The commercial case for making buildings more sustainable

Despite the current economic headwinds, developing and implementing clear decarbonization and resilience strategies now is the smart decision for longer-term performance:

• Mounting costs from climate risks, including heatwaves, flooding, storms and droughts, are increasingly impacting urban areas – with big implications for building owners.

• Rising demand for sustainable buildings and spaces that support corporates’ low carbon goals and meet employees’ rising expectations will change lease markets at scale.

• More restrictive finance and tougher regulation are coming down the line. Companies face more stringent building performance standards and corporate disclosure mandates.

Creating a more sustainable and resilient future requires today’s buildings to undergo marked transformation in their infrastructure and operations.

Yet in today’s tough economic environment, securing the internal buy-in and investment needed to make existing buildings more sustainable can be a difficult task.

Investment in real estate is down and fundraising is more challenging. The office sector, in particular, is experiencing dynamic shifts in demand with the impact of hybrid work on lease renewals.

Despite the shorter-term hurdles, developing and implementing clear decarbonization and resilience strategies now is the smart decision for longer-term performance. In many respects, the commercial case for sustainable buildings has never been stronger due to three key factors:

Mounting costs from climate risks

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Increased demand for sustainable buildings

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More restrictive finance and tougher regulation

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No city – and few buildings within – is immune from the growing impact of climate change.

It’s not just dealing with events that make international news headlines. Those already on the front line of climate change are suffering from repetitive smaller events which may be growing quickly in scale and intensity. In the U.S. the impacts of climate-fueled extreme weather events have cost US$612 billion in the last five years, according to NOAA’s National Centers for Environmental Information

However, for some companies, climate risk remains a blind spot. Part of building a strong business case will involve understanding the risks of disruption to business operations and potential damage to buildings.

Taking action for long term resilience

One of the biggest challenges in assessing climate risk is the wide range of approaches and the lack of consensus on standardization. Some providers are thinking about value at risk in terms of insured value, others are looking at change in asset value or replacement cost.

Nonetheless, climate modeling and scenario analysis tools are becoming more sophisticated, enabling more companies to understand their risks and develop plans to take appropriate action. These short-term resilience measures should be integrated into broader decarbonization plans which are key to reducing longer-term risk.

Pressure to lease spaces that both support corporates’ low carbon goals and meet employees’ rising expectations will intensify in the next few years.

Historically, many companies have opted for green certified office spaces – often paying a premium to lease them. These premiums, which vary between cities, still exist. 

Green premiums across global markets

+7.1%

North America

Average rental premium for green-certified, class A office stock across 8 major markets in the U.S. and Canada

+11.6%

London

Average rental premium for green-certified, office stock

+9.9%

Asia

Average rental premium for green-certified, class A office stock across 9 major markets in Asia

^{Source: JLL Research, 2023; JLL’s Sustainability and Value – London Offices Investment report
Note: All three studies calculated green premiums using a hedonic pricing model, meaning that the impact on rental values from environmental certification was isolated from other effects, such as building age and location}

As momentum for more transparency and accountability around sustainability grows, tenants will increasingly seek environmental performance indicators, such as energy intensity and electrification, on top of green credentials.

JLL is already seeing evidence of this in advanced European markets, like London and Paris, where low-carbon prime office spaces are reaching historic rental highs this year, even with an overall slowdown in the sector.

Yet while corporate demand for sustainable buildings will increase, supply is struggling to keep pace.

Across 20 major global office markets, only 34% of future demand for low carbon workspace will be met in the next several years, JLL research shows. In other words, for every 3 square meters of demand, only 1 square meter is in the current pipeline.

Supply and demand dynamics vary significantly between major cities depending on factors such as the main type of industry and corporate space requirements as well as property features of existing stock.

City spotlights

New York

New York is dominated by finance and professional services, sectors that tend be highly carbon conscious. Across the leased footprint of the top 100 occupiers, 72% is tied to a carbon commitment. Demand from these corporates, at an estimated 2.2 million square meters by 2030, is expected to be twice the current development pipeline of suitable space.

Paris

Paris is amongst the most climate progressive cities in Europe. Across their leased footprint, 80% of the top 100 corporate occupiers in Paris are signed up to carbon commitments, with 17% of those being SBTi, NZC committed. This amounts to roughly 1.5 million square meters of future occupational requirements by 2030, compared with just over 800,000 square meters of best-in-class sustainable office space. As such, future demand is likely to exceed supply by 54%.

Sydney

Sydney, too, is facing its own significant supply issues. In June 2023, the National Australian Built Environment Rating System (NABERS) formally introduced a Renewable Energy Indicator as a parameter in its rating scheme, with the focus on rewarding buildings transitioning to electrification and procurement of renewable energy for operations. As the proportion of all-electric buildings in Sydney remains low, the city will see a deficit of NZC ready stock. Demand will be five times larger than future supply of all-electric 100% renewable energy buildings in the next five years.

Regulation may not have an immediate effect, especially on existing buildings, but it is coming both directly with building performance standards and indirectly through corporate disclosure mandates.

At international and national levels, there have been significant developments in corporate disclosure requirements in the past 18 months, including the EU’s Corporate Sustainability Reporting Directive (CSRD), the U.S. Securities and Exchange Commission’s (SEC) Climate-Related Disclosure requirements and the International Sustainability Standards Board (ISSB). Beginning in 2024, the ISSB will take over monitoring for the TCFD.

Given that more than 60% of carbon emissions within urban areas typically comes from buildings, city governments are increasingly implementing policies and initiatives aimed at reducing carbon emissions, mitigate growing physical risks and building longer-term resilience to a changing climate. 

Analysis of the targets, actions, regulations and instruments across 16 cities covering carbon, energy, buildings, circularity, biodiversity and resilience, shows a wide spectrum of commitment and action, from the ‘Climate Progressive’ cities such as New York, Paris and Singapore, to those cities that are just ‘Starting Out’ on their route to decarbonization. 

‘Climate Progressive’ city governments are rolling out a vast array of ‘carrot and stick’ policy instruments covering new and existing real estate. For example, New York has introduced several pioneering local laws while Paris is taking a lead in considering embodied carbon, and Singapore has set out a holistic approach to greening its buildings.  

As decarbonizing operations and retrofitting buildings involves extended timescales, taking action sooner rather than waiting for new regulations to be announced will help companies stay ahead.

Taking steps to decarbonize

The real estate industry has the expertise and technology needed to create low-carbon buildings. Every real estate portfolio will take a slightly different route to cut emissions and build resilience, but the steps to decarbonize, as set out in WEF-JLL Green Building Principles, are clear.

By implementing the right measures in the right way at the right time, owners can minimize the impact of physical and transition risks on their buildings – most specifically on their value and the income they generate – while corporates can reduce the disruption to their spaces and business operations. Both can unlock opportunities by developing sustainable and inclusive spaces that are ready for what lies ahead.