Green Leases Begin to Move into the Mainstream

The acceleration of ESG programs is penetrating the commercial real estate industry, and it is fueling an increase in green leases. In the 2021 Sustainability report from RICS, 40% of respondents have noted an increase in green lease adoption.

A green lease is an agreement between the landlord and the tenant to meet certain environmental goals. The terms can either encourage sustainability standards or they can be contractually dictated. The concept helps both companies and landlords meet ESG requirements, which often can’t be accomplished without participating from both parties.

Although the adoption of green leases is increasing, they are not yet common; however that could be rapidly changing. Half of respondents to the RCIS survey said that green leases command premium rents, and 30% of participants said that so-called brown buildings actually offer reduced rents to compensate tenants for the lack of sustainable features.

Overall, green leasing illustrates the rising demand for green assets. More than half of participants in the survey said that there is an increase in demand from both tenants and investors for green assets, and only 6% said that there was reduced demand for green building following the COVID-19 pandemic. However, although there is more awareness and buzz around the topic of ESG, 43% of survey respondents said they have not yet seen a change.

While reducing the energy consumption of existing assets is important, new construction is also playing a role in the growth of green properties. Here, the industry is falling short. According to RCIS, 70% of survey participants have no operational carbon measurement in the lifecycle of their projects, and more than half of the respondents said that they are not measuring embodied carbon. One issue is a lack of standardized approach. If there were widespread standards, 18% of respondents said they would use them.

While this survey clearly shows that the built community can do more to achieve decarbonisation, several companies have made major commitments to ESG targets. BlackRock is leading the charge. In 2020, the firm promised that by the end of the year, 100% of its portfolio will integrate ESG metrics, up from 70% at the end of April.

Others are joining. Earlier this year, WashREIT announced that it is expanding its green bond framework with $350 million in green bonds for eligible properties. The move underscores increased commitment to ESG practices in the CRE industry and among REITs in particular. And, Blackstone plans to reduce carbon emissions by 15% across all new investments where the company controls energy usage.