Green Leases in Commercial Real Estate | Are you signing on the GREEN dotted line?

‘Up to 42% of organisations surveyed by JLL have already signed a green lease, with another 43% planning to do so by 2025.’ (JLL)

As we live through the cost-of-living crisis and battle to pay our utility bills at home, our energy consumption and therefore our environmental footprint has never been more prevalent. It’s on the news, in the papers, on social media – and climate change is all around us.

With the increased awareness and need to meet ESG targets within Commercial Real Estate, implementing a green lease is one way where Landlords and Tenants can work together to reduce the environmental impact of a real estate asset. Adding provisions into a lease to align both parties can have a significant impact on how sustainable a building is operated.

Which begs the question, are you signing on the Green dotted line? 

/ Green Leases and Commercial Real Estate.

According to a JLL report on green leasing in the context of commercial office spaces, the built environment accounts for nearly 40% of global carbon emissions. So, it makes sense that environmental initiatives are becoming a necessary component in lease agreements, setting out clear objectives on how a building is to be managed, sustainably occupied, and even improved over time.

These agreements, increasingly known as ‘green leases’, feature clauses that generate efficiencies and support sustainability goals through data sharing, transparency, energy efficiency, and waste management.Ultimately with net-zero goals fast approaching, it’s becoming a global expectation that ESG (environmental, social and governance) becomes embedded in real estate. 

And this expectation goes beyond just new build developments too. In some cases, asset owners and landlords are able to gain greater access to investment for retrofitting existing buildings to enhance their ESG performance. The likes of SFDR Article 8 and 9 are changing the narrative on green investment too, so if a landlord can prove their assets will have strong ESG alignment; access to green capital increases.

/ Green Leases and Higher Rental Premiums.

ESG and green leases don’t just stop at investment and policy either. There is proven global research that buildings with ESG at the helm can command higher rents from tenants, and even see their asset value increase.

‘Highly efficient, green-certified buildings can command a green rental premium of anything up to over 20% over less-sustainable buildings in high-cost markets such as Hong Kong. Conversely, assets with lower energy efficiency, and without green provisions in place, may risk incurring a “brown discount” on their valuation.’ (JLL)

/ But let’s NOT forget about the S in ESG.

With the environmental aspect of ESG being the main topic of discussion when it comes to PR and global climate discussions, the S in ESG – Social is just as important to Commercial Real Estate.

Social is all about social initiatives made to better the health and wellbeing of communities. It could be health and safety standards in the workplace or care home, safe work conditions, diversity and inclusion, all the way to human rights. It could even be encouraging commercial offices or retail spaces to have clear and safe paths to public transport for residents.

JLL’s research showed that sustainability leads the world over are also prioritising social values: ‘Up to 87% of sustainability leaders have already implemented criteria in their leases to ensure regular engagement with local communities compared to 43% across all organisations, according to JLL’s social value report.’

So, I’ll ask the same question again, are you signing on the Green dotted line?

With Utopi, our specialist ESG technology platform makes it simple, easy and cost-effective to report on real-world ESG performance across your entire portfolio, all the way down to each individual space. Meaning all those granular ESG areas like waste management that could lead to higher rents and an increase in asset value, increased access to green capital; are quick to report on, and better yet, quick to act on.

For more information on Utopi get in touch - we’re experts in the Commercial Real Estate market.

Author: Tom Cartlidge, Commercial Real Estate Lead at Utopi