The commercial real estate sector, particularly the office sector, has faced many disruptions over the past few years.
COVID has dramatically reshaped the way that we work, with a surge in telework and decreased occupancy rates for office buildings.
Environmental, Social, and Governance (ESG) goals and action have become essential. According to GRESB, over 95% of investors now use ESG data in their decision making.
Building Performance Standards (BPS) are emerging across the U.S.—most have their first compliance deadlines within the next few years. This will drive building owners to significantly invest in the efficiency of their buildings to avoid steep noncompliance fees.
Tenant demand for low and no-carbon buildings has significantly increased such that demand is outpacing supply (JLL).
With this rising demand for decarbonization, offices must utilize all tools available to meet ambitious carbon goals.
The lease is one of the critical tools that must be used to ensure both landlord and tenant are able to meet their goals and requirements while reducing risk. Green, or high-performance leases that have clauses that address ESG are a long-time tool to spur efficiency and decarbonization action at the building level. While it is the measures enabled by the lease and not the signing of the lease that result in the operational savings, the lease plays a key role to ensure measures can and will be implemented, defines the efficiency standards required for the asset, and outlines the associated roles and responsibilities of both landlord and tenant.
IMT recently conducted research to revisit the potential savings that can be unlocked by green leases.
Research Methodology
We analyzed a model performance-based lease to pull out specific energy conservation measures and conducted a literature review to find studies that analyzed the potential savings from the identified energy conservation measures. Then, we utilized Commercial Buildings Energy Consumption Survey (CBECS) 2018 data to understand the energy consumption profile of an average U.S. office building.
| U. S. Office Average Energy Consumption Breakdown | ||||
|---|---|---|---|---|
| Space Heating | Ventilation | Other | Lighting | Computing |
| 30% | 20% | 17% | 12% | 8% |
| Cooling | Refrigeration | Water Heating | Cooking | Office Equipment |
| 8% | 2% | 1% | 1% | 1% |
Table 1. Office Energy Consumption Breakdown, CBECS 2018
To get a sense of how a lease clause would impact energy savings on the whole building, we reviewed each clause to understand the area of building impacted. For example, a clause requiring ENERGY STAR appliances for an office building would impact Computing, Refrigeration, Cooking, Office Equipment, and Other. Then, we multiplied the savings by the percent building area impacted. After completing this step for each clause, we summed up the total savings. To account for any overlap in savings between each energy conservation measure, we removed a third of total savings.
Results
Our analysis found that green leases have the potential to enable over 17% of site energy savings. Implementing green leases across all U.S. office buildings would result in over $2.2 billion in energy savings and over 499,100 metric tons of CO₂ avoided.
| Savings Potential Over the Life of the Lease – U.S. Office Buildings | |
| USD, Nominal | $2,273,204,678 |
| Savings ($/sf) | $0.34 |
| Energy Savings (MMBTU) | 94,345,784 |
| Savings (kBTU/sf) | 14 |
Table 2. Potential Cost Savings for U.S. Office Sector from Widespread Green Lease Implementation, Institute for Market Transformation 2024
17% and $2.2 billion savings are conservative estimates for the average office building. Our calculations utilized data from the most current CBECS (2018), so it does not account for more recent changes to office building energy consumption, including changes to the office sector in the aftermath of COVID and changes to traditional office work environments. Average electricity prices have also risen sharply in recent years, so the potential cost savings could be higher.
The specific savings enabled by a green lease for a particular building will greatly depend on the building’s baseline efficiency and the green lease clauses. If utilizing a performance-based lease, which will include a clause on a building energy or carbon reduction target, the savings from the implementation of that clause will depend on the energy consumption reduction achieved to reach the building target.
The calculations in Table 2 above accounted for five clauses with specific energy conservation measures, but a typical green lease that meets Green Lease Leaders standards would likely include additional clauses. A green lease that includes additional specific energy conservation measures will likely unlock additional savings opportunities.
Table 2’s calculations also did not account for the impact of greater data transparency, utility efficiency education, or collaboration between the landlord and tenant, as there are not many reliable studies with this information. Greater data transparency, utility efficiency education, and collaboration to act on the data would likely result in additional opportunities for savings.
Conclusions
The Green Lease Leaders program, created by IMT in partnership with the U.S. Department of Energy, has grown dramatically in the last ten years, with program participants now managing 7.6 million square feet in the U.S. In today’s market, not having a green lease in place increases risks for both owners and tenants. Without green lease language, it can be very difficult to comply with emerging policy requirements, meet your organization’s ESG goals, and stay competitive in a complicated market.
