A perennial question for real estate investors is whether the cost of the sustainability measures they take in their portfolio leads to increased rents and therefore values.
However, the industry is increasingly leaning towards the view that the search for a ‘green premium’ is a simplistic way to look at sustainability in real estate. Increasingly, good sustainability practice is indivisible from best practice in other areas. No real estate investor would disagree that the best buildings achieve the best rents, however it is much harder to say how much of this performance is due to sustainability initiatives.
A meta-analysis of 42 studies on the value of sustainability initiatives was conducted by Ben Dalton and Franz Fuerst for the Routledge Handbook of Sustainable Real Estate, 2018. It showed a 6% rental premium and a 7% sales premium for buildings with a green certification. However, there are few – if any – prime buildings being developed today without some sort of green certification.
Matt Oakley, head of commercial research at Savills, says: “The reality is that we probably need to stop asking about a ‘green premium’, at least if we’re going to frame the question in narrow terms centred around rents. Instead, investors should be having a far more nuanced and wider conversation about the advantages energy-efficient buildings deliver and engage in better dialogue with occupiers about how these benefit both parties.”
Furthermore, many developers are now going beyond green certification and also looking at health and wellness. They are also taking into consideration the value of resilience to climate change and future extreme weather events.
The coming years will show that while a green premium is a temporary add-on, a brown discount will have a much more material impact on the financial performance of a building. A 2020 report from the Urban Land Institute and Heitman found investors now commonly view local climate risks, such as wildfires, increasingly frequent and intense storms and sea-level rise, as core factors in investment decision-making.
JLL’s Return on Sustainability report also notes that investors are starting to consider both the operational and embedded carbon in buildings, something which is not always a consideration in building certification. JLL research suggests there is no observable correlation between LEED certification and carbon emissions.
Overall, JLL suggests, there may be a shift from a “green premium” to a “brown discount”, where buildings which do not meet the requirements of tenants, investors and regulations could become stranded assets.
Christian Ulbrich, global CEO at JLL, says: “The coming years will show that while a green premium is a temporary add-on, a brown discount will have a much more material impact on the financial performance of a building.”
Although climate change has been a concern for many decades, recent events are escalating the need for us to focus more on creating resilient cities which deliver a greater urban contribution to the environment as a whole.
The desire to use more sustainable building materials and the advancement of technology to monitor how much energy we use has allowed us to better address our new agenda for more sustainable architecture.
However, there is still work to be done to future-proof our building designs so they can adapt and evolve into a variety of uses over time. The longer a building remains in use, the more sustainable it is. The more flexible spaces are and the greater mix of uses they offer will make these developments more sustainable.
As we emerge from the pandemic, there has been much discussion around how cities will adapt to shape the new workplace environment. Are we going to be working more from home, will we go back in the office, or will there be a ‘third place’? Retail assets can evolve and facilitate new typologies of working platforms. The coffee shop workspace, for example, has already started to become the third place for many small businesses.
The challenge going forward is ensuring our buildings are resilient enough to accommodate changes in how we wish to use them. Those designed to be flexible are in the best position. Like people, our buildings are evolving but social customs are changing faster than developments are being built. On completion, most buildings cannot harness the best technology of the day, because that technology did not exist when they were being designed.
The only solution to this problem is to future-proof the building with the most flexible layouts. This allows it to accommodate multiple uses over its lifespan, in turn increasing the lifespan of the built form.
It is encouraging to see these ideas explored by the real estate industry and the collaboration of developers, city governments and designers. Our transformation of a 100-year-old Capital Steel Factory in Beijing, which preserves the site’s industrial remains as part of a future gateway to the Winter Olympics, is just one example. This 3-Star Green Building initiative is creating a new ecosystem that aims to preserve heritage and reduce carbon wastage.
The notion of architectural adaption is an important process that encourages buildings to be designed to adapt to their habitat. This trait is important for the survival and longevity of the built form, an essential sustainable criterion for our cities of tomorrow.
David Buffonge is co-founder & executive director at architect Lead8
