By Rick Zelinsky
The real estate ecosystem is facing significant challenges in addressing the rising demand for sustainability-focused operations. According to a JLL study, demand for high quality, low carbon workspace is set to outstrip supply by 75% across major U.S. markets by 2030.
To meet corporations’ interests in leasing more environmentally friendly workspaces, green leases have emerged as a powerful tool for both tenants and landlords to align interests around sustainability. With rising regulatory pressures and the demand for cost-efficient operations, green leases offer distinct advantages: cost reduction, enhanced workspaces, and guaranteed compliance with environmental regulations. However, to unlock these benefits, it’s important to successfully navigate potential challenges when developing a green lease to ensure optimal outcomes for all parties involved.
What Is A Green Lease?
A green lease incorporates terms and conditions that foster collaboration between landlords and tenants on energy efficiency and sustainability performance. These clauses can range from broad commitments to specific, enforceable obligations, to share responsibility for reducing a building’s carbon footprint. In the U.S. alone, 1.2 billion square feet of office space and 2.5 billion square feet of industrial space will be experiencing a lease expiration before 2030, creating an unprecedented opportunity for collaboration between landlords and tenants.
Green lease clauses can be tailored to meet various sustainability goals, ranging from “light green” aspirational commitments to “dark green” binding legal obligations. These clauses can be added to new or existing leases via a Memorandum of Understanding (MoU). To ensure their success, it’s essential to define clear expectations upfront, detailing commitments, setting measurable targets, and using Key Performance Indicators (KPIs) to track progress. Involving sustainability experts early in the process can also help ensure that both parties are aligned and that the lease is both ambitious and actionable.
Navigating Common Challenges
While green leases offer significant benefits, they also come with their own set of challenges. Here’s how to address the most common obstacles:
- Perception of Increased Costs: Both landlords and tenants often worry about the initial costs of energy and sustainability building upgrades. However, long-term savings frequently outweigh these upfront investments. According to IMT, green leases can help reduce tenant utility bills by up to 22% through energy-efficient upgrades and better energy management. While some low-cost measures, such as air quality testing or installing submeters, may be necessary, the long term benefits–from lower utility bills and alignment with ESG goals–far outweigh the initial investments.
- Data Sharing and Management: Managing and sharing accurate utility data between landlords and tenants can be complicated, especially when tenants control their own data. Integrated workplace solutions providers now offer AI powered tools to aggregate and manage data across portfolios. For instance, platforms like Tango enable real-time monitoring of energy use, providing a clear, shared view of consumption. Many workplace management systems also integrate with reporting frameworks like ENERGY STAR and GRESB, automating climate disclosure compliance with building performance standards and simplifying the data-sharing process.
- The Need for Robust Collaboration: Green leases require close collaboration between landlords and tenants to align sustainability goals. This can be particularly challenging when there’s high tenant turnover or differing priorities. Additionally, the complexity of these leases often necessitates outside expertise in energy efficiency and sustainability. To overcome these challenges, leases need to be well-structured, with clearly defined roles, responsibilities, and sustainability targets that benefit both parties.
Green leases represent a powerful opportunity to align environmental goals with operational efficiency, driving value for both tenants and landlords. By embracing green leases, and the technology platforms that enable them, tenants and businesses can reduce costs, comply with evolving regulations, and meet the growing demand for sustainable workspaces. Early adopters of green leasing practices will not only enhance their market competitiveness, but also position themselves as leaders in the eco-conscious commercial real estate market of the future.
Rick Zelinsky, Senior Vice President of Product Strategy at Tango, brings over 25 years of expertise in lease administration and accounting, serving as the main architect behind Tango’s lease solution. Today, Rick dedicates much of his time to collaborating with customers, ensuring that Tango consistently delivers the innovative features organizations rely on.
