Given the climate-conscious economy, commercial real estate must now consider sustainability in its investment strategy. Buildings and infrastructure account for roughly 40% of global carbon emissions, putting real estate at the forefront of the fight against climate change.
Yet a substantial gap is materializing between the demand for green buildings and their supply. In 21 major cities worldwide, roughly 30% of the projected demand for low-carbon office space will go unmet in 2025, and this shortfall could widen to over 70% by 2030 if current trends persist.
This supply gap brings challenges and opportunities for commercial real estate stakeholders, including investors, tenants, and regulators.
Demand is outpacing supply, meaning companies with ESG (Environmental, Social, and Governance) commitments are scrambling to find compliant spaces, while owners of inefficient buildings face obsolescence.
At the same time, the shortage creates a chance for investors and developers to deliver new low-carbon projects and capture a market premium.
In this article, we’ll explore why ESG matters for real estate investors, the roadblocks to adoption, and steps to build a sustainability strategy that can help bridge the low-carbon building gap.
Why ESG Matters for Investors in Commercial Real Estate
ESG is a strategic imperative for investors that directly impacts asset value and long-term returns.
With a substantial shortage of low-carbon buildings on the horizon, investors have a clear incentive to fund and develop sustainable real estate versus traditional real estate properties.
| Factor | ESG-Focused Real Estate | Traditional Real Estate |
| Operating Costs | Lower due to energy efficiency | Higher due to less efficient energy use |
| Property Value | Higher with green certifications | Subject to market trends, may decrease without sustainability measures |
| Tenant Demand | Strong demand from sustainability-conscious tenants | Mixed demand, may struggle with tenant retention |
Capital directed into green buildings and retrofits can tap into surging demand: many corporate tenants now actively seek energy-efficient, ESG-certified spaces to meet their own climate targets and reduce operating costs.
This strong tenant appetite means sustainable properties often enjoy higher occupancy and can command “green premiums” in rents and sale prices.
In fact, the growing scarcity of ESG-compliant buildings is creating a medium-term opportunity (typically achievable within 10 years) for investors who deliver low-carbon projects now, as they stand to benefit from premium pricing.
Conversely, owners of carbon-intensive, inefficient properties risk seeing their assets devalued. This is already evident as “brown discounts” in markets like Europe, where buildings with poor sustainability are discounted by the cost needed to bring them up to standard.
ESG also matters for investors from a risk management and compliance perspective.
Regulators worldwide are introducing stricter building performance standards and disclosure requirements, which can directly affect real estate investment portfolios.
For example, real estate firm JLL reports that, in New York City, only about 4% of top-tier office buildings currently meet new local laws limiting carbon emissions, and more than 30 other U.S. cities plan similar rules.
Investors who ignore these trends may face steep retrofit costs, fines, or stranded assets as regulations tighten.
On the other hand, proactive investors who integrate ESG are better positioned to future-proof their portfolios. They mitigate regulatory and climate risks (such as extreme weather impacts and energy price volatility) and bolster their reputation and access to capital.
Banks and institutional funds increasingly prefer or even require strong ESG performance before financing projects, meaning ESG-minded investors can secure funding more easily and at better rates.
4 Roadblocks to ESG Adoption in Real Estate
Despite the unmistakable benefits and urgency, certain industry roadblocks exist to adopting ESG practices and accelerating the supply of low-carbon buildings.
Here are four of the most notable roadblocks.
1. Financial
One major barrier is financial: upgrading old buildings or constructing new high-efficiency ones requires significant capital expenditure.
With a projected cost of over $3 trillion, retrofitting office buildings across 17 major countries is an enormous challenge, far exceeding the money available through existing green finance programs.
Property owners and investors might struggle to justify these upfront costs, especially if the payback period is long or uncertain. This financing gap delays renovations and new sustainable developments, contributing to the lack of supply.
Without better financing models or increased incentives, accessing capital for ESG initiatives continues to be one of the biggest obstacles.
2. Regulations and Standards
The ESG rulebook isn’t the same everywhere.
Building owners and investors must work through a patchwork of sustainability laws, reporting guidelines, and building standards that differ from place to place.
While leading cities and countries are beginning to mandate energy efficiency and emissions cuts for buildings (for instance, France’s Tertiary Decree requires cutting building energy use by 40% by 2030), not all markets have obvious or enforceable standards.
Inconsistent rules create uncertainty, making developers hesitant to invest in sustainability if they are unsure how regulations will impact them.
