Sustainability: As Much a Priority for Occupiers as for Rents in Site Selection

A partnership ecosystem is essential to achieve sustainable targets.

by JLL

With the real estate sector contributing nearly 40% of all green house gas (ghg) emissions, it is time to think green, and as such, the sector is seeking to transform itself into a more responsible asset class. As a result, sustainability has gone mainstream now and has become an agenda in most boardroom discussions. A clear consensus has emerged that environmental impact can potentially have an adverse effect on businesses in the long run.

Strong value creation being made possible through sustainable practices, green certifications and operational efficiencies at the project level is well recognized. Sustainability now features among the top three considerations for occupiers during site selection, alongside location and rentals.

According to JLL’s report “Sustainable Real Estate: India’s Response to a Greener Future,” 87% of occupiers in the Pan India survey and 78% of investors accept that “climate risk poses a financial risk.” Sustainability has gone mainstream for occupiers in India and real estate is at the core of it. The survey finds 87% of those participants say the link between CRE (Corporate Real Estate) and sustainability is a board-level agenda, and 81% say that real estate is a game-changer in achieving the sustainability agenda.

Occupiers in India are ahead of investors on sustainability ambitions, with the majority of occupiers, 82%, either leading or on the path, against 66% of investors. Seven in 10 occupiers surveyed have carbon emission targets as part of their corporate sustainability strategy. The need for a more sustainable environment has led to greater demand for green buildings, so much so that demand for green buildings risks outstripping supply in India today.

The good news is that seven in 10 occupiers are willing to pay a premium to lease green-certified buildings. Due to the higher demand for green buildings, retrofitting presents the biggest challenge and opportunity. Half of landlords want to actively undertake retrofitting and adaptation for building lifespan extension.

However, the need of the hour is a partner ecosystem to accelerate the race to net zero. Of those surveyed, the majority (nine in 10) believed that a strong partnership among cities, investors and occupiers is necessary. Closing the technology and data gap will be crucial. Nine of 10 agree that digital solutions will be critical in achieving sustainability goals.

Said Sandeep Sethi, managing director-work dynamics, West Asia, JLL:

“Sustainable future in general and ambitious net-zero commitments in particular cannot be achieved without the ecosystem coming together with a collaborative approach. Ninety-six percentage of stakeholders in the research survey agree that collaboration among policy influencers, investors, developers, and occupiers will be instrumental in achieving these ambitions. It is not surprising hence, that sustainability has gone mainstream, and real estate is at the core of it. Ninety percent of respondents of our survey believe that the link between CRE and sustainability is a board-level agenda.”

It is also important to note that, as per the survey, 65% of corporate occupiers and 50% of polled investors have already incorporated carbon emissions reduction as part of their enterprise sustainability strategy.

Real Estate Takes Its First Steps

India has a long road ahead to reach net-zero carbon by 2070, and will need to start with smaller steps, said Dr. Samantak Das, chief economist and head of research and REIS, India, JLL, who elaborated:

“With corporations already committing to aggressive zero-emission targets within the next decade, the built environment will need to keep pace. Investments in technology to measure and accurately report emissions will be as critical as defining clear achievable goals within specified timelines.”

He continued:

“Employees will significantly drive the corporate sustainability agenda by pushing for greater participation and clearly wanting to work for firms that establish their credentials as responsible leaders. The push from employees will further create the right motivation for employers and asset owners to introduce sustainability features if they want to remain relevant while creating asset enhancement opportunities.”

Ambitious decarbonization goals need a multipronged, actionable strategy at a firm level, the report states. A significant opportunity lies in tackling the carbon emissions from real estate, whether owned or leased. Recognition of this fact is clear, given that 96% of occupiers agree that real estate is a game-changer in achieving the net-zero carbon agenda.

Furthermore, for 77% of occupiers, carbon emissions reduction is specifically part of their real estate strategy. A majority of occupiers (93%) agree that they will proactively prioritize locations that help them reduce carbon emissions in the future and investors (65%) agree they would prioritize investing in cities that are climate-change progressive.

Most companies that state their aim for net-zero are talking about targeting emissions that come from their own operations, classified as Scope 1 and Scope 2. Other emissions from sources not directly controlled by an organization, including emissions from suppliers and customers (or the Scope 3 emissions) are often overlooked.

In this survey, JLL found that among those who had already adopted net-zero targets, only 45% included Scope 3 emissions as part of their plans. If companies do not look at the full impact of their products and services-including the Scope 3 emissions — the world will not stay on track to achieve the ambitious goals set by the recently concluded COP26 (the United Nations Climate Change Conference) in November 2021.

Fifty-seven percent of occupiers have already achieved green building certification and 40% aspire to have market-recognized sustainability certification for their portfolio by 2025. Two-thirds of all occupier respondents say they are already paying a 4-10% premium on rents for sustainability certifications. This trend is set to continue, as 92% of respondents are willing to pay a rental premium to take up certified office buildings.

This validates the belief held by investors that green certifications drive higher occupancy, higher rents, higher tenant retention and overall higher value for the asset. As a result, when building or buying assets, investors prioritize buildings with green certification. JLL also found that, overall, LEED (Gold level) certification is most sought after in India.

In Conclusion

Sustainability as an economic risk has become the dominant discussion point across board rooms. It has the ability to transform business, industries and society. Real estate can be the medium of big change by its innate existence across all sustainability-driven concerns and offer tangible solutions. It is a high-impact segment toward reducing global ghg emissions.

The sector can not only bring about change through reimagining the built environment, but it can also have a positive impact on the health and well-being of employees, customers and residents by promoting social sustainability, accessibility, inclusivity and diversity.

We are coming to the realization that transitioning to a low-carbon economy while being critical is also a complex journey. A partnership ecosystem is essential to achieve sustainability targets, with city regulators playing a key role in enabling the decarbonization of the built environment, along with investors, landlords and occupiers.