From national and foreign economic aid to healthcare, there have been significant policy reversals across multiple industries recently, including commercial real estate (CRE). One of those priorities is the impact of climate change and commercial property. The Environmental Protection Agency recently announced the biggest deregulatory action in U.S. history, many of which will impact how commercial buildings are constructed and retrofitted.
Until now, the industry has only seen the need for more sustainable solutions — and their costs have grown. Shifting policies may mean now’s the time for new ways to balance green initiatives and save on costs. Many tenants are still looking for green-certified buildings that emphasize health and well-being, like green and outdoor spaces.
Globally, investors are continuing to place emphasis on sustainable practices, which may keep developers and owners pushing for more improvement with physical retrofitting of systems to create an ecosystem of climate technology that helps systems of all types run more efficiently.
Implementing green initiatives into commercial construction and renovation has many financial benefits. Sustainable buildings tend to have lower operating costs due to energy efficiency and resource conservation measures. And, properties that meet sustainability standards tend to attract and retain tenants more effectively, leading to increased asset value, per Johnson Controls, a global building technology and software firm specializing in sustainability.
According to CBRE,” eco-conscious options are crucial and transformational and are increasingly attracting modern tenants. “CBRE’s findings demonstrate that sustainability is no longer optional but a must-have for many occupiers when making real estate decisions.”
Sustainable commercial spaces are in high demand globally, and green properties can demand higher rental rates. A 2023 JLL study found that the average rental premium for green-certified, Class A office buildings across eight major markets in the U.S. and Canada is 7.1%.; the “green premium” for London rentals, 11.6%.
Though green buildings may ultimately save costs, attract higher rents and offer greater retention, retrofitting older buildings and implementing state-of-the-art sustainability features can be complex and costly, requiring a significant amount of upfront capital.
The U.S. Green Buildings Council (USGBC) states that retro-commissioning (RCx), or Existing Building Commissioning, is a tool for maximizing potential energy savings by evaluating and improving all components of operation and management of a building’s systems and processes. Approximately 1% of retro-commissioning market penetration can yield energy savings of over 830,000 metric tons of carbon dioxide (CO2) annually. CO2 is a long-lived greenhouse gas that can live in the Earth’s atmosphere for thousands of years and, according to climate.gov, any reduction in CO2 emissions can help minimize future temperature rises for the planet.
NASA defines the greenhouse effect as “The process through which heat is trapped near Earth’s surface by substances known as ‘greenhouse gases.’ Imagine these gases as a cozy blanket enveloping our planet, helping to maintain a warmer temperature than it would have otherwise. Greenhouse gases consist of carbon dioxide, methane, ozone, nitrous oxide, chlorofluorocarbons, and water vapor.”
One way these costs can be offset is through the Inflation Reduction Act (IRA) and its investment tax credits (ITCs). Fast Company says CRE firms have generated historically high return on investment (ROI) from sustainability projects. The ITCs offer developers immediate returns through tax credits for solar power, battery storage solutions, and energy efficiency improvements. The U.S. Department of Energy website says that solar systems, “placed in service in 2022 or later — and begin construction before 2034 — are eligible for a 30% tax credit.”
Moreover, if a system meets domestic manufacturing specifications (see energy.gov for examples of solar photovoltaic manufacturing specs), the owners can claim 40% in tax credits. So, if the installation costs $400,000, it would result in $160,000 in tax savings. Fast Company estimates that commercial sector renovations and retrofits are projected to increase up to 11% annually by 2027, with additional funding from the IRA.
Another way CRE companies can save on retrofitting is by taking a phased approach and tackling the low-hanging fruit first. Low-cost, high-impact changes like LED lighting upgrades, water conservation systems, waste-management or recycling programs and renewable energy systems like solar can put CRE companies on a path for long-term savings.
One example is at KBS’ UBS Tower in Nashville, where this WELL-certified high-rise has a single-stream recycling program and a 59% diversion rate that’s resulted in $6k in annual waste management savings.
KBS confirmed its commitment to sustainability in 2022 when it established the KBS Green Team to focus on the areas where it can make the greatest environmental impact. Its goals are to reduce energy use, lower the company’s carbon footprint and achieve a 5% greenhouse gas (GHG) emissions reduction by 2025, which it’s currently on track to hit.
KBS was also recognized in the 2024 GRESB Real Estate Assessment, which marked the company’s second year of participation. KBS Real Estate Investment Trust III achieved three Green Star designations, up from two stars in 2023, placing KBS REIT III in the top 60% of all 2,223 real estate entities that participated worldwide. The GRESB Rating provides a performance measurement among participants on a global scale and KBS is committed to continuous benchmarking and upgrading its infrastructure to keep moving forward with its goals. One such goal is to reduce energy, water, and waste usage by the end of 2025.
Making significant moves to implement sustainable CRE may attract investors and result in cost savings, higher rents, and increased tenant retention and satisfaction. Factoring in significant investment tax credits and even retrofitting existing buildings can prove well worth the initial capital required to make these changes.
Learn more by visiting KBS.com/Insights.
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