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 intensity

End-target for offices:

• 70-80 kWh per sqm or on pathway to meeting this target (~20-25kBtu per sqft)

All properties: reduce Energy Use Intensity (EUI) by 50-60% below current building averages

Electrification

100% electrified buildings or have plans to remove onsite fossil fuel systems in place.

Energy

100% clean electricity or have plans to source 100% clean electricity

Focusing on building performance boils down to three factors – energy efficiency, no onsite fossil fuel use and clean energy sources.

When it comes to reducing operational emissions in buildings, best practice is for occupiers to prioritize energy efficiency and then to electrify (move from onsite fossil fuel sources) for an optimized amount of energy use supplied by 100% clean electricity. As renewable technologies become more affordable, a clean energy future is coming faster than many expected, enabling a stronger link between building electrification and decarbonization. In the meantime, many corporates are leveraging Purchase Power Agreements (PPAs) and Renewable Energy Certificates (RECs) to secure clean energy. However, these instruments are under increasing scrutiny, especially as market forces naturally drive the transition to clean energy, and regulatory authorities reconsider their appropriateness. Because of this, a truly NZC building can insure against such regulatory risks.

As lease markets shift, greater governmental clarity around the built environment and carbon performance is emerging. In January 2024, the Biden Administration in the U.S. released its draft National Definition for Zero Emissions Building, while the UK is finalizing its own Net Zero Carbon Building Standard, following similar standards set by France and Sweden. These definitions offer a consistent and measurable basis for zero emissions buildings and respond to industry calls for a unified framework.

While operational carbon is frequently in the spotlight, ‘embodied carbon’ is an emergent issue. It refers to ‘upfront’ emissions associated with building construction, including extraction, manufacturing and transportation of materials used. Embodied carbon is critical because it addresses the environmental impact of the entire building lifecycle, not just the operational phase.

In a similar effort to its initiative for corporates, SBT is finalizing guidance for the buildings sector that addresses in-use operational emissions and embodied carbon. The guidance would require in-use operational emissions reductions to fully align with 1.5°C CRREM (v2) pathways. Before this guidance, building owners would typically reference CRREM for decarbonization pathways while corporate occupiers resorted to SBTi. These guidelines effectively bridge the gap between the two and could lead to occupiers seeking CRREM alignment for their locations and focus more on embodied carbon for new developments.

While many in the CRE world are not recognizing the demand for low carbon buildings today, it is a growing trend. Many forward-thinking companies are making leasing decisions that fully integrate their carbon goals; for example: