For decades before environmental performance made it to boardroom and underwriting conversations, many commercial real estate owners treated sustainability as an unnecessary cost.
Greener buildings were considered expensive “cosmetic” upgrades.
But the continuously rising demand for sustainable CRE is changing that mindset.
That, and the fact that owners can no longer ignore the operating costs and climate risks tied to inefficient or vulnerable buildings, is forcing them to look at sustainability as part of asset protection.
The primary motivations differ by market; European and APAC investors seem more focused on decarbonization and physical climate risk, while US investors seem more split on ESG because of political and legal scrutiny.
Even so, there’s no denying that sustainability now affects how exposed a building is to future losses. Lower energy use and better resilience against extreme weather ultimately attract stronger tenants and improve a property’s overall performance.
Why is demand for sustainable commercial buildings rising?
Regulations are forcing CRE owners to act
The demand for sustainable CRE is rising partly because, while federal policy is still uneven, local and state rules keep raising the bar.
- New York City’s Local Law 97 now sets emissions limits for most buildings over 25,000 square feet.
- Colorado’s Regulation 28 also requires many large commercial buildings (including multifamily) to report annual energy use to the Colorado Energy Office and reduce building-level emissions or energy intensity over time
If you own CRE or are planning to invest in commercial properties in these markets and other markets with similar rules, you need to understand how your building consumes energy and where its emissions come from.
And if your building misses energy or emissions targets, you may end up having to pay penalties and spend money on retrofits.
Green certifications give you something concrete to check when a building claims to be sustainable.
Instead of relying on vague language, you can look for a recognized standard such as LEED or BREEAM and see whether the asset meets defined performance criteria.
This, of course, doesn’t replace due diligence, but it gives you a clearer starting point when comparing buildings for acquisition.
Related blog: Key Drivers Affecting the Current Commercial Real Estate Market
Climate risk has become a financial risk
There’s no question that more severe weather is pushing sustainability higher on the CRE agenda.
Many existing properties were not built for that risk, let alone the conditions owners may face during the next holding period.
So, if you’re in the market, check how the property’s main climate exposure could affect the building.
For example, if the asset is in a flood-prone market, model what repeated water intrusion could do to your repair costs and insurance premiums.
Note that some assets may become harder to insure on workable terms, which can weaken your refinancing options and/or scare off buyers later. Account for that risk.
Tenants want better-performing buildings
Large occupiers (especially corporates with ESG mandates) increasingly want buildings that use less energy and draw power from cleaner sources.
This demand started strongly in office markets, but even industrial and retail tenants now have to report their emissions.
Logistics tenants may care about energy data across warehouses, for example, because those buildings affect their own reporting.
If you’re a landlord, you now need to treat sustainability as part of your leasing strategy.
Does your property have weak energy data or outdated systems? You might find it harder to win tenants with reporting requirements.
Expect them to ask for proof before they sign:
- Can you provide utility data?
- Can you show how the building uses energy?
- Can the property handle future electrification without major disruption?
Tenants may choose a competing building if you can’t provide defensible, audit-ready answers.
What should you do before investing in sustainable CRE?
Price power constraints into the deal.
If you’re planning to buy a building, be sure to check when it draws the most power and how much those spikes add to the utility bill.
Are peak charges cutting into NOI?
Simulate whether better building controls can reduce usage during the most expensive hours.
Before you commit capital to onsite energy upgrades, check whether the applicable tax credits will truly lower your project’s cost enough to make the payback work.
Note that grid capacity can now limit a CRE asset’s potential.
You may want to electrify heating or bring in a higher-power tenant, but the local grid may not have enough available capacity.
The building’s own electrical system may also need expensive work before it can handle the added load.
All these power constraints should be priced into underwriting.
Before you buy or retrofit, check how much power the asset can actually draw and what it would cost to increase that capacity.
Are you interested in data centers?
AI-related facilities use huge amounts of electricity and water, so communities may push back on projects that might strain local infrastructure.
You need to show how the project will manage resource use and why the local grid can handle it.
Make sure that the utility data is reliable.
Check whether you can access whole-building utility data, especially if tenants pay their own bills or the lease structure limits the control you will have as a landlord.
Is the data incomplete?
If not, can you fix it by adding lease terms that require tenants to share utility-use data with you, or by submetering?
Make sure that there is a way to track energy use by tenant space or building area.
Are you comparing properties?
Be sure to use the same reporting boundary for every asset you are interested in (such as whole-building utility use rather than landlord-controlled areas only).
If one building has actual utility bills and another only has estimated energy use, do not rank them in the same comparison table without making a note.
The building with estimates may look better or worse simply because the data is incomplete.
Fund your next sustainable CRE investment
Private Capital Investors can help fund energy upgrades or the purchase of a better-performing commercial property with direct lending built around your project.
As experienced commercial real estate lenders, we provide rapid capital for acquisitions and construction.
Our streamlined underwriting helps you close faster, while flexible terms let you match the loan to your timeline and business plan.
