Posted on May 20, 2024
The Rising Value of Sustainability in Commercial Real Estate
As we approach the mid-point of 2024, sustainability continues to rank amongst the top trends in commercial real estate. We have seen a distinct shift in demand for properties that are not only economically viable, but also environmentally responsible. Investors and tenants are increasingly favoring properties that align with their values of sustainability, potentially reflecting a broader societal shift toward environmental awareness.
At LPA, sustainability isn’t just a trend—it’s integral to our assessment and valuation processes. Our deep expertise in sustainable commercial real estate allows us to provide our clients with detailed insights and advanced analytics that drive informed investment decisions. You can learn more about our stance on ESG and other sustainability trends in our 2024 CRE outlook blog. LPA’s commercial real estate valuation experts have extensive firsthand knowledge of these trends and how they are impacting commercial properties of nearly every type.
The question remains, will the sustainability of a property make or break its future valuation? Keep reading to find out.
What Defines a Sustainable Commercial Property?
Core Characteristics
Sustainable commercial properties are distinguished by several key characteristics that contribute to their desirability and long-term value:
- Energy Efficiency: These buildings incorporate advanced technologies such as smart thermostats, LED lighting, and energy-efficient HVAC systems.
- Renewable Materials and Resources: The use of recycled materials and resources, like bamboo flooring and solar panels.
- Certifications of Sustainability: Properties may be awarded certifications like LEED, ENERGY STAR, or WELL that authenticate their environmental performance standards.
Economic and Environmental Impact
The adoption of these features delivers substantial benefits, both environmentally and economically:
- Reduced Operational Costs: Energy-efficient systems and sustainable materials typically result in lower utility bills and maintenance costs.
- Increased Tenant Attraction & Retention: Buildings with green certifications are highly attractive to eco-conscious tenants which leads to higher occupancy rates and reduced tenant turnover.
At LPA, we leverage our extensive experience in evaluating these features to provide accurate appraisals of sustainable properties so that our clients understand the full value of their investments. Keeping current trends top of mind when determining the valuation of a property assists the property owner in making the best decision in the current economy.
The Impact of Sustainability on Property Valuation
Sustainable features in commercial properties are not just about being environmentally friendly—they also make strong economic sense. Here’s how sustainability is reshaping property valuations:
Market Trends and Investment Insights
- Premium on Sustainable Features: Properties with sustainable features often command higher market values. For instance, a study by the Building Owners and Managers Association International indicated that buildings with LEED certification can achieve up to a 10% premium in rent over non-certified counterparts.
- Growing Investor Demand: There is a clear trend of investors prioritizing sustainability. A recent survey by the Urban Land Institute found that 74% of investors are willing to pay more for buildings with sustainable features due to their reduced environmental risks and potential for higher returns.
Sustainability, however, is just one of the determining factors in the valuation of a property. LPA San Antonio Director Allison Jobe notes that “sustainability plans have positive effects on both property performance and valuation as there are environmental and economic impacts,” and current trends are demonstrating this to be true.
Sustainability and Its Role in Attracting Tenants and Investors
The evolving preferences of both tenants and investors are reshaping the commercial real estate landscape, with a pronounced shift toward sustainability. This trend is driven by a new generation of tenants who not only seek, but expect environmental responsibility in their living and working spaces.
Tenant Preferences and Market Dynamics
- Increased Demand: Buildings that boast sustainable features are in high demand. These properties attract a tenant base that values environmental stewardship, which helps translate to quicker lease-ups and fewer vacancies.
- Higher Occupancy Rates: Sustainable buildings consistently report higher occupancy rates compared to their conventional counterparts. This is partly due to the growing societal emphasis on sustainability, which appeals to a broad spectrum of potential tenants, from corporate clients to small businesses focused on their ecological footprint.
- Tenant Retention: Properties with green certifications or built with sustainable materials often experience higher tenant retention rates. Tenants are more likely to renew their leases in buildings that contribute to their well-being and align with their values.
Financial Impacts
- Premium Rental Rates: The market often recognizes the added value of sustainable features through higher rental rates. For example, properties with energy-efficient certifications can command a rent premium at a 21.4% higher average market sales price per square foot.
- Appeal to Investors: Investors are increasingly drawn to sustainable properties for their potential to yield higher returns. These properties are seen as future-proof investments that are likely to appreciate in value due to their alignment with future environmental regulations and their appeal to a broad tenant base.
Supporting Data
Investment in sustainable properties is not just a moral decision, but a financially sound strategy. Data indicates that buildings with sustainability certifications can achieve a 4% to 7% increase in asset value compared to non-certified buildings. The increasing stringency of building regulations related to energy efficiency and environmental impact further underscores the importance of investing in sustainable properties.
Additional Financial Benefits of Investing in Sustainable Properties
Investing in properties that prioritize sustainability is not only beneficial for the environment, but also offers significant financial advantages for property owners.
Tax Benefits and Incentives
Governments and local municipalities often offer a variety of incentives for sustainable development, including:
- Tax Credits: Property owners may qualify for tax credits for implementing energy-efficient systems or renewable energy sources.
- Rebates and Grants: Various rebates and grants are available to offset the initial costs associated with green certifications and sustainable renovations.
