Value creation through energy-smart, low-carbon buildings

Obsolescence risk has accelerated across real estate markets over the past five years, driven by insufficient capital investment in aging building stock and rapidly evolving occupier demand. Our research reveals a convergence of market fundamentals that is making the business case for low-carbon, energy-smart strategies stronger than ever for value creation.

• The gap between existing stock and what occupiers and investors view as desirable is widening. As building inventory ages across most sectors and new construction pipelines tighten, retrofitting is emerging as a critical lever for owners to preserve and enhance value. Yet, for the CRE industry to meet climate targets and tenant demand, retrofit rates must accelerate more than fivefold.

• Buildings can help solve the energy problem. Electricity costs are proportionate to 4%-26% of rental value, making efficiency improvements essential for building competitiveness. But buildings can do more than just consume energy—they can generate, store and actively manage power. This shift from consuming energy to actively managing and generating it can unlock additional revenue increases of 25%-50%.

• Our analysis across 30 markets shows that 1.5 billion square feet (~140 million square meters)—or 70% of potentially obsolete stock—sits in markets with strong sustainability value-add potential, representing a massive addressable market for investors ready to capitalize on this opportunity.

Five structural drivers are aligning to catalyze this shift. Investment momentum, low-carbon lease demand, energy market dynamics, physical risk adaptation and regulation are converging to make sustainability central to value-add strategies.

Commercial real estate markets globally are facing accelerating obsolescence risk as aging building stock increasingly fails to meet evolving demand standards. Evidence shows a widening value gap between high-performing assets and those falling behind market expectations.

Tenants are seeking well-located, efficient space that supports productivity, wellbeing and corporate objectives. Investors are sharpening their focus on future-proofed assets that can deliver resilience against evolving tenant demand as well as regulatory and financial pressures. In addition, energy and insurance costs are becoming more and more volatile. Together, these influences are reshaping the definition of quality in commercial real estate.

Sustainability is a key contributor to this shift. With the net-zero and energy transition well underway, buildings are not only critical targets for decarbonization but also have the potential to act as active energy resources within the broader transition. Energy-efficient, electrified buildings powered by clean and reliable energy are increasingly viewed as sources of competitive advantage—offering improved operating performance, reduced exposure to energy market volatility and stronger tenant and investor appeal.

Sustainability presents a viable opportunity to enhance and protect asset value for many older buildings. Yet the scale and nature of this opportunity varies significantly across markets and sectors. To capture these nuances, JLL’s Sustainability Value-Add Barometer is designed to provide a comprehensive view of where and why sustainability is best positioned to form an integral part of successful value-add strategies. At its core, the barometer affirms that, while obsolescence poses a significant risk, it also creates one of the largest opportunities in our industry: transforming outdated stock into high-performing, energy-smart buildings.

The barometer evaluates five critical market drivers: Investment momentum anchors the analysis in broader CRE fundamentals, ensuring that sustainability strategies are grounded in markets with robust activity to support value creation. On this foundation, the remaining four drivers—low-carbon lease demand, energy market dynamics, physical risk adaptation and tightening regulation—explain how and why that momentum is being redirected toward strategies that incorporate sustainability. Together, they illuminate both the scale of the opportunity and the specific mechanisms shaping it.

Each market reflects a unique combination of these drivers. By integrating these dimensions, the barometer provides not just a ranking of markets but a framework to understand where sustainability is most critical to value-add strategies, and why.

Spotlight on leading markets

The top three markets in the barometer—London, Paris and New York—illustrate how different regional dynamics shape the path to sustainable value creation. European markets demonstrate more uniform, policy-driven sustainability adoption with progressive and consistent frameworks supported by mature delivery models. London leads globally, though grid decarbonization remains a longer-term opportunity requiring a mixture of strategies to maximize value creation. Paris ranks second, positioned as prime for electrification strategies given its exceptionally clean electricity grid and strong regulatory support.

Generally, North American markets show wider regulatory variation at the local level, with adoption driven primarily by economic opportunity rather than policy mandates. Success requires proving profitability to spur widespread market adoption—and nowhere is better positioned to demonstrate this than New York, which ranks third globally.

