Environmental sustainability is top of mind in commercial real estate today. But what is sustainability exactly?
Sustainability is a movement focused on manifesting benefits for the 3Ps of “People, Planet, and Profit.” In other words, supporting human health and well-being, protecting the natural environment, and promoting economic growth.
This concept has become valuable in our society due to the environmental protection it imparts and the economic, social, and health benefits it bestows on our stakeholders — particularly investors and tenants.
Let’s see what impact sustainability has on the commercial real estate industry and how it can help improve efficiency, demand, and valuations for our properties and operations.
1. Investor and community expectations
The rising awareness of ESG (Environmental, Social, and Governance) principles in the industry and media — and the adoption of ESG as the standard by which the conscientiousness of businesses is measured today — puts new pressure on CRE operators.
Now, we need to evaluate how the way we’re doing business aligns with the expectations of our investors and the public. Market-beating returns (alpha) are no longer the primary measure of an investment opportunity. Investors want to know how our products (properties) help the communities in which we operate, how they impact the environment, and the level of transparency we represent.
So, aside from the practical benefits of operating sustainably, which we’ll look at next, we need to embrace sustainable practices to ensure we can compete in attracting capital and tenants.
2. Sustainable practices and operational efficiency
What do sustainable operations look like?
Common practices and considerations associated with sustainability in commercial real estate include construction waste management, water and energy efficiency, indoor air and environmental quality (for health), building for durability, and local materials sourcing (reducing transportation emissions).
For operators, the key concerns in terms of the bottom line are those that save us money on operating and maintenance costs. Today’s prevalence of sustainable materials, building technologies, fixtures, and equipment make it a relatively cost-effective measure to implement.
Twenty years ago, it was a different story, but today the competition in the sustainable technologies and materials industry has reduced its products’ relative production costs and prices (current material shortages notwithstanding) — solar panels are an example of this trend. The breakeven or payback period when building or renovating sustainably is comparable to doing it traditionally.
Indeed, you can save money on the front end of the development process by reducing construction waste and excess costs. However, the real upside is in the long-term efficiency created by reduced maintenance and energy consumption over the project’s lifecycle.
3. Tech facilitates efficiency and reporting
It’s a beautiful thing when the sustainability measures we pursue enable us to achieve greater efficiency. Yet, without a way to track and report the gains we’re making, the apparent efficiency won’t help us provide proof to investors or other parties to our transactions of our strengthening NOI.
This is where technology can help us build our case by collecting comprehensive, real-time operational and financial data from each of our properties. Data management platforms keep our labor costs low by automating this process and streamlining analysis and reporting — also crucial for operational transparency and ESG alignment.
Tech-enabled building equipment and fixtures, integrated with contemporary building and property management software, allow us to optimally manage and monitor the performance of our assets and get an excellent idea of the extent of the savings that sustainable strategies produce.
4. Enhanced demand and value
The ROI of building and operating sustainably is less apparent in how it supports tenant demand for our properties. In addition to the bolstered value we experience from improved NOI, we can build our valuations through top-of-market rents and optimal occupancy supported by operational efficiency.
Further, building and operating ‘green’ is a deal-breaking value for a tenant base that is becoming more focused on environmental values and economic advantages. With the many options that tenants have in the marketplace, we can carve out a competitive advantage by offering structures and spaces that promise lower operating costs for tenants and safe and healthy environments in which to work and live.
The challenging economic environment created by the ongoing health crisis and market volatility makes it even more crucial to engineer our properties and enterprises to embody these values and deliver efficiency from the outset.
Fortunately, sustainably designed and built properties attract high-quality tenants willing to pay more. The consequences are higher lease rates, lower vacancy, and less marketing expense to create awareness with tenants. Popular with the local media, projects that achieve a green rating certification also get extra attention in the regional marketplace.
Aligning with community values
Embracing sustainability in your operations adds up to optimal NOI, valuations, and enterprise value. It also gives us the edge in appealing to investors and the community by aligning with their values and the growing preference for properties and ventures that embody sustainable principles.
While passing on savings and value to our tenants, we’re also building consumer-centric brands that project our values and priorities to the marketplace and the industry. And though we may be able to push forward without adopting sustainable practices, we’ll soon pass — or have already passed — the point at which we won’t sustain growth by sticking to the status quo.