrification and clean energy are the simple answers, although prioritization across these factors will vary for different property sectors and industries. For the top five industries in the office sector, the majority (>50%) of top occupier demand is tied to a carbon reduction target, but demand will be greatest from finance, technology and professional services sectors.

Outside of the leading markets, sustainability-minded corporates are still focusing on green building certification, with ESG remaining a tick-box exercise. Premiums exist for green-certified buildings (e.g., through LEED or BREEAM), but as corporates focus on their carbon targets, they will have to go beyond certifications. This is because today’s most common certifications are typically design and construction-based and have no real correlation with better energy or carbon performance.

This is true for popular frameworks available globally, including LEED and BREEAM. Both the U.S. Green Building Council (GBC) and BRE, the organizations behind these frameworks, have indicated they are evolving their certifications to better reflect emissions performance. In the market today and gaining traction in the UK, NABERS is often seen as a better measure of operational carbon emissions. Canada’s GBC has made strides in creating a built environment definition with its Zero Carbon Building Standard for design as well as performance.

Nevertheless, tenants cannot wait for existing performance-based frameworks to scale or for LEED and BREEAM to evolve. London’s lease market is about one to two years ahead of most others for climate target penetration. As commitments worldwide increase exponentially, it is a feasible indicator of future tenant behavior in the near term.