Sustainability criteria are also becoming increasingly important in the commercial real estate sector. What landlords should consider and why now is a good time to take these criteria into account for upcoming renovations.
The topics of sustainability and social responsibility have reached many areas of society. They are also gaining importance in the commercial real estate industry under the term "ESG."
The abbreviation ESG has become an important acronym in this context: the "E" stands for environment (environmental and climate protection), the "S" stands for social and includes, for example, a company's social responsibility. "G" stands for governance, which refers to sustainable corporate management. While larger project developers and office landlords are increasingly putting ESG on their agenda, smaller, private landlords are rarely aware of the tasks involved. This is pointed out by the experts at Larbig & Mortag Immobilien in Cologne. But even for them, there are good reasons to attach greater importance to sustainability and CO2 reduction. Ultimately, this will secure their long-term rentals and maintain the value of their commercial rental space. ESG will be an indispensable component of commercial property valuation in the future, regardless of whether the property is owned by private or institutional owners. This is because sustainable investments are already in demand today.
When financing larger real estate projects, companies must comply with ESG regulations in the EU taxonomy for investment products. Taxonomy is the classification system that translates the EU's six comprehensive climate and environmental goals into a clear set of criteria. Companies must be able to demonstrate their efforts to protect the environment. If they cannot provide the relevant evidence, the bank may refuse to grant them financing or offer them a loan on less favorable terms, such as a higher interest rate.
In order for a new building or a building that has undergone extensive renovation to meet ESG criteria, it should, for example, be heated and cooled using renewable energy. This could be photovoltaic systems on the roof or connection to the district heating network. "Green roofs, facades, or interior areas improve the microclimate. When it rains, roof vegetation absorbs precipitation like a sponge. A more detailed knowledge of the materials used and their recyclability are further aspects on the path to a sustainable building," explains Uwe Mortag, managing director of Larbig & Mortag Immobilien in Cologne.
Social aspects such as daycare, gym, and flexible working hours
If a building has a daycare center or a company offers its employees flexible working hours or a company gym, this improves the social aspects within the framework of ESG. It is important that these measures are not advertising claims, but must be verifiable with facts and figures. Anything else would be "greenwashing."
If a property is to be sold at some point, larger, professional buyers such as insurance companies, funds, and larger family offices will examine the ESG criteria of their new acquisitions more closely in the future. This is because many have now imposed their own principles for sustainable or climate-neutral business practices. Ultimately, they are also driven by their shareholders and stakeholders, who in turn place greater value on the sustainability of their investments.
Commercial property tenants must also prepare for changes. After all, they too are important for the valuation of commercial real estate. Whether large fashion chains, banks, insurance companies, municipalities, or office users such as consulting firms, IT companies, or service providers, there is a growing focus on ensuring that leased office space complies with the company's own sustainability code. Until a few years ago, it was enough for many commercial tenants that their building had a high energy standard, such as a gold seal from the German Sustainable Building Council (DGNB). This is no longer enough for discerning tenants: they demand additional criteria. In addition, sustainability aspects can also improve the ability of office users to attract skilled workers. Factors such as charging stations for e-bikes and e-cars, a good indoor climate, and lighting adapted to biorhythms are important to many employees when choosing an employer.
Higher, but not alarming, office vacancy rates
Before the pandemic, most commercial landlords did not have to worry about renting out their space. This has changed in some cases. In almost all major cities, the market has eased and there is more vacant office space available again. In Cologne, for example, the office vacancy rate in the third quarter was 4.5 percent. Before the pandemic, it was 2.5 percent. This represents an increase of 55 percent in two years. "This is not an alarming situation, especially considering that the number of office workers will continue to rise in the long term. In the cathedral city alone, it is expected to increase by 21,000 jobs to 356,000 by 2030," says real estate expert Mortag. This is confirmed by a study conducted by KölnBusiness in August 2021. "The discussion about more home offices will therefore not affect the basic space requirements. In our opinion, home (office) will not become synonymous with future office work. However, one or two days of mobile working per week will remain as a result of the pandemic," says Mortag.
However, it should be borne in mind that currently it is mainly unrenovated, larger spaces with unfavorable floor plans that are vacant. Their owners are now called upon to act. They would be well advised to modernize their spaces and also take ESG requirements into account. It is to be expected that sustainability criteria will become an important decision-making factor in the leasing and sale of commercial properties, alongside the quality of the fittings, the location, and the price.
