A new report from the Institute for Market Transformation (IMT), What’s in a Green Lease? Measuring the Potential Impact of Green Leases in the U.S. Office Sector is now available. An excerpt from the Introduction is below; to read the report in full, click here.
Introduction
This study, through an analysis of current energy efficiency measures facilitated by the signing of green (or energy-aligned) leases, estimates that green leases have the potential to reduce energy consumption in office buildings by 11 to 22 percent, yielding reductions in utility expenditures in U.S. commercial buildings up to $0.51 per square foot. Green leases have the potential to provide the leased U.S. office market $1.7 billion to $3.3 billion in annual cost savings. The magnitude of the split incentive problem, and the commercial sector’s current failure to achieve energy efficiency at scale, presents a significant opportunity for owners and tenants to save billions of dollars through attainable changes to their lease structures and building management.
Office buildings in the United States are not as energy efficient as they should be. Market failures, including the principalagent problem, haved created a gap between the optimal investment in energy effiency and the actual investment that has occurred in commercial spaces. Owners and tenants seeking low-risk solutions to increase the performance of their buildings should turn to a ubiquitous aspect of commercial real estate: the lease. By adopting green leasing practices, the energy efficiency gap can be filled, and utility consumption in offices across the country reduced—with potential for both landlords and tenants to realize significant savings. By utilizing the lease as a tool to improve energy efficiency, a building operator can create a high-performing asset that minimizes the building’s environmental impact, proving valuable to both the socially and fiscally responsible investor.
Adopting green lease practices doesn’t mean reinventing the wheel either. By including a handful of new or modified clauses in a traditional commercial lease, both owners and tenants can better realize the benefits of investing in energy efficiency measures. These measures, which will be described in this report, contribute to higher-quality spaces for tenants, who recoup their investment through lower utility bills and improved productivity and comfort. Green lease clauses drive the creation of more-valuable buildings for owners, who enjoy greater rents and lower vacancy.