3. The Market
Operational and market factors also play a part.
The split-incentive problem is a classic example: landlords often bear the cost of energy upgrades, while tenants reap most of the utility savings, reducing the owner’s motivation to invest.
Without lease structures that share benefits (such as green lease clauses), necessary retrofits can be delayed.
Not to mention, some firms still prioritize short-term returns over long-term sustainability, especially in uncertain economic times, which can stall ESG initiatives.
4. Supply Chains and Technology
Finally, supply chain and technical challenges—from sourcing low-carbon materials to finding skilled labor for green construction—can slow down projects to improve ESG metrics.
These roadblocks help explain why, despite strong demand, the supply of green buildings isn’t keeping pace. Overcoming them will require coordinated effort and innovation.
6 Steps to Build a Sustainability Strategy in Commercial Real Estate
Given the challenges, building a robust ESG strategy is paramount for any organization involved in commercial real estate.
A thoughtful sustainability strategy helps investors and property owners proactively bridge the gap between supply and demand for green buildings.
Here are six fundamental steps and considerations for developing an effective ESG strategy in this sector:
1. Benchmark Current Performance
Begin with thoroughly evaluating your real estate portfolio’s ESG performance.
This includes measuring the sustainability metrics of each property, including:
- Energy usage
- Carbon emissions
- Water efficiency
This assessment will highlight which buildings are most at risk of falling behind (for example, carbon-intensive older assets) and identify the greatest opportunities for improvement.
2. Set ESG Goals and Policies
Define what “success” looks like regarding sustainability for your portfolio or company.
This might involve:
- Committing to targets such as carbon neutrality or net-zero operations by a certain year
- Reducing energy consumption by a percentage
- Achieving green building certifications for all new projects
Ensure these goals align with broader market trends and regulations. Remember that, globally, countries and businesses are aiming to halve emissions by 2030, so targets should be ambitious yet credible.
3. Invest in Sustainable Real Estate
Channel capital expenditures and new investments into low-carbon, resilient properties.
Prioritize retrofitting existing buildings with energy-efficient systems (LED lighting, modern HVAC, insulation upgrades) and renewable energy sources and pursue new developments designed to high sustainability standards from the outset.
Doing so, you directly help close the supply gap of green buildings.
Importantly, these investments are increasingly likely to pay off. With demand for sustainable space far outstripping supply, such assets can attract premium tenants and command higher rents or values.
4. Align with and Advocate for Policy Changes
Rather than viewing regulation as a burden, incorporate upcoming building codes and ESG regulations into your strategy as guideposts.
Stay ahead of the curve by ensuring properties meet or exceed foreseeable standards (for example, anticipated energy performance standards in your city or carbon pricing mechanisms).
Part of a good ESG strategy is actively supporting the framework that makes ESG adoption easier and more profitable for all players.
5. Engage Tenants
An effective sustainability strategy treats tenants as partners. This means marketing the ESG features of your properties to attract like-minded tenants and working with existing tenants to improve building performance.
For instance, implement green lease clauses that share the costs and benefits of efficiency upgrades or provide sustainability dashboards and resources so tenants can participate in energy savings.
Doing so lets you align incentives and tap into tenants’ sustainability commitments. Remember that for many occupiers, a building’s sustainability is now a core deciding factor in where they lease space.
Increasing tenant demand for ESG-compliant buildings creates a virtuous cycle: the more tenants insist on green buildings, the more the market will supply them.
6. Monitor, Report, and Refine
Lastly, treat ESG as a continuously evolving aspect of your strategy.
Track key performance indicators (KPIs) regularly and report on them transparently to investors, regulators, and tenants.
These KPIs include:
- Energy usage
- Emissions
- Indoor air quality
- Social impact metrics
This ongoing monitoring ensures accountability and identifies new challenges and opportunities as the market and technology change.
In Closing
The coming years are pivotal for the sustainability transformation of commercial real estate.
Without rapid adoption of ESG principles, the built environment will struggle to meet the demands of investors seeking resilient assets, tenants seeking green workplaces, and regulators seeking to meet climate targets.
However, this gap is also an unprecedented opportunity.
Building and retrofitting sustainable properties not only helps society and the planet but also positions real estate portfolios for success in a future where sustainability is non-negotiable.
In short, ESG in commercial real estate matters because it enables the sector to bridge the low-carbon building gap.