Operational Cost Savings
- Energy Savings: Sustainable buildings typically consume less energy than traditional buildings, thanks to energy-efficient appliances, better insulation, and smart building technologies.
- Maintenance Costs: Materials used in sustainable buildings are often more durable and require less maintenance over time, contributing to long-term savings.
Challenges and Considerations in Valuing Sustainable Properties
While the benefits of investing in or developing a sustainable property are clear, appraising those properties presents a number of unprecedented challenges.
New Standards and Regulations
As the demand for sustainable properties continues to grow, the complexity of the valuation does too. With the increased rate of adoption, sustainability standards, regulations, and certification thresholds continue to evolve. This presents a significant hurdle for CRE appraisers who must navigate these changes, for example:
- Frequent Updates to Standards: Sustainability certifications like LEED, BREEAM, or WELL are regularly updated to reflect new environmental priorities and technologies. Appraisers must stay informed about these updates to assess compliance and value accurately.
- Regional Variations in Regulations: Sustainability regulations can vary significantly by region, affecting how properties are valued based on local vs. national standards. Appraisers need to be knowledgeable about the specific regulations in the areas they serve.
Specialized Knowledge and Skills Required
Accurately valuing sustainable properties requires specialized knowledge that goes beyond traditional real estate appraisal skills:
- Technical Understanding of Sustainable Technologies: Appraisers must understand how specific technologies, such as solar panels, green roofs, and high-efficiency HVAC systems, contribute to the overall value of a property.
- Assessment of Non-Tangible Benefits: Elements like improved air quality and natural light are significant benefits of sustainable buildings. Quantifying these benefits in terms of property value requires expertise and a deep understanding of tenant and investor preferences.
Knowing the ins and outs of the sustainability of a property helps guide the producing appraiser to the most accurate valuation. LPA Denver Senior Associate Maggie Lucas states “Sustainable buildings tend to experience lower operational costs over time due to energy efficiency and reduced maintenance needs, which can positively impact cash flow and asset appreciation.” Knowing these details helps investors make the best financial decision for their properties. She further notes that “as societal and regulatory pressures drive demand for environmentally friendly spaces, sustainable commercial properties are likely to maintain their attractiveness to tenants and investors, protecting their value over the long term.”
Market Perception and Data Availability
The market’s perception of sustainable properties can influence their valuation significantly:
- Premiums for Green Features: Although sustainable properties often command a premium, determining the exact premium requires careful analysis of market trends and comparable sales data.
- Data Scarcity on Long-Term Performance: There is limited data available on the long-term performance and operational savings of green buildings, which can complicate valuation accuracy. Appraisers must often rely on projected data and trends rather than established historical benchmarks.
Our dedicated research team keeps current market trends top of mind to ensure we deliver our clients with the freshest data. LPA Dallas Senior Associate Researcher Andrew Burns affirms this stating “LPA Research is dedicated to keeping up with the latest data as sustainability features are becoming increasingly essential to track and analyze while newer construction is built.” He and his team understand that “being the forefront of this new data not only helps our appraisers be more efficient, but helps our clients get the right value for their property.”
LPA’s Expertise
At LPA, our team is well-versed in the nuances of sustainable properties and are equipped with the tools and knowledge necessary to conduct thorough and accurate valuations. Our commitment to excellence and in-depth and comprehensive research ensures that our clients receive the most reliable advice on the market. It’s because of those benchmarks and the quality we provide that our clients trust us as their partner in commercial real estate ventures. Having up to date data amidst an ever-changing market allows investors to make the best financial decisions for their current and future investments.
The Role of Sustainability in Future-Proofing Investments
Investing in sustainability is not just a commitment to environmental stewardship, but also a strategic move to safeguard against future market shifts and regulatory changes. As we navigate a rapidly evolving commercial real estate market, the integration of sustainable practices offers a significant advantage.
Anticipating Market Trends and Regulatory Changes
- Adapting to Market Trends: The market’s increasing lean towards sustainability means that future developments are likely to be governed by eco-friendly practices. Buildings that preemptively adopt these practices are more likely to remain competitive and in demand.
- Regulatory Compliance: Environmental regulations are tightening globally, with significant implications for property management and development. Investing in sustainable properties ensures compliance with current and future regulations, thereby avoiding potential fines and retrofitting costs.
Mitigating Risks
- Reducing Operational Risks: Sustainable buildings are designed to minimize resource wastage and optimize energy use, which not only reduces operational costs but also mitigates the risk of obsolescence.
- Appealing to a Broader Tenant Base: As tenant preferences shift towards greener living and working spaces, sustainable properties are likely to see increased demand and tenant retention.
Treading this water effectively and alone is challenging. At LPA, we help bridge that gap by offering strategic investment planning and commercial real estate appraisal services that align with the latest sustainability trends. We work to help you ensure that your investments are both profitable and future-proof.
Conclusion
Sustainability in commercial real estate is no longer just an optional feature; it’s a crucial component of a property’s long-term value and marketability. Investing in sustainable properties provides value from both an environmental and economic perspective.
Whether you are looking to invest in new properties or optimize your existing portfolio, LPA is here to guide you through every step of the process. Contact us today to learn how our appraisal and advisory services can help you capitalize on the benefits of sustainable commercial real estate.