Why the economic case for decarbonization of real estate outweighs the politics

The temperature is rising around how we’re discussing sustainability across the business world. Every week brings new headlines about companies scaling back on climate action pledges, “greenhushing” and policy changes. To many, the sustainability momentum of a couple of years ago seems to be fading fast.

That’s the politics at play. However, it is a mistake to compare the real estate perspective with other industries such as banking or oil and gas. Those industries have a more complex and long-term business case to make on decarbonization, whereas in real estate, we deal with real assets where physical interventions are needed to create real outcomes.

Here, the politics are increasingly dwarfed by the realization that effective decarbonization is a sound financial move. Which corporate board doesn’t want to lower its operational costs, secure its energy requirements or futureproof its real estate investments?

For companies leasing space, implementing measures to improve energy efficiency will have a direct impact on their operating expenses. In recent years, energy costs have increased by 29% in the US, 71% across the European Union and 54% in the UK. In Australia, year-over-year energy prices rose by 25% in 2024.

JLL's study of more than 46,600 buildings across 14 global cities shows that light to medium energy retrofits, such as lighting upgrades, introducing smart building technologies and optimizing heating and cooling systems, can unlock between 10% and 40% in energy savings, depending on property type. Across the buildings analyzed, this translates to potential annual energy savings of $0.49 to $1.94 per square foot on average. And as energy use and costs go down, emissions do too.

There are also longer-term futureproofing considerations such as ageing grids struggling to cope with increased demand. Many owners and occupiers of critical buildings want to generate their own power and store it effectively for use during peak times. This switch to onsite renewables is a business decision to futureproof buildings that equally helps to lower carbon emissions from operations.

Despite the political rhetoric in some sectors, the corporate commitment to sustainability is strong. More than 10,000 companies have now signed up to the Science Based Targets initiative (SBTi), committing to significant emissions reduction by 2030.

About 80% of these companies have joined in the last two years. And these commitments are reflected in their real estate choices. Amid the return to office push, companies want spaces that meet the expectations of their employees and customers.

Yet this year 30% of demand for low-carbon office space in 21 cities around the world will not be met, JLL research indicates. This gap could potentially widen to more than 70% globally by 2030.

In the industrial sector, 65% of future demand from 900 occupiers in 18 hubs across North America, Europe and Australia is tied to a carbon reduction target. A conservative estimate suggests that 41% of projected demand for low carbon space will not be met by 2030, given the current quality of existing stock and current construction estimates for the next five years.

For investors prepared to undertake the necessary retrofit work, these numbers represent a significant short-term economic opportunity. JLL’s latest Future of Work survey shows 45% of corporate real estate leaders will pay more to occupy spaces with leading sustainability credentials.

There is also now a real cost of inaction. For example, New York’s Local Law 97 on greenhouse gas emissions for buildings will enforce fines from this year for 2024 emissions. An estimated 5,300 buildings of 34,000 in scope will not comply with emissions limits. This is just the start – the regulatory landscape across many US states, countries and the EU is planning to ramp up standards with increasing financial penalties for buildings that fall short.

While some owners continue to delay their decarbonization plans and potentially take the financial hit, it leaves them vulnerable to liquidity risk and reputational damage.

Financing rules are also tightening. In October, ING Bank, one of the biggest real estate lenders in Europe, said it will no longer provide new debt for companies lacking a plan to decarbonize their assets.

Adapting to growing climate risk is another area where strategic decision-making sits alongside environmental returns. Insurance costs in the US are rapidly becoming the most significant expense for property owners, impacting both operational revenues and long-term property valuations.

Some sectors will be more acutely exposed to greater risks from a changing climate. Across the US, 69% of industrial real estate is in the top 10 markets most exposed to climate risk, compared to 57% for offices. In Europe, 49% of industrial buildings lie in the region’s 10 most exposed markets, compared to 42% for offices.

Resilience strategies such as water collection and recycling, installing solar panels and microgrids for energy, and implementing nature-based solutions on and around buildings can equally help buildings to better withstand the impact of weather events, manage insurance costs and deliver environmental benefits.

Buildings designed with resilience front-of-mind will have a competitive advantage in global leasing markets. Some 45% of corporate real estate leaders will only select buildings that are resilient to climate events, according to JLL’s Future of Work 2024 survey.

Across the real estate industry, it’s increasingly clear that the business benefits of proactively tackling decarbonization far outweigh a ‘wait-and-react’ approach.

Energy efficiency, retrofitting and climate adaptation all show how decarbonization is now clearly linked to managing risk, cutting operational costs and creating and protecting long-term value.

That’s why sustainability efforts in real estate are driven less by political pressure and more by sound business logic. Increasingly, the big question for owners and occupiers is moving from "should we decarbonize?" to "how quickly can we optimize our business operations by decarbonizing?".