There is abundant value embedded in low-carbon transition plans

‘Green’ buildings with high energy performance have long been valued for their ability to enhance occupant satisfaction, save energy, conserve water and reduce waste – all of which contribute to net operating income and reduced operating costs. This has been the predominant financial value proposition underpinning investment in high-performance, green buildings for the last decade.

In practice, investors have most often interpreted green buildings as a variation of Class A real estate with additional sustainability amenities that attract tenants, drive higher rents, and may also reduce operating costs, such as utility costs. Recent econometric research shows these benefits are capitalized into sales price premiums.

There is now increasing interest in looking at market dynamics more holistically. This includes capturing value created by repositioning relatively low-performing, or ‘brown,’ assets through investment in credible transition plans toward low-carbon operations.

This strategy is not new. However, several factors are coming together to create new investment opportunities. Most importantly, low-performance buildings are under pressure from multiple factors, and green buildings have sustained their advantages throughout the post-covid recovery.

Key drivers include: new performance regulation, such as Building Performance Standards in the US; growing understanding of exposure to physical climate risk, such as flood or extreme temperatures; and rising expectations for healthy, productive working spaces, such as those with enhanced ventilation to reduce the spread of infectious diseases. These factors mean that investors can do more than simply find lower-risk, already-green buildings.

Improvement potential

New GRESB data shows these brown-to-green opportunities are broadly available to investors. We can illustrate this with three reference points:

1. The Climate Risk Real Estate Monitor provides estimates of the average energy efficiency of the current building stock in a selection of countries.
2. GRESB-reported data provides information about the measured, operational energy efficiency of investor-owned real estate in a range of countries and sectors.
3. ASHRAE 100-2024 is a standard that provides a global reference for energy efficiency expected from a newly renovated building of a given property type in a specific climate zone.

ASHRAE 100 provides a quantitative target for energy efficiency performance following a major renovation, whereas CRREM provides a description of the market as it is today. Comparing ASHRAE targets to CRREM (Figure 1), we can see significant opportunities to reposition assets from brown – low efficiency – to green – high efficiency (ie ASHRAE targets for efficient buildings are well below CRREM values).

Digging deeper, we can see these patterns also apply across geographic regions. For example, Figure 2 illustrates the relationship between the building stock (CRREM), investor-owned property (GRESB) and ASHRAE targets in office and retail properties in the UK, US and Japan. Comparison of the GRESB data against the two reference points tells us investor-owned buildings are generally more efficient than the prevailing national building stock (represented by CRREM here). This makes sense, as investment-grade property is likely to be designed, built and operated to relatively high standards. However, a large fraction of ­investor-owned property still has the potential to be repositioned to the efficient, achievable ASHRAE targets.

Improvement plans

Realizing these opportunities requires changes in approach for some investors. Traditionally, buyers looked for green credentials, such as LEED certifications or ENERGY STAR ratings. These labels provide a backward-looking indicator of an asset’s performance. A brown-to-green strategy requires estimating the future potential for asset performance. Specialists call this a low-carbon transition plan or strategic decarbonization plan. Real estate professionals may understand it as a capital plan that incorporates sustainability criteria, such as energy efficiency, regulatory compliance costs and physical climate risks.

Regardless of the name, the plans evaluate the entry and exit points for an investment, along with milestones such as the service life of key components and systems. In turn, these can be used to understand the degree of discount or premium to expect when acquiring or selling the asset.

Econometric research suggests these performance improvements can contribute to significant financial returns. Investors have the potential to take advantage of the spread between increasing ‘brown discounts’ and persistent ‘green premiums.’ Academic research indicates that green sales premiums relative to comparable Class A buildings exceed 10 percent. Premiums relative to low-performance, brown buildings should be greater.

On average, traditional green buildings are generally a safer bet for investors, provided they set reasonable risk-adjusted expectations. Repositioning brown, low-performance buildings provides opportunities for greater returns, contingent on significant additional risks. These opportunities are widely available in investment-grade real estate, and can be realized with credible transition plans and on-the-ground execution.