Why sustainable buildings make sense for people, planet and business

With greenhouse gas emissions at an all-time high, JLL’s CEO, Christian Ulbrich, explains why organizations must focus on implementing solutions that will transition their real estate portfolios to net zero now and why inaction on creating sustainable buildings today will lead to higher costs tomorrow for building owners.

January 17, 2023

Given the current economic and geopolitical outlook, it’s understandable that many businesses are focusing on short-term cost control and business resilience.

However, they must not walk back from sustainability when it comes to real estate, where green-house gas emissions are at an all-time high. For all the companies that have made commitments, it’s now time to draw up a comprehensive roadmap to get real estate portfolios to net zero and start implementing it as soon as possible.

It's not just about limiting environmental damage caused by carbon emissions. Inaction today will result in much higher costs in the future.

For occupiers, the global energy crisis has already led to soaring costs to keep the power on in energy inefficient buildings. Amid the ongoing uncertainty, no one knows when or if prices will return to previous levels. Cutting energy use must be a priority from both a sustainability and a cost viewpoint.

That’s just the first step. We’re now seeing forward-thinking companies move to renewable sources, whether investing in installing onsite solar panels to turn a variable cost into a fixed one - typically at a lower price or procuring renewable energy offsite.

The new financial risks

For building owners, the stakes are getting higher for assets that fall behind the sustainability curve. Risks of not acting range from “brown discounts” – where a building without green credentials sees its value fall because it wouldn’t meet a tenant's low-carbon targets – to more expensive financing for companies without robust decarbonization plans.

It’s early days on this front, but anecdotal evidence is mounting in multiple markets and the numbers will soon follow suit. Amid growing pressure from shareholders, employees and wider society, companies increasingly want to occupy buildings that reflect their sustainability goals.

The problem is that supply isn’t keeping up with demand. London, for example, is facing a significant shortage of spaces with low-carbon footprints by 2025 because of the number of companies with net-zero commitments is higher than the pipeline for green buildings, either new or those being retrofitted to meet new standards.

For forward-thinking owners and investors, there’s still an opportunity for green premiums, where buildings with high-level green certifications command rents between 9% and 28% higher. But such standards won’t soon be a matter of choice with ever-tightening regulations on the horizon and an industry shifting to think planet first.

With buildings accounting for more than 60% of carbon emissions in cities, it’s become a focus area for metropolitan governments.

Right now, most efforts are targeting new buildings, where it’s relatively easier to enact rules around energy and emissions, and issue fines to building owners whose properties don’t comply. But a pivot to existing buildings is coming. Already major global hubs like New York City, Tokyo and Berlin are setting limits on green-house gas emissions for buildings that already exist. It’s only a matter of time before more cities follow.

Retrofitting in the spotlight

When it comes to boosting the supply of net zero buildings and accelerating the decarbonization of real estate, retrofitting – investing in older buildings to meet both regulations and market expectations – offers the most potential. With 80% of office buildings in mature cities still set to be in use in 2050, the focus must be on addressing existing stock.

This means we need to retrofit between 3% to 3.5% of existing buildings per year if the net zero target is to be met, according to JLL’s Retrofitting Buildings to be Future-Fit report. But current retrofit rates are only around 1%, meaning that rate needs to at least triple.

The question is, what’s holding companies back? In terms of brown discounts, it’s partly because it’s an emerging trend. Investors want to be able to quantify the spread between the upside of acting and the downside of not acting to aid decision-making – and that’s the difficult part.

Even though we have most of the technology we need to decarbonize buildings, it still takes investment, time and expertise to carry out the necessary work. On average, it costs 10%-20% of AUM at a portfolio level to decarbonize, but it ranges widely at an asset level, partly because investments also have an upside and distilling green additional costs is hard to do.

Many companies are also unsure about how to turn commitments into action. It’s why we developed the Green Building Principles in conjunction with WEF to help companies design and implement plans to decarbonize their portfolios.

Overall, a gloomy economic outlook, rising materials costs, supply chain issues, and uncertainty around locking in contractors are playing their part.

Still, we can’t afford to wait. Cooperation between owners, tenants and governments will be key to success. Landlords and tenants must collaborate to identify joint opportunities, share metrics and equally distribute the costs and benefits.

As the risks of inaction continue to rise, companies without a plan stand to lose out in the longer-term, whether through financial loss or reputational damage. As the evidence in the market increasingly supports this, the business case for starting to transition buildings to net zero now has never been stronger.