Green Leasing – Passing Strategy or Wave of the Future?

Is green leasing a fleeting trend for the environmentally conscious or the blueprint for a sustainable, cost-efficient future in commercial real estate? As is usually the case, the answer falls somewhere in the middle and requires a nuanced perspective to uncover the potential benefits and challenges of this emerging strategy.

Green leasing, also referred to as “energy-aligned” or “high-performance” leasing, is a relatively new concept and has gained prominence only in the past decade. Its primary aim is to foster a sustainable built environment for the long-term. However, the advantages of green leasing can extend well beyond environmental considerations, benefiting both landlords and tenants in many ways. The advantages include reduced operating expenses, increased tenant attraction and retention, and enhanced asset valuation. Furthermore, financial institutions increasingly require sustainability standards to issue loans backed by commercial buildings and a growing number of cutting-edge real estate owners expect the buildings they acquire to have green leasing provisions throughout their tenant roster.

Green leasing is a multifaceted approach that relies on alignment between landlords and tenants. In these leases, landlords must undertake efforts to provide services, facilities, and building materials which comply with sustainability guidelines. There are a number of corresponding provisions which pass-through to tenants their pro rata share of sustainability-related expenses and include requirements that tenants operate, and make alterations to, their leased premises according to specified standards. In exchange, the parties realize cost savings and environmental protection through improved energy efficiency and consumption, water conservation, and waste reduction. Tenants and their invitees also enjoy enhanced quality of life with better indoor air quality and safer workspaces, promoting health and well-being. Landlords enjoy the benefits of high tenant satisfaction in optimized and sustainable buildings, helping to ensure the long-term value preservation of these buildings.

However, there are potential downsides to consider. Some view green leasing as an environmentally friendly but economically challenging endeavor. Initial cost outlays can be expensive, sometimes prohibitively so for landlords with older buildings. Additionally, green leasing relies on trust, as both parties must work together in utility metering, data gathering, and reporting mechanisms. Nevertheless, when executed effectively, green leasing can yield substantial economic benefits and foster a strong relationship between tenants and landlords, bolstering tenant satisfaction and contributing to high occupancy and rental rates for landlords.

While it is true that each property requires an individual evaluation to determine the feasibility of green leasing, I think the concept is here to stay for those who can make it work. In the right circumstances, green leasing can represent the future of sustainable, healthy, and cost-efficient commercial real estate building development and operation. While challenges remain, the potential for wide-ranging benefits and collaborative relationships between landlords and tenants makes green leasing a compelling choice for those who are able to embrace this forward-thinking approach.

Note: At LeasePilot, we are considering adding the capability to track sustainability provisions in the platform – please reach out to us if you are interested in discussing this feature.

 

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