The Greening of Lease Terms

As new-construction commercial properties—and retrofitted older ones—veer toward sustainability and the goal of net zero carbon emissions, the use of these properties is also headed in that direction. JLL reports that more occupiers are signing leases that factor in sourcing energy from renewables, reducing carbon emissions from building operations and decreasing waste and water use.  

Globally, 34% of occupiers already have green lease clauses, while a further 40% plan to sign them by 2025, according to JLL’s Decarbonizing the Built Environment report. Investors are also taking action, with 42% now having green lease clauses in place and an additional 37% planning to adopt them by 2025. 

On the ownership side, landlords ranging from Columbia Property Trust, Shorenstein and Tishman Speyer in office to Digital Realty and Prologis in industrial have taken the lead. These and other owners across the office, industrial and retail sectors were honored earlier this year with the Green Lease Leaders Awards, organized by the Institute for Market Transformation (IMT) and the U.S. Department of Energy’s Better Buildings Alliance. 

“Green leases can be a great mechanism in bringing transparency and alignment between landlords and occupiers and making buildings as sustainable as possible in the process,” says Richa Walia, EMEA corporate research and strategy director at JLL. 

For tenants, there’s the prospect of cost savings through better energy efficiency across building management, services and utilities, which also supports their own sustainability targets. The IMT has estimated that green leases can help reduce utility bills by up to 22%, or around 50 cents per square foot in U.S. office buildings alone. 

If all leased office buildings had green leases, the market could reap more than US$3 billion in annual cost savings, the IMT estimates.  

“More clients are now aware that green leases can unlock both short- and long-term benefits,” says Quentin Drewell, sustainability director in JLL’s Upstream Sustainability Services. “In the past, green leases were about balancing the financial incentives for sustainability improvements between the building owner and the tenant. 

“While this is still important, conversations are now turning to mutual value creation,” he adds. 

We’re also seeing evolution in the areas covered by green leases. “Five to 10 years ago, green leases were more around energy efficiency and waste reduction, which today are standard practice, while other dimensions such as health and wellbeing and biodiversity are now leading practice,” says Walia, citing recent experience with retail tenants and their landlords. 

Walia anticipates broader adoption of the green leasing model as more occupiers roll out sustainability plans. Although green leases are increasing in number, more industry standards that underpin these lease structures are needed to support further growth, Drewell believes. 

“Progress has been made in defining what makes a lease green – and much of that is due to occupiers and landlords increasingly working in tandem,” he says. Drewell adds that 78% of investors and 85% of occupiers agree that a strong partnership between cities, investors and occupiers is instrumental in driving decarbonization. 

Pictured: Tishman Speyer’s under-development The Spiral office tower in Manhattan. The owner-developer has been recognized as a Green Lease Leader.