Sustainable CRE: Why the tenant-landlord relationship is key
In our last blog about sustainable CRE, we looked at the value of investing in environmentally sustainable buildings. This time, we’re going to focus on one of the challenges of building a sustainable CRE portfolio: namely, how to ensure your tenants use your building in an environmentally-conscious way.
Whether you are a CRE landlord, owner, investor or asset manager, this should be of interest to you. Why? Because the activities of occupiers could make up as much as 70-80% of a building’s total carbon footprint (source: EG). So even if you have a host of green building certifications and have installed super-efficient main building services , how your building performs depends significantly on how your tenants operate within it.
This is known as the ‘'performance gap’: the difference between how a building should perform when it’s designed, and how it actually does perform when it’s occupied.
The challenges of getting tenants on-board
An obvious problem is the question of who pays and who benefits from interventions designed to improve sustainability in commercial real estate.
For example, tenants might not feel motivated to engage with or contribute to energy, waste or water-saving measures when the benefits of these won’t be realised within the time limit of their lease. On the other hand, landlords and owners might be reticent to stump up all the money for improvements, when the tenants stand to gain significantly from reduced energy bills.
Then there’s the impact of Covid-19. As the pandemic continues to disrupt traditional working patterns, CRE landlords and owners are likely to be preoccupied with the more short-term risks to their business, such as tenants defaulting on rents, cancelling leases or taking out shorter leases, or businesses needing to reconfigure their workspace to allow for social distancing. Getting tenants to operate more sustainably might not feel like a priority right now.
The way forward
Despite the challenges, the sustainability industry now agrees that greater collaboration between CRE landlords and tenants is critical to reducing the operational footprint of our buildings and meeting our Net Zero Carbon Commitments. The most comprehensive investor-driven tools, such as GRESB and NABERS, even measure the effectiveness of tenant engagement as part of corporate sustainability performance. So make no mistake: this is an issue that you need to get on top of, to protect your ESG credentials and to improve the value of your portfolio.
The Covid-19 crisis, rather than a distraction from the sustainability agenda, could be the stimulus that accelerates its take-up in the CRE sector. Landlords need to find ways to make leases more attractive to tenants, and one way to do this could be to offer more efficient workspaces with lower operational costs.
So how can the challenges be overcome? How can landlords and owners collaborate better with their tenants so that a building’s sustainability performance can be improved? Fortunately, the knowledge, solutions and best practice case studies around this topic are ever-growing.
Originating in Australia, green leases are a type of contract between a landlord and tenant that includes specific provisions around the sustainable operation of a property. For example, green leases could require tenants to purchase recycled construction materials in the fit-out phase, to develop a comprehensive waste management system, or to use energy-efficient appliances. Typically, green leases include obligations for both the landlord and the tenant and usually offer financial incentives to the tenant for meeting these conditions.
The popularity of green leases is certainly growing, especially in cities and for data centre operators, as a US paper by the Institute of Market Transformation (IMT) found earlier this year. A 2015 study by IMT also estimated that green leases had the potential to cut energy use in US office buildings by 11–22%, which could save the market $3.3 billion annually.
Green leases could be good news for other reasons too: a study by stok, LLC found that building improvements facilitated by a green lease have the potential to increase occupant productivity by 8%-10% due to improved thermal comfort, ventilation, air quality, and movement.
Grosvenor, one of the world’s biggest property groups, has recently been implementing green leases in London, as part of its Net Zero Carbon Buildings Commitment. The company’s Transformation Manager, James Manning, has written about this recently, explaining that a key driver was the fact that within Grosvenor’s London estate, tenants account for more than 90% of operational emissions from buildings.
Grosvenor’s approach to green leases has been to ensure they are:
- Easy and cost-effective for tenants. It cites a specific example, where landlords can use their size to buy green energy at lower and less volatile prices for their tenants. Grosvenor says that by doing this, it has been able to save tenants an average of 6% on their utility bills.
- Collaborative, including commitments from both parties. Here, the company states the importance of tenants and landlords being willing to share energy and other environmental data with each other. Because without good data, energy efficiency improvements cannot be identified or measured.
- Facilitate an ongoing dialogue between tenant and landlord on environmental topics. Operating a building sustainably is not something that is ever ‘complete’. It can’t ever be ticked off our to-do list because standards, legislation, human behaviour, and the climate change models, are always changing. It’s an ongoing process which Grosvenor says, relies on sharing knowledge and learning from and influencing tenants.
We think these three themes are a useful summary for landlords who are just starting to consider green leases. When you are ready to dive into the detail, the Better Buildings Partnership has a much more comprehensive Green Lease Toolkit.
Tenant-landlord forums and committees
Another common approach to getting tenants on-board is a good old-fashioned one: regular forums or meetings between a landlord and its tenants, the purpose of which is to address sustainability issues together. After a collaborative workshop around sustainability with some of its retail tenants, Hammerson, the major European REIT, identified four areas of opportunity and one of these was Sustainability and Innovation forums (source: Hammerson)
They have pledged that “all Hammerson-owned centres will have a thriving Sustainability Innovation Forum that is led by on-site Hammerson employees. Retail brands at each centre will attend regularly and participation and engagement with smaller, independent retailers will be supported and encouraged. Through ongoing support of centre-based Sustainability Innovation Forums, better solutions can be developed and quickly scaled up.”
This is a recurring theme in many of the case studies and solutions we have read about. For example, this series of case studies developed by Energy Star (the US energy efficiency programme) includes various examples of landlord-tenant sustainability ‘committees’ or ‘boards of directors’. The purpose of these regular meetings is to listen to and understand tenants’ issues, as well as to share information, educate and train tenants on how to operate more sustainably.
Data collection and sharing
Every single case study or blog we’ve read on this topic cites the importance of effectively collecting energy, waste, water and other environmental data and then sharing this with your tenants regularly. This has to be the starting point for any improvements. Being able to see, in black and white, the impact of their actions and how they compare with other tenants or other sites, can be a powerful educational tool. It can also be empowering and motivating, especially when they see improvements.
Of course, this relies on sub-meters and sensors being properly installed and maintained, so that you can clearly see the specific data for each tenant. It’s a basic point but one that still isn’t common practice sadly. It also requires you to have an effective building data management platform which pulls all of the data into one interface and enables you to share it easily with your tenants. You can read more about potential data headaches and how to overcome them here.
More about the Fabriq platform
The Fabriq building analytics platform can help you get your tenants on-board with your sustainability agenda. It provides resource-consumption data, broken down by tenant or asset type, in a user-friendly platform that can be branded to your requirements. It also allows you to benchmark against other sites in your portfolio and against external data providers such as GRESB and REEB. You can find out more about the Fabriq platform here.
Find out more at our webinar
To hear more about reshaping the landlord-tenant relationship, watch our Sustainable CRE webinar. It’s hosted by Fabriq’s Colin Ma and includes guest speaker Howard Pierce, a partner of a Spanish asset manager group, Urban Input.