A view on the New York market: Low-carbon features are now integral to the highest-quality buildings

The New York market exemplifies how sustainability has evolved from a nice-to-have feature to a market necessity, with low-carbon characteristics now integral to the highest-quality buildings. This economic validation in America's most competitive office market provides the proof of concept needed to accelerate sustainability adoption across other markets, where business case demonstration drives investment decision-making more than regulatory compliance, and where first-mover advantages still present an outsized opportunity to create value.

The five drivers composing our Sustainability Value-Add Barometer provide a holistic framework for understanding both the scale of the opportunity and the levers that will define competitiveness in the decade ahead.

Investment momentum as a core driver

Investment momentum serves as a critical foundation for sustainability value-add strategies, reflecting the underlying market health necessary for successful asset transformation. Across the 30 markets studied, 69% of CRE investment activity is already occurring in locations with high sustainability value-add potential, demonstrating that capital is actively flowing into these markets. The prevalence of aging building stock and obsolescence risk makes sustainability integration crucial for redirecting this capital effectively.

In established CRE markets today, high construction costs and built-out urban environments mean that investment activity increasingly depends on existing stock rather than new development. Across major markets, 84% of office and 73% of industrial & logistics stock is over a decade old¹, creating acute obsolescence risk from aging inventory alone. Moreover, markets with high sustainability value-add scores account for 1.5 billion square feet (~140 million square meters), or 70%, of potentially obsolete stock, making sustainability a critical lever for value creation.

While investment momentum provides the capital foundation, sustainability offers the strategic framework to transform aging assets into competitive, future-ready buildings. Retrofitting presents the most effective path forward—but the imperative to act has never been stronger. The costs of inaction are increasingly higher than the costs of intervention. Volatile energy markets, tightening regulations and tenant demand for low-carbon space are converging to make non-retrofitted assets both more expensive to operate and less attractive to occupiers and investors.

However, the scale of action must accelerate. Retrofitting rates must increase more than fivefold globally, from 2.4% today to 13.2% annually for the sector to align with net-zero goals by 2050. The urgency is particularly acute in markets such as New York, Chicago and Berlin, where large, aging inventories and low baseline efficiency amplify both the risks of delay and the value at stake.

Low-carbon lease demand as a core driver

Tenant demand is one of the strongest influences shaping real estate value and, today, occupiers are increasingly seeking space that aligns with their corporate targets to reduce emissions. In fact, 75% of future office and 65% of future industrial & logistics space requirements from top occupiers will be tied to corporate carbon reduction targets. Tenants are looking to optimize operations with smaller, more efficient footprints and lower energy spend—and they are willing to pay a premium for buildings that deliver long-term performance. In this environment, sustainability is no longer an add-on but a core component of how tenants perceive and value premium space, with energy efficiency and carbon performance becoming essential selection criteria alongside traditional amenities.

For landlords, this represents both a challenge and an opportunity. Buildings that cannot meet this growing demand segment risk stranding, while those that can demonstrate sustainability credentials will command stronger demand and pricing power.

Examples from leading markets illustrate how these dynamics are playing out:

• New York: Deloitte has committed to nearly 800,000 square feet (~75,000 square meters) at Hudson Yards, relocating from iconic 30 Rockefeller Plaza to a tower designed to be one of the city’s first all-electric, zero-carbon-emissions skyscrapers. The move reflects Deloitte’s prioritization of sustainable workspaces and employee wellbeing—values also evident in its earlier London relocation to 1 New Street Square, which the company identified as the location most aligned to its corporate sustainability goals.

• London: A leading occupier's headquarters search prioritized sustainability from the outset, ultimately selecting Woolgate, a strategic retrofit that retained 98% of the existing structure, significantly minimizing embodied carbon. The all-electric building targets NABERS 4.5-star and BREEAM Excellent ratings and will be powered by a 100% green Power Purchase Agreement. This decision demonstrates how leading occupiers are embedding sustainability into their space selection criteria and how well-executed retrofits can simultaneously deliver on exceptional customer experience and ambitious sustainability goals.

