Property Owners' Efforts To Green Their Buildings Are Hitting A Wall

Local regulations, tenant demand and lender requirements have made commercial properties greener — but owners are now reaching the limit of what they can do.

Landlords’ progress toward sustainability — whether through energy-efficiency measures or switching up a property’s power systems — is stalling, industry players said at Bisnow’s National Energy and Sustainability Conference last week. 

Physical building constraints, the grid’s increasing reliance on fossil fuels and federal defunding of renewable power are making it more difficult for U.S. commercial real estate investors to reduce their buildings' emissions, which could sap future returns.

“If you don't retrofit your building, you're going to have a stranded asset,” GDI Ainsworth Senior Vice President of Energy Services and National Operations Support Randy Topp said onstage at the New York Marriott Marquis.

The value premium for buildings with green improvements is as high as 25%, research has shown.

Landlords have been trying to cut down on emissions for years, industry figures said onstage. Tenant expectations have played a part in property owners’ efforts, Topp said. And investors, too, now care far more about building sustainability than they have in the past, Ares Management Head of Environmental, Social and Corporate Governance Daren Moss said.

“Almost five years ago, when we talked to investors, they used to just ask a question and move on,” he said, adding that today, he fields questions about how Ares achieved its goals, the impacts of the company's policies and steps it has taken from the prior year.

Local regulations have also pushed landlords to take action.

Some 47 U.S. jurisdictions now require landlords to submit reports on their buildings’ energy- and water-usage levels, Facilities Dive reported. Four other states and 23 cities ask even more, from requiring landlords to meet performance targets through optimizing a building’s existing electricity infrastructure to mandating emissions cuts.

The results of those efforts have been particularly evident in New York City, industry figures said. Local Law 97 has the country’s most onerous requirements for landlords, mandating that they cut their buildings’ greenhouse gas emissions by 40% from their 2006 levels before the end of 2029 or face financial penalties.

Landlords first had to submit property data to the city last year. It forced a lot of owners to examine practical ways to make energy-efficiency savings, like swapping out traditional lightbulbs for LEDs or insulating their piping, Kelly-Ann Corrigan, chief operating officer of proptech firm Runwise, said onstage.

“You had to start somewhere,” she said. “What has been amazing about Local Law 97 is that it's taken sustainability initiatives that have often been to the side, by another group, and brought them to the forefront of capital planning and budgets.”

But property owners throughout the country are now running into new issues. After taking almost every measure possible to cut their buildings’ emissions through efficiency measures, landlords are coming up against the physical constraints of their properties.

Swapping out a building’s core infrastructure for heat pumps and steam power requires landlords to sacrifice internal floor space and rooftop areas that could otherwise be used for amenities to attract tenants, Silverstein Properties Senior Vice President of Operations Jason McCalla said.

“That's a limiting gap that is not spoken about,” he said.

Additionally, landlords that have already optimized building efficiency are seeing further progress stymied by the grids from which they draw power.

More than half of the 11,000 power plants that fueled grids across the country in 2023 used natural gas, coal and other fossil fuels, according to data from the Environmental Protection Agency. That means that no matter what owners do, for the most part, their buildings are likely still pumping carbon dioxide into the atmosphere.

“The electrification goal is not yet achievable in certain markets from a power capacity standpoint,” Prologis Director of Sustainability Adam Brooks said. “If all buildings were to achieve the market's building energy performance standard tomorrow, the city utility could not provide the energy necessary to retain functionality.”

Politics are also getting in the way of commercial owners’ ability to procure green energy. Federal policy revisions have changed how Clarion Partners is approaching renewable energy, said Karen Mahrous, the investment firm's head of ESG.

Last year’s One Big Beautiful Bill Act introduced earlier dates for the end of tax incentives for solar and wind energy — a move a judge overturned Saturday — and required projects hoping to earn tax credits through using clean hydrogen to kick off by the end of next year.

“Attention and time of the sustainability team is also a valuable resource,” Mahrous said. “We may have to shift our attention to some things that have better incentives.”

But even with those headwinds, owners still have to take decisive action to keep their buildings green, Topp said — or face the consequences.

“You need it to be energy efficient, you need to have a low carbon footprint,” he said. “Otherwise, you're not going to attract the tenants to occupy it, and you won't be able to sell the building or won't be able to get financing for the building.”