Designing, building, and maintaining a green office building may require extra time and effort, but tenants are sending a clear message to the real estate industry – environmental sustainability is here to stay and of critical importance. 

Jones Lang LaSalle partnered with CoreNet Global, an international association of workplace and corporate real estate executives, to query attendees of CoreNet Global Summits on four continents over a six month period in 2007.  Four hundred and fourteen industry professionals at CoreNet Global Summits in London, Melbourne, Denver and Singapore took the watershed survey called, “Sustainability Perceptions and Trends in the Corporate Real Estate Industry.”  The overall goal of the survey was to gauge corporate awareness and understand the key issues driving sustainability in real estate and some of the perceptions that may be shaping corporate action and therefore real estate demand.

The results show that corporate real estate professionals around the world are grappling with sustainability and see it as a near term critical issue for their business.  Globally, approximately half of all respondents answered that sustainability is a critical issue now, and nearly 80% cumulatively said that sustainability would be critical to corporate real estate within two years.  Respondents in Europe lead the pack, not surprisingly, in terms of the immediacy of sustainability, with the US not far behind.  The level of interest, information flow, and pressure on the topic has certainly escalated exponentially in 2007.  Even emerging markets in Asia Pacific are thinking about and beginning to act on sustainability in real estate.

Energy seen as most important factor

What issues are of most importance regarding sustainability?  Corporate survey respondents ranked energy utilization as the most important issue currently.  Interestingly, other specific environmental issues such as water utilization and carbon emissions were ranked lower, and by a fairly significant gap.  This suggests that while the importance of corporate sustainability is increasing, not all of the details are yet in full focus, and companies may not be fully grasping how intertwined the components are in terms of their cumulative impact on the environment.  The factor that respondents said would be most likely to increase the importance of sustainability was again increasing energy costs.  With energy unitization ranking highly on the current priority list, and increasing energy costs ranking as most likely to escalate the issue, corporates clearly recognize that sustainability can become a “cost saving” technique on the energy front with a positive impact on the economic bottom line in addition to being important environmentally.

Other factors that companies indicate could increase the importance of sustainability included regulation, customer influence, and employee interest.  Companies are seeing the probability of regulatory changes (such as taxes or new reporting demands) impacting their business, so the risks of being unprepared have for potential changes have increased beyond a marketing dilemma.  The rise of employee interest in the topic is no surprise either.  Companies see their real estate and their corporate identity and corporate values as critically important to attracting and recruiting the labor that drives their businesses.  In an increasingly challenging labor market with a well-documented shortage of knowledge workers in the US, sustainability has become one of the ways companies can improve their competitive advantage in the often cut-throat war for talent and improve productivity and quality of work environment once talent is secured.  Some of the early findings regarding the impact of sustainable space on employee health, productivity, and job satisfaction are compelling.  The young knowledge worker talent, in especially short supply, is specifically keen on environmental issues and corporate social responsibility.  As a result, cutting edge companies are now beginning to go as far as to say they will not go into a new building anywhere that does not meet certain environmental standards (not necessarily LEED). 

If you build it, will they pay?

One of the key components of sustainability in real estate that has held back the industry is the lack understanding of the costs of “green” buildings and environmentally friendly property features as well as the willingness of tenants to pay a premium for solutions that costs more.  We asked as part of the survey how much more respondents expected it to costs to build a new sustainable building or LEED certified building.  And the results show clearly that there is a perception of cost premium.  In the US, 37% of respondents believe that on average, the initial cost of LEED construction is 1-5% above traditional construction.  While costs can vary significantly depending upon the level of LEED features, studies show that this group answering 1-5% is probably the most accurate.  Interestingly, 50% responded that they think the cost premium is more than 5%, and this perception of significant additional cost could be what is holding some companies back.  The expense and capabilities of sustainability in real estate are changing rapidly, and the previous lack of documented cost information for sustainable building features and return on investment/payback period metrics needs to change for sustainability to become fully mainstream to both investors and tenants.   What is encouraging, however, is that overwhelmingly the survey confirms that tenants are willing to pay a premium for sustainable real estate solutions.  Fifty-two percent of respondents said they would be willing to pay 1-5% more for sustainability, and an additional 25% answered that they would be willing to pay a 5-10% premium. 

With the demand side of the picture becoming clearer and more difficult to ignore, what does the supply look like?  Our survey asked respondents to rate the availability of sustainable real estate solutions, and while tenants seem willing to pay, the options are simply not there yet in the marketplace and this has been a limiting factor.  Only 17% said that there is good, or widely available, sustainable real estate solutions in markets where their companies need to locate offices.  Forty two percent reported patchiness and said the supply chain is good in some markets but not others, and the remaining 41% view overall availability as limited or minimal.  In fact, estimates from McGraw Hill using USGBC data last year (2006) suggest that 2% of the US commercial real estate stock is currently LEED, so for tenants, sustainability is rarely on the menu.  This is changing.  In fact several major metro areas, such as NYC, Toronto, and Atlanta, have office development pipelines that are expected to be in excess of 75% LEED certified when complete.  This shifting supply will continue to evolve, driven by a combination of regulations, incentives, and tenant demand, though the overall market may change slowly as a significant challenge remains in “greening” existing buildings and portfolios.

The results of this survey confirm for us that we have passed the tipping point for sustainability.  The question is no longer about whether sustainable design should be considered or pursued in commercial real estate.  The question will be – how do you justify why you chose not to have a sustainable design.  Sustainability is not a passing fad.  It is quickly being mandated as a business imperative.  Architects and engineers have been proactive on the topic for some time.  We are now seeing more service providers, real estate investors, lenders and insurers mobilize on the topic of sustainability and investigate new products and strategies as a way to grow, manage risk, and diversify their businesses and real estate portfolios.  Jones Lang LaSalle has been a leader and frontrunner in this field, with its dedicated global Energy and Environmental Sustainability team and our continuing efforts to gain intelligence and insights through market surveys such as this one.