The Challenge of Sustainability in Real Estate The construction and real estate industries are among the biggest contributors to carbon emissions and consumers of energy. However, the sector has recently taken major strides toward rectifying this by adopting higher sustainability standards such as NZEB (nearly zero-emission building) and LEED (Leadership in Energy and Environmental Design) rating systems. These voluntary accreditations certify sustainable buildings and neighbourhoods and are favoured by different markets worldwide.
Rising Demand for Green Buildings
Multinational firms are increasingly focused on the Environmental, Social, and Governance (ESG) credentials of their real estate assets, viewing them as a reflection of their brand, culture, and values. These businesses seek high-performing, sustainable properties that align with their green goals and help attract and retain top talent. As a result, there has been a surge in demand for office spaces with the highest ESG standards, prompting landlords to ensure new developments or refurbishments meet occupier expectations. Evidence suggests a “Green Premium,” where buildings with higher ESG accreditations achieve higher rents, quicker leasing, and higher valuations.
Impact of New EU Directives
The race to adopt green standards in real estate will accelerate as the EU introduces higher standards. On March 15th of this year, the Energy Performance of Buildings Directive passed a vote in the EU parliament to improve standards as part of the goal of climate neutrality by 2050. The directive will have wide-ranging implications for the property sector, including:
- All new buildings occupied, operated, or owned by public authorities must be Zero Emission Buildings from January 1, 2026. New leases must also be for NZEBs, likely increasing demand for such stock from the State.
- When seeking new properties, the State will prioritize retrofitting existing buildings or leasing Zero Emission Buildings.
- All new non-residential buildings must be Zero Emission Buildings from January 1, 2028.
- A Minimum Energy Performance Standard: All non-residential buildings must have an E rating by 2027 and a D rating by 2030.
- The use of fossil fuels in heating systems will be phased out by 2035 for new buildings and buildings undergoing renovations, and fully phased out by 2040 for all buildings.
- The lifecycle Global Warming Potential (GWP) of all new buildings shall be disclosed after January 1, 2027, and targets will be set for new buildings from 2030.
EU Taxonomy and Sustainable Finance Regulations
Another EU regulation that has increased focus on the sustainability of property is EU Taxonomy, which creates a common classification system for sustainable economic activities. From a real estate and construction perspective, the three main economic activities covered by the Taxonomy are the construction of new buildings, renovation of existing buildings, and ownership (including the acquisition of buildings).
Corporate Sustainability Reporting Directive
Additionally, the Corporate Sustainability Reporting Directive (effective from January 2023) requires large companies and SMEs to report on their carbon/energy use, dependence on fossil fuels, and other sustainability issues. This directive will increase tenants’ focus on the operational building data reported on buildings and shared in their leases, as firms will be required to disclose their office space’s energy efficiency and carbon footprint.
Occupier Demand for Sustainable Buildings
On the ground, the ESG focus among occupiers has only accelerated post-Covid. Occupiers are now focused on the actual energy performance of buildings, along with BREEAM, LEED, NABERS, or BER credentials. ESG credentials and efficiencies have transitioned from a “nice to have” to a mandatory requirement for many firms, driven by hiring and talent retention considerations.
Future Outlook
These new EU directives will lead to an increase in demand and development for energy-efficient buildings. Properties like One Charlemont Square (LEED Gold, NZEB Building, and A3 BER), EXO (NZEB, LEED Platinum, and A3 BER), and 76 SJRQ (LEED Gold and A3 BER), which are EU Taxonomy Mitigated buildings, will be more sought after by occupiers as they aid in reaching sustainability goals and targets.
