Dr. Sarah Kapnick, Global Head of Climate Advisory at J.P. Morgan, offers insights on sustainable real estate, including why it’s important now and how owners, investors and property managers can benefit from it.

Why sustainable real estate is important

Several factors are driving demand for sustainable commercial real estate:

• Green certifications: “Third-party certifications create recognizable standards that attract sustainability-focused buyers,” Kapnick said. Leadership in Energy and Environmental Design (LEED), Building Research Establishment Environmental Assessment Method (BREEAM), WELL Building Standard and Global Real Estate Sustainability Benchmark (GRESB) are among the most common certification organizations. 
• Local regulations: While federal policies are limited, local entities are picking up the slack. For example, New York City’s Local Law 97 places emissions limits on most buildings over 25,000 square feet. Colorado’s Regulation 28 requires most large commercial, multifamily and public buildings to benchmark energy use and meet specific performance standards. New California laws  will require detailed disclosures on climate risks and emissions from public and private companies.
• More severe weather: Whether it’s tornados, hurricanes, fires or other natural disasters, extreme weather events are more frequent and severe. “Since building code upgrades often follow disasters, existing real estate may not have been built for the climate of today, let alone tomorrow,” Kapnick said. “Rising physical risk from climate change is creating a new wave of interest in sustainable design.” 
• Insurance costs: Climate change’s higher winds, more intense rainfall and longer fire seasons can severely damage properties' infrastructure and increase insurance costs. “Commercial real estate insurance prices are rising rapidly in areas with exposure to rising seas, such as coastal zones, and wildfires, including the western U.S.,” Kapnick said. “This has led to more awareness and the incorporation of climate risk into investment decisions in these acutely exposed regions.”
• Tenant demand: “Properties often use resilience credentials to attract buyers after an extreme weather event,” Kapnick said. But that’s not the only reason demand for green properties is up across apartment, office, retail and industrial. “Tenants are prioritizing buildings that are energy efficient, free from onsite fossil fuels and powered by clean energy,” according to JLL. 

Benefits of sustainable real estate

Investing in sustainable real estate can offer two major benefits:

• Higher returns: Installing solar panels, rainwater harvesting systems and other sustainability measures often lead to energy and cost savings. Sustainable properties can also attract and retain tenants more easily and qualify for green financing from Fannie Mae and Freddie Mac. 
• Reduced exposure: Sustainable real estate can help commercial real estate owners and investors stay ahead of environmental regulations and market fluctuations. “Managing exposure to extreme weather and climate will influence insurance prices, potential damage and potential changes in future value,” Kapnick said.
• Tax credit eligibility: Incorporating renewable energy—including solar and wind—across your property may qualify you for renewable energy tax credits, including the Investment Tax Credit and Production Tax Credit. Likewise, investing in geothermal heating, cooling or power systems could make you eligible for a tax credit of up to 60%.

The future of sustainable real estate

Sustainable real estate is poised for growth. “The impacts of carbon commitments will increasingly materialize in lease markets, creating a tipping point in the near future where investments in low carbon buildings will start to pay dividends,” according to JLL.

The industry will likely invest in retrofitting existing real estate to reduce vulnerability and increase asset value, Kapnick said. “New builds in regions that have recently experienced a disaster will build to withstand the next one and heavily market their credentials.”