Sustainability initiatives can come with a bevy of advantages, including positive financial results. Along with reducing electricity, water, and other energy consumption, ESG initiatives and green building certifications can also increase a building’s revenue potential. For example, a 2018 study of IREM’s Income/Expense Analysis® (now Income/Expense IQ) explored data from two large multifamily real estate development and management companies. While the report showed that these Class A properties incurred higher operating expenses than less sustainable buildings, the additional revenue they generated was enough to offset these costs, resulting in net operating income (NOI) of $4.61 per square foot, or $4,260 per unit.
Erin Hopkins, PhD, an associate professor of property management in the College of Liberal Arts and Human Sciences at Virginia Tech, says that plenty of research has examined sustainability’s impact on revenue by using eco-labels, such as LEED and ENERGY STAR®, as a proxy measure for green structures. “There is a general consensus that buildings with eco-labels enjoy economic benefits such as higher rents, greater occupancy, and increased sales prices,” she says.
In Seattle, Jesse Anderson, LEED AP, sustainability director at Blanton Turner, AMO®, sees buildings with green certifications driving anywhere between 7%–10% higher rents per square foot than noncertified Class A and B assets. He also encounters more brokers inquiring about green certifications because their clients desire units with lower overhead costs for utilities.
The “Green is Good” report from Cushman and Wakefield, AMO®, found that since 2015, rents in LEED-certified office buildings averaged $4.13 per square foot (11.1%) higher than in non-LEED buildings. On average, multifamily spaces generated 3.1% higher rents than non-certified properties during the 2000–2021 period, though they had slightly more vacancies than non-LEED buildings.
In Seattle, Anderson observes the following rent premiums among the city’s sustainable property segment compared to properties without sustainability certifications:
“For office and retail spaces, we recommend budgeting for a premium based on sustainability features and green certification status, as these are strategies for attracting specific tenant demographics to Class A assets,” he says.
Anderson confirms that sustainable office and retail buildings also benefit from higher occupancy rates than noncertified buildings by an average of 1%–2.5%.
Another significant way in which property managers are seeing sustainability measures impact revenue is through government-supported initiatives.
One such program in Seattle, the Living Building Pilot Program, offers extra floor area and height allowances in exchange for meeting aggressive energy and water goals, according to the city’s Department of Construction and Inspections. Anderson says this program allows for a potential increase of 25% more gross floor area (GFA) than the building code typically allows for in new construction. This translates to increases in rentable square footage by about 20% in multifamily properties and almost 25% in commercial assets. For existing buildings with unreinforced masonry structure undergoing seismic strengthening renovations, the pilot program can result in 30% more GFA for the property, Anderson says.
Location, location, location
Whether sustainable properties can demand higher rents and occupancy depends largely on the local appetite for green amenities. For locations with less interest in sustainability, the NOI impact may be less significant, but Hopkins says there still are many ways to promote the building as a sustainable property.
“If you’re operating in a market that doesn’t place value on sustainable building initiatives from an ecological standpoint, your team’s marketing plan can instead highlight these initiatives from an economic or health and well-being perspective to still communicate their value,” Hopkins says.
As demand for green buildings increases, property managers should be aware of some common pitfalls. One is competitors using a marketing tactic known as “greenwashing,” or making a building appear more sustainable than it actually is. Hopkins says some common examples of greenwashing include marketing the property as energy efficient when it isn’t, or advertising that the property has a low carbon footprint when that hasn’t been verified.
“Managers may advertise properties as being eco-friendly by using varying colors of green in their marketing materials while including no meaningful details about sustainability,” Hopkins says.
Another challenge occurs when green buildings become the expectation, leading to the market becoming saturated. Property managers can then struggle to capture the rent premiums that likely helped justify the original decision to invest funds into property upgrades.
“The buildings that benefit the most seem to be the early adopters,” Anderson says.
Additional benefits of sustainable building initiatives can have a less immediate effect on revenue, such as those that intersect with risk management.
“For example, climate risk management identifies potential physical risks, the likelihood of their occurrence, the possible direct and indirect material impacts to the property, and then incorporates resilience into analyzing these physical risks at the property level,” Hopkins says. “Incorporating this type of risk management reduces the likelihood of disruption in business operations and the resulting loss of revenue.”
As real estate owners and investors grow more interested in properties’ ESG plans, sustainability features are becoming crucial to ensuring financial backing.
“ESG reporting provides a broader and measurable perspective for stakeholders interested in sustainability,” Hopkins says. “Shareholders are increasingly demanding this transparency to make investment decisions because it’s critical to them as a means of ensuring long-term financial performance.”
Anderson says clients and their financial institutions are interested in assets’ energy, water, and waste performance. “Recently, the information requests from financial institutions have begun to specifically ask if Blanton Turner, as the management company, has an ESG strategy in place for its own company operations,” he says.
The sum of all parts
For property managers wondering exactly how implementing green measures will financially impact their buildings, Hopkins says it’s essential to consider multiple financial metrics in order to properly account for the different impacts of sustainable initiatives. “These include NOI, before-tax cash flow, cash-on-cash return, payback period, and a cost-benefit analysis,” she says. “While one sustainability initiative may have a bigger revenue impact than its counterpart, upfront costs, property asset holding period, and required rate of return are also important considerations.”
Anderson encourages property managers to review certification options for their properties and check if there are any existing opportunities. “Depending on your market, you may be able to set your company apart as an outlier from your competitors and highlight this differentiation to ultimately drive stronger rent premiums and occupancy rates at your properties,” he says.
Source: “Green impact“