How are green leases supporting real estate’s decarbonization drive?
More companies are now looking to take tangible steps towards cutting carbon
Green leases are once again growing in popularity as landlords and tenants increasingly work together to support real estate’s path to net zero.
As sustainability becomes a corporate priority, more occupiers are now signing leases that factor in sourcing energy from renewables, reducing carbon emissions from building operations and decreasing waste and water use.
Globally, some 34 percent of occupiers already have green lease clauses, while a further 40 percent plan to sign them by 2025, according to JLL’s Decarbonizing the Built Environment report.
Investors, too, are taking action, with 42 percent now having green lease clauses in place and an additional 37 percent looking to adopt them by 2025.
“Green leases can be a great mechanism in bringing transparency and alignment between landlords and occupiers - and making buildings as sustainable as possible in the process,” says Richa Walia, EMEA corporate research and strategy director at JLL.
Committing to greener buildings
In Hungary, property manager Multi Corporation is putting green leases in place with tenants at the Allee mall in Budapest. In London, the Canary Wharf Group this year agreed a green lease with JLL at its Wood Wharf asset.
For tenants, there’s the prospect of cost savings through better energy efficiency across building management, services and utilities, which also supports their own sustainability targets. The Institute for Market Transformation (IMT) in the U.S. estimates that green leases can help reduce utility bills by up to 22 percent, or around 50 cents per square foot in U.S. office buildings alone.
If all leased office buildings had green leases, the market could reap over US$3 billion in annual cost savings, the IMT estimates.
“More clients are now aware that green leases can unlock both short- and long-term benefits,” says Quentin Drewell, sustainability director in JLL’s Upstream Sustainability Services. “In the past green leases were about balancing the financial incentives for sustainability improvements between the building owner and the tenant.
“While this is still important, conversations are now turning to mutual value creation.”
Last year, retailer Pulbrook & Gould signed a green lease with landlord Grosvenor which includes a forum to share experiences and accelerate innovation alongside measures such as collecting energy consumption data.
The areas covered by green leases are also evolving. “Five to 10 years ago, green leases were more around energy efficiency and waste reduction, which today are standard practice, while other dimensions such as health and wellbeing and biodiversity are now leading practice,” says Walia, pointing to recent experience with retail tenants and their landlords.
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Avoiding the ‘brown discount’
For landlords, there’s emerging evidence in some countries such as Germany of a brown discount both in terms of rent and asset value on divestment, while in others such as the UK, highly sustainable buildings command a green premium.
“As corporates increasingly take action based on science-based sustainability targets, those major landlords who can offer green leases are well-positioned,” Drewell says.
Furthermore, being able to offer green leases to tenants seeking multiple locations across the globe may soon distinguish more forward-thinking landlords from their peers.
“While it’s yet to occur, we’re not far away from a point where occupiers with space in several countries require green lease contracts,” says Drewell.
“We’re seeing multinational property owners developing consistent sustainability standards across their global portfolio, and green leases are tool being used to manage performance and adhere to minimum standards.”
Supporting future growth
While green leases are increasing in number, more industry standards that underpin green leases are needed to support further growth, Drewell believes.
“Progress has been made in defining what makes a lease green – and much of that is due to occupiers and landlords increasingly working in tandem,” he says, pointing to the fact that 78 percent of investors and 85 percent of occupiers agree that a strong partnership between cities, investors and occupiers is instrumental in driving decarbonization.
Some countries are ahead of the curve. In France, green lease clauses are mandatory for all large commercial leases. All parties are required to share data, regularly review a property’s environmental performance and commit to a program of improvements. Germany’s central real estate body, ZIA, set out its guiding principles for green leases in 2018.
In the U.S., offices, industrial buildings and data centers are increasingly turning to green leases. The country’s Green Lease Leaders recognizes the likes of AEW Capital Management, GITS Partners, Prologis and Tishman Speyer.
The challenge is now converting growing interest into tangible action among both landlords and tenants.
“Closer collaboration and partnerships will be key to meet net zero carbon targets within real estate,” says Walia. “Green leases have a way to go to become mainstream in the market but as more companies roll out their sustainability plans, we’ll see broader adoption.”