The ‘Green Lease’ Is The Next Phase Of Built Environment Sustainability

Real Estate

The role of the built environment in addressing climate change is clear as buildings account for almost 40% of global carbon emissions according to the World Green Building Council. There has never been a greater commitment to reducing carbon emissions, with over 4,400 corporations and 220 investors signing up for the United Nation’s Race to Zero campaign, which aims to cut emissions by 50% before 2030.

This commitment isn’t just good for the planet—it also comes with considerable financial benefits. Numerous studies over the past three decades have proven the value of green building certifications, with a rental premium of 6% and sales premium of 7.6% across commercial and residential properties.

But there is a new value driver to consider: healthy buildings. From early offerings of fitness classes and healthy food options, health and wellbeing considerations have matured into technical building components like indoor air quality, temperature and humidity. These improvements come with their own financial upsides. MIT’s Real Estate Innovation Lab found healthy certified buildings pull in effective rents that are 4.4% to 7.7% more per square foot than non-certified and non-registered peer buildings.

What’s good for the planet and what’s good for people are undoubtedly aligned. Transitioning to a low-carbon economy and lowering greenhouse gas emissions globally will save lives, reduce chronic disease and improve the health of people in many communities. But at the building level, healthy initiatives sometimes come at the expense of environmental efforts. 

For example, in the U.S., the recommended ventilation rate for commercial buildings is approximately 20 cubic feet per minute, but Harvard research into healthy buildings shows doubling the rate to 40 cubic feet per minute can improve the cognitive performance of the building’s occupants. Improved ventilation, however, means a higher energy expenditure, with an environmental and real-world cost that must be incurred by buildings owners.

Bridging this divide will be essential to creating the next generation of best-in-class buildings, the kind that are sought out by environmental and socially conscious corporate tenants. New certifications are cropping up to better define sustainability in measurable numbers and to incorporate healthy strategies into environmental goals.

The conversation around health and sustainability is maturing and building owners and investors need to be at the vanguard.

Certifications evolve to reflect new priorities

Established in the 1990s, the LEED certification by the U.S. Green Building Council is the most common method for rating buildings in the U.S. today. But LEED certified properties—which are awarded points for addressing carbon, energy, water, waste and transportation among others—don’t always correlate to lower greenhouse gas emissions. One of the reasons for this disconnect is the focus on green construction and not necessarily sustainable operations.

New green certifications take a closer look at total carbon footprint across operations and embedded carbon. While still in their infancy, standards like the Canada Green Building Council v1 Zero Carbon Building Standard, LEED Zero Carbon, NABERS Climate Active Carbon and BREEAM Built for Performance are gaining traction as sustainability efforts grow more mainstream.

Healthy building certifications like WELL and Fitwel are explicit in what is needed to create a healthy indoor environment: ventilation, air quality, thermal health, an absence of dust and pests, water quality, noise reduction, lighting and views. Harvard’s T.H. Cahn School of Public Health lays out these nine foundational pillars and actionable steps to improve them, bringing the best of academic research on public health into the realm of the built environment.

While historically there has been little crossover in the priorities of sustainable and healthy buildings, a reset is underway. Building tenants desire spaces that optimize health, well-being and human performance—and that are good for the planet. In short, people expect more and in greater numbers. According to JLL research, 79% of surveyed corporate tenants say carbon emissions reduction will be part of their corporate sustainability strategy by 2025, and 42% of corporate occupiers believe their employees will increasingly demand green and healthy spaces.

These new determinants of real estate value will trickle down to impact due diligence, buyer pool, liquidity, ability to insure and access to capital.

The path forward: Adopting new standards, embracing technology, and matching investor and occupancy priorities

Investors and property owners have difficult decisions ahead as they begin to prioritize property improvements and marry the initiatives that contribute to both sustainability and health goals. Embracing new tools like Europe’s Carbon Risk Real Estate Monitor (CCREM) or working with experts like third-party climate risk data firms will be essential to understand the impacts of decisions to upgrade systems or fit out tenant spaces.

A new generation of property technology can also help assure sustainable and healthy improvements are meeting their mark. Data that can help investors and corporate tenants record and report accurate, quantifiable results of environmental and wellness initiatives will stand apart. To do so requires adoption of real-time sensor technology to monitor CO2 particles, temperature, comfort and overall employee engagement.

While seemingly a win-win for owners and tenants, the benefits of sustainable building and wellness solutions vary for each party, clouding motivations and affecting investment decisions. For example, in a gross lease, where the landlord covers the utilities and charges an all-in rent, tenants may not be motivated to alter their behaviors to use less water and energy or produce less waste. By contrast, in a triple net lease, where tenants cover their utility bills, landlords may not want to pay the capital expenditures necessary to lower operating costs.

This sort of challenge can be overcome with tools such as a green lease, which aligns the interests of building owners and tenants through clauses that include cost recovery, submetering, data sharing, and minimum efficiency standards. Through these negotiations, landlords and occupiers can overcome the split incentive roadblocks.

Fortunately, there is a lot of common ground for all parties, with investors and occupiers prioritizing operational efficiency and lowered costs as part of their environmental goals. All sides are increasingly making bold climate commitments and will look to their real estate to be a part of meeting those commitments, increasing their motivation to win-win agreements.

For all that touch real estate, there is a learning curve on this journey. The process is equally iterative, complex and critical. But one thing is clear, starting early will have advantages, and the demand for green, low-carbon and healthy space is only going to rise.

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