• Melbourne: Commonwealth Bank has pre-committed to 161,000 square feet (~15,000 square meters) at 435 Bourke Street, a CBUS development that will deliver 635,000 square feet (~59,000 square meters) of fully electrified space with a 5.5-star NABERS pre-certification. The move, aligned with the bank’s 2050 net-zero target, will see it vacate two existing CBD assets that currently have NABERS ratings of 4 and 5.5 stars, but which both still rely on fossil fuels. This decision highlights how leading occupiers are willing to relocate from even relatively efficient buildings if they fall short of long-term sustainability standards.
   

Energy market dynamics as a core driver

Power—particularly access to reliable, affordable and clean power—is becoming a decisive factor in real estate decision-making. Electricity costs are proportionate to 4%-26% of rental value, making efficiency improvements one of the most immediate and measurable ways to improve property operating expenses. The financial impact, however, differs widely by market and asset type and grows sharper in regions exposed to volatile energy prices. This uneven landscape is creating both distinct investment opportunities and urgency to act.

Electricity costs can reach up to 26% of rental value in high-burden markets such as Chicago and Los Angeles, meaning that efficiency improvements in these locations deliver outsized financial benefits. In contrast, markets like Seattle and Miami show lower energy cost burdens, though efficiency improvements still provide value creation opportunities driven by occupier demand, physical resilience and regulatory requirements.

Beyond efficiency improvements, buildings can address increasing energy challenges—from volatile electricity costs and power outages to growing EV charging requirements—by evolving into active energy resources through smart building technologies, on-site generation, and battery storage. This shift from consuming energy to actively managing and generating it can unlock additional revenue increases of 25%-50%.

This market-specific variation underscores why successful sustainability value-add strategies require tailored approaches that account for such nuances. For building owners, understanding these dynamics enables targeted capital deployment where energy solutions can generate the highest returns, turning sustainability into a driver of financial performance.

Physical risk adaptation as a core driver

A changing climate, bringing more frequent and severe weather events, is increasingly impacting real estate stakeholder decisions. For owners, physical hazards raise questions around asset damage, insurance costs and long-term value. For occupiers, they relate to employee safety, operational continuity and access to reliable infrastructure. Our analysis of global markets reveals substantial exposure across the commercial real estate industry: 53% of CRE investment over the last decade—equivalent to $2.4 trillion—has occurred in markets facing acute climate change risks.² These hazards, particularly flood damage and extreme heat events that strain energy systems, present material financial and operational risks to both building owners and users, forcing adaptive responses across the industry.

Regional patterns also stand out. European cities demonstrate a unique risk profile, typically showing lower climate hazard scores compared to global averages yet exhibiting the most proactive adaptation strategies among JLL's clients. This apparent contradiction reflects Europe's accelerated warming trajectory—twice the global average—and recent extreme climate events like the devastating Valencia floods in Spain that make climate impacts tangible for Europeans. Stronger public-private alignment is driving earlier and more coordinated climate adaptation responses in European markets, demonstrating how regional awareness and policy frameworks can push proactive risk management even in relatively lower-risk markets.

Regulation as a core driver

Governments are playing an increasingly active role in steering the real estate sector toward sustainability, using incentives and regulation to promote, mandate and enforce action. Around the world, policymakers are paying greater attention to reducing emissions from the built environment—whether directly through building performance standards or indirectly through corporate disclosure requirements that cascade down to occupiers and their space needs.

Europe remains the most advanced, with sustainability progress largely policy-driven and underpinned by consistent frameworks. But even in less centralized systems, regulation is becoming a powerful catalyst. In the U.S., despite a federal rollback of climate policy under the current administration, state and local governments are moving ahead aggressively. California has taken the lead on climate-related corporate disclosure requirements, and when combined with other states adopting similar rules, these jurisdictions account for 31% of U.S. GDP. While aimed at corporations, such requirements inevitably ripple into the built environment as companies work to align their real estate with corporate requirements.

At the local level, regulation is even more direct. Nearly 15 U.S. jurisdictions now have building performance standards in place, covering about a quarter of the nation’s building stock.³ These laws compel owners to track, report and in most cases reduce energy use and emissions—establishing compliance as a baseline requirement for investment and operations.

These emerging regulatory frameworks effectively create a floor for sustainability requirements while rewarding early movers who exceed minimum compliance thresholds.

