The ESG Impact on Commercial Real Estate: How It’s Shaping the Market from Core to Secondary and Tertiary Sectors
Introduction
Environmental, Social, and Governance (ESG) considerations are no longer optional in commercial real estate—they are fast becoming a central focus for investors, tenants, and regulators. While ESG compliance initially gained traction in core commercial markets, its influence is now trickling down into secondary and tertiary markets. Commercial landlords who fail to adapt risk falling behind as sustainability, energy efficiency, and ethical governance increasingly shape property demand and valuation.
In this article, we’ll explore the growing impact of ESG on commercial real estate, its expanding reach beyond primary markets, and practical steps landlords can take to future-proof their assets.
ESG’s Influence on Core Commercial Markets
Leading institutional investors, corporate tenants, and government policies have accelerated ESG adoption in major commercial hubs. In core markets, Class A office buildings and premium retail centers are setting the standard by integrating:
- Green Certifications: Many prime assets now seek ratings such as NABERS, Green Star, or LEED to demonstrate sustainability credentials.
- Energy Efficiency Upgrades: Landlords are investing in smart lighting, HVAC improvements, and renewable energy sources to reduce emissions.
- Sustainable Financing: Banks and financial institutions are offering green loans and sustainability-linked bonds to support ESG-focused property initiatives.
- Regulatory Compliance: Governments in major markets are implementing stricter ESG reporting requirements, carbon reduction targets, and tenant energy disclosure mandates.
These factors have led to increased tenant demand for ESG-compliant buildings, as businesses prioritise sustainable premises to align with their corporate social responsibility goals and attract environmentally conscious employees and customers.
The Trickle-Down Effect to Secondary & Tertiary Markets
Initially, ESG adoption was driven by the largest players in high-value commercial real estate markets. However, its impact is now filtering down into second- and third-tier markets due to several key drivers:
- Investor Expectations: Private and mid-tier investors are recognising that ESG-aligned properties offer better long-term asset performance and lower risk exposure.
- Tenant Preferences: Smaller businesses are following the lead of major corporations in prioritising sustainability in their leasing decisions.
- Regulatory Expansion: Governments are extending ESG-related requirements to broader commercial sectors, affecting landlords in suburban and regional markets.
- Rising Operating Costs: Energy-efficient buildings deliver long-term cost savings, making ESG-driven improvements increasingly attractive for landlords in non-core markets.
As ESG principles become the norm, secondary and tertiary market properties that do not align with sustainability expectations risk depreciation, higher vacancy rates, and reduced financing options.
How Landlords Can Prepare & Position Their Properties
With ESG rapidly reshaping the commercial real estate landscape, landlords must take proactive steps to enhance their properties’ sustainability and compliance. Here are several key strategies to consider:
1. Improve Energy Efficiency & Secure Green Certifications
Upgrading building systems to improve energy efficiency is one of the most impactful ESG measures. Consider:
- Retrofitting lighting with LED solutions.
- Upgrading insulation and window glazing to enhance thermal performance.
- Investing in renewable energy sources such as solar panels.
- Obtaining NABERS, Green Star, or similar certifications to enhance marketability.
2. Ensure Compliance with ESG Regulations
ESG reporting requirements are expanding, and landlords must stay informed about relevant legislation, including:
- Energy efficiency disclosure mandates.
- Environmental impact assessments.
- Workplace safety and social governance obligations.
Ensuring compliance early will help avoid potential penalties and enhance property appeal to ESG-conscious tenants and investors.
3. Engage with Tenants & Offer Sustainable Leasing Options
Tenant collaboration is essential for achieving ESG goals. Consider implementing:
- Green Lease Clauses: Encouraging tenants to operate sustainably by setting energy efficiency benchmarks and waste reduction targets.
- Sustainability Incentives: Providing rebates or rent reductions for tenants who adopt sustainable practices.
- Shared ESG Initiatives: Partnering with tenants on waste management, recycling programs, and energy conservation efforts.
4. Invest in Smart Building Technology
Modern technology can help optimise energy use and improve building performance. Landlords should explore:
- Smart meters for real-time energy consumption tracking.
- Building automation systems that regulate lighting, heating, and cooling based on occupancy.
- Water efficiency technologies to minimise consumption and waste.
5. Leverage Sustainable Financing Opportunities
ESG-compliant properties are increasingly eligible for preferential financing options, including:
- Green Loans: Offering lower interest rates for sustainability-focused property upgrades.
- Government Grants & Incentives: Subsidies for implementing renewable energy solutions or energy efficiency improvements.
- Sustainability-Linked Bonds: A growing financial instrument attracting ESG-conscious investors.
Conclusion
The rise of ESG in commercial real estate is no longer confined to top-tier markets. As sustainability expectations continue to evolve, secondary and tertiary market landlords must act now to remain competitive in the long term. By improving energy efficiency, embracing smart technology, engaging tenants, and leveraging sustainable finance options, commercial property owners can align with ESG trends and secure long-term asset value.
The future of commercial real estate is becoming green, and those who take proactive steps today will reap the benefits in the years to come.
As always, if we can help you review the best strategies for your commercial property, please reach out to our team. We’d love to help!
