The Sustainability Imperative: The Future of Real Estate Investment

Real estate is undergoing a global paradigm shift

To reduce emissions and limit temperature rises, business models and economies will need to adapt. Although real estate is just one facet of the complex sustainability challenge that the world faces, it is a critical one: nearly 40% of global carbon dioxide emissions come from the real estate sector. The footprint of commercial buildings has never been under more scrutiny. As businesses feel the pressure to reduce their environmental impact, ‘greening’ their real estate is one of the first levers that they reach for. And as many organizations reduce their office space, sustainability becomes a critical factor in the buildings they choose – and those they lose.

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Commercial Real Estate is changing forever. What is the impact of the green premium?

PERE keynote interview

BCLP’s Andrew Auerbach (Head of US Real Estate) and Kieran Saunders (European Head of Corporate Real Estate & Funds) discuss the sustainability imperative within real estate with leading publication PERE. Andrew and Kieran explore the factors driving sustainable building investment, both in Europe and the US, covering issues such as retrofitting, environmental standards and cost.

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The key stories that emerged from our research are:

The sustainable real estate investment imperative

Our research shows that almost all corporate tenants are considering sustainability factors when making property rental decisions, and investors recognize the impact of the ‘green premium.’ But as sustainability standards rise, this green premium could give way to a ‘brown discount.’ On average, investors believe that 11% of their firm’s current real estate investment portfolio is at risk of being unsaleable due to failure to meet certain sustainability criteria. This amounts to an average of $442 million of investments at risk per firm.

From green intention to action

Both corporate occupiers and investors are aware of the sustainable real estate imperative, but closing the gap between intention and action is challenging – and expensive. Our research sheds light on an increasing dislocation in the market: 79% of corporate occupiers say that by 2030 the sustainability of a building will be the most important factor in the rental decision-making process for their organization, but investors believe that on average, over half of their property portfolio (55%) will still be made up of real estate assets that have unknown, poor or average sustainability performance by this date.

Scaling up sustainable real estate investment

The research identifies three key barriers to sustainable real estate investment: a lack of consensus (including definitions, certifications and data); the need for cultural change and organizational transformation; and the difficulty in bringing older buildings up to modern sustainability standards. We also explore some critical drivers to increasing investment, including greater standardization, government incentives and proptech.

Three dimensions of sustainable real estate investment

As part of our research, we identified three key dimensions of sustainability-focused real estate investment: firms’ strategy, appetite, and level of investment in green real estate. We then scored our investor respondents on each dimension, enabling us to map areas of strength and weakness on a global and market level.