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Sustainability in Commercial Real Estate: Walking the Green Talk

Posted by Surabhi Sheth, Real Estate research leader, Deloitte Services LP, on June 04, 2014

"Green" talk has become an integral part of our environmentally conscious lives; we are aware, in varying degrees, of the carbon footprint left by our driving, eating and heating, as well as the environmental impact of these and many other daily-life habits. Likewise, "green buildings" and "sustainability" are buzzwords in the commercial real estate (CRE) sector, among policy makers and environmentalists alike; taking green to the next level is an omnipresent challenge. The question is, are we walking the walk, or just talking?

First we need to understand why sustainability is so important in the CRE sector.

The facts speak for themselves: according to the U.S. Department of Energy, commercial buildings account for 18.7 percent of energy usage, 40 percent of carbon dioxide (CO2) emissions and 88 percent of potable water consumption in the United States. In contrast, green buildings1 are estimated to consume 29-50 percent less energy than "non-green";2 use 40 percent less water;3 emit 33-39 percent less CO2;4 and produce about 70 percent less solid waste.5

Apart from the environmental benefits, why else should CRE companies focus on implementing sustainability in existing buildings?

Utility costs, as they relate to energy, water and waste, impact CRE company profits, and environmental measures targeted toward reducing these costs stand to have a positive impact on asset values. There is also increasingly clear evidence that the combined demands of occupiers, investors and regulators are such that tangible benefits can be derived from embedding sustainability into the full investment process.

These benefits — which manifest themselves in a range of property-value fundamentals such as rental growth, yield premiums, total occupancy costs and the like — are increasingly sensitive to sustainability factors (Figure 1). Ultimately, buildings with relatively better sustainability credentials tend to enjoy increased marketability.6

Figure 1: Potential relationship between sustainability and factors affecting building value

Source: Deloitte Analysis. The original illustrative analysis is based on UK market context, but is considered to have a high degree of resonance with U.S. markets as well.

By these objective standards, are CRE players walking the green talk? What progress has been made with sustainability adoption thus far?

Encouragingly, we are seeing a more proactive and comprehensive stance on sustainability among CRE firms. The growth in green building certifications indicates that the industry has made progress in energy, water and waste efficiency. CRE players have begun to implement and report sustainability, with some also collaborating with stakeholders such as tenants, investors and the government. However, with the constant, progressive evolution of sustainability, stakeholders' expectations are evolving continuously. Are CRE players likewise adapting and pushing the sustainability envelope far enough to meet the dynamic demands of various stakeholders?

We believe sustainability adoption tends to be narrow either in terms of sustainability aspects (energy, water, waste), or localized to specific properties in the total portfolio.

Further, the sector is at a nascent stage in uptake of enhanced disclosure and reporting on broad sustainability performance. While some initiatives have had a significant impact on non-financial disclosure within the industry, these remain subject to notable limitations (information collection and measurement), which suppress transparency and relevance.

Along with scope for CRE players to increase certifications of existing buildings, there is substantial room for deepening sustainability implementation in certified buildings, where in-use performance can remain stubbornly below design expectations.

So, what should CRE owners focus on to increase sustainability adoption?

We recommend three areas that can act as game changers and may lead to improved brand value and competitive advantage:

  • Embed environmental, social and governance (ESG) risk management into core investment processes to maintain stakeholder confidence
  • Improve measurement and reporting to manage sustainability risk
  • Plan resource efficiency to enhance occupant satisfaction and investment returns

While each of the three recommendations cited here requires specific action, CRE players need to understand on a broad level the full benefits of, and the external push for, retrofitting their existing property portfolio to improve performance in sustainability terms. Subsequently, they should target interventions in the right assets at the right time to enhance total returns.

Would you like to walk the green talk? If the answer is yes, please read our new report: Breakthrough for Sustainability in Commercial Real Estate. You also won't want to miss our Dbrief webcast on this topic, June 4, 2014 from 2-3 p.m. EDT.

1 U.S. Environmental Protection Agency (USEPA) defines green building as a structure that is environmentally responsible and resource-efficient throughout its life cycle. Green buildings are designed to reduce the overall impact of the built environment on human health and the natural environment by efficiently using energy, water and other resources; reducing waste, pollution and environment degradation; protecting occupant health and improving employee productivity. http://www.epa.gov/greenbuilding/pubs/about.htm.
2 Lisa Galley, Jean Rogers and David Wood, “Metrics for Responsible Property Investing: Developing and Maintaining a High Performance Portfolio," ULI Fall Council Forum, November 2009.
3 Ibid.
4 Ibid.
5 Ibid.
6 Ibid.

As used in this document, "Deloitte" means Deloitte LLP and its subsidiaries. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.

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