While the Sustainability Value-Add Barometer is designed as a market-level assessment, the relative importance of sustainability drivers varies meaningfully across property sectors. Although energy costs and volatility carry significant implications across sectors, energy market dynamics weigh most heavily in energy-intensive sectors such as data centers and advanced manufacturing sites, where efficiency improvements and access to reliable, affordable power more acutely influence competitiveness and operating margins. By contrast, low-carbon lease demand is especially pronounced in the office sector, where a greater concentration of corporate occupiers with net-zero commitments is reshaping leasing decisions and driving a sharper divide between high- and low-performing assets.

These nuances reinforce that while sustainability is a driver of value, the way it translates into opportunity differs by sector. For investors and owners, understanding these differences is critical to tailoring strategies that both respond to occupier priorities and capture sector-specific advantages.

Case study: A sustainability-focused value-add investment strategy in action

A leading global investment manager is launching an innovative net-zero pathway real estate fund, recognizing that whereas some investors already prioritize sustainability, most have not realized the opportunity presented by decarbonization. The fund is targeting to deliver a net IRR of 12%, underlining that sustainability and accretive financial returns go hand-in-hand.

• Arranging partnerships with tenants through aligned economics. While tenants consume the majority of a building’s energy use, the fund pursues energy reductions by creating structured win-win economic solutions that align incentives between landlords and tenants for mutually beneficial economics. The fund will prioritize sustainability-focused counterparties since such tenants will have similar sustainability-performance goals that allow better alignment.

• A tailored approach. Rather than applying a uniform approach across property types, the strategy is tailored to each location, market and property type. Priority is given to properties in regulated markets with rapidly decarbonizing electrical grids, and to properties where energy use intensities can be significantly reduced. Construction methods, building technology specifications, capital structures and CapEx improvement plans are adapted to maximize both financial and impact performance. 

• Managing early-mover risk. Operating without established benchmarks requires careful risk management. The fund intends to mitigate these risks through a three-pronged approach: acquiring properties at lower-cost bases (i.e., applying ‘brown discounts’), implementing CapEx budgets that maintain conservative all-in cost bases with downside protection, and targeting exits to markets that will price sustainability improvements and asset resilience at tighter yields.

By applying a disciplined approach that balances financial returns with sustainability performance, the fund aims to demonstrate to the market that decarbonization can deliver both climate transition benefits and financial outperformance. With valuations on fully decarbonized "dark green" properties still opaque compared to traditional assets, the fund seeks to capitalize on this market inefficiency, turning a market gap into a durable competitive advantage.

As the energy transition accelerates, real estate and energy systems are converging—and buildings are at the center. If we think of buildings as machines, one of their primary functions has always been to convert energy into comfort - using power to heat, cool and light space so that users can work and live productively. But what if buildings could do more?

Advances in technology, shifting tenant expectations and the urgency of energy market dynamics are creating a new vision: buildings that are smarter, more dynamic and capable of contributing actively to the energy transition by both generating as well as consuming power.

To capture this opportunity, sustainability value-add strategies must embrace a broader transformation.

• One size does not fit all. Market conditions and sector-specific dynamics shape both the risks and opportunities for each asset. Strategic transformation requires tailoring solutions to local regulation, grid conditions, occupier demand and property type to maximize impact.

• From passive users to active energy players. Smart building technologies, on-site renewable generation and energy storage systems allow properties to evolve into decentralized, distributed energy hubs. These capabilities not only reduce carbon footprints but also enable buildings to evolve into active energy resources that are embedded within the broader energy ecosystem— allowing them to work collaboratively with utility grids and help manage peak demand hours, driving operational resilience, supporting grid stability and accelerating the transition to a low-carbon economy.

• Unlocking new business models. Beyond lowering costs and improving rental income, owners can leverage sustainability to deliver added solutions like energy-as-a-service (EaaS), EV charging networks, smart analytics and integrated sustainability reporting. These innovations can unlock new revenue streams while strengthening tenant-landlord relationships, positioning buildings as platforms for solutions rather than just places for space.

The opportunity ahead is clear: sustainability is the next frontier of value creation. It is not simply about mitigating risk, but about redefining what buildings can do—and capturing the competitive advantage that comes with it.

¹Across 30 major office markets and 15 major industrial & logistics hubs.
²Across 80 real estate markets globally.
³Institute for Market Transformation (IMT)