Retail Real Estate and ESG

ESG Tool Kit: Chapter 8

You are reading part 8 of the 10-part ESG Factsheet Series. Explore all the chapters here.

ESG FAQs  |  What is ESG  |  ESG Ratings  |  ESG Reporting  |  ESG Climate and Risk  |  ESG Human Capital Management  |  Supply Chain and ESG  |  Real Estate and ESG  |  Plastics and Packaging and ESG ESG Glossary of Terms

Retail real estate includes stores, shopping malls, fulfillment centers and warehouses. Retail tenants make up a significant portion of U.S. commercial real estate. ESG priorities for real estate largely center around environmental concerns like greenhouse gas emissions, energy efficiency and waste and water management, but societal concerns like human health, wellbeing and accessibility are being increasingly considered in building development and use.

Retail stores have been some of the hardest hit by the COVID-19 pandemic, with bankruptcies and higher than normal vacancy rates. Beyond store closures and other obstacles, landlords and retail tenants face mounting pressure to decarbonize and to achieve net-zero energy consumption (where the amount of energy used at the property equals the amount of renewable energy created on-site).

Retail leasing

Retail leasing accounts for a large portion of commercial real estate, and the type of lease a retailer enters affects its ability to measure and control its ESG impacts. In full-service leases, tenants pay a lump sum, and the landlord is solely responsible for things like utilities and maintenance. This can make it difficult for retail tenants to collect data about their energy and water usage, and there is little incentive to make improvements. In triple net leases, where tenants pay for their utility usage, tenants are more incentivized to make efficiency improvements.

It is predicted that 40 percent of occupants will have green lease clauses by 2025.

ESG elements are also more difficult to control in shared areas and in leases where it is specifically noted that tenants are not permitted to make alterations, improvements or other changes to the premises like LED lighting installations, low-flow water fixtures and efficient HVAC upgrades.

To create the mechanisms needed to control ESG impacts and incentivize improvement, commercial real estate has introduced things like green leases, in which tenants commit to participating in things like energy or water conservation initiatives, recycling programs or other sustainable actions to gain financial incentives. Green leases have been increasing in popularity in recent years; it is predicted that 40 percent of occupants will have green lease clauses by 2025.

Challenges and solutions

Currently, 28 percent of all global carbon emissions — and more than 40 percent of emissions in the United States — are from residential and commercial real estate; most of these emissions come from the energy used for heating, cooling and lighting. In response, regulatory requirements are tightening, and net-zero commitments and energy-saving initiatives have become commonplace for tenants across all industries. Some of these initiatives include:

  • Updating appliances like heating, cooling and lighting fixtures to be more energy efficient
  • Using enhanced technology for remote utility metering
  • Sourcing high-quality “green” construction materials like timber in place of energy-intensive materials like steel and concrete
  • Entering into green leases to align tenants’ environmental- and sustainability-related actions with financial incentives
  • Achieving third-party sustainability certifications like ENERGY STAR, LEED and more

The future of retail real estate

In the coming years, retail real estate will continue to see buildings with better sustainability performance commanding higher rents but incurring lower operating and maintenance costs. ESG-related priorities will continue to have an increasing impact on employee, consumer and investor behavior. Successful retail operations will need to include convenient, multichannel options that support digital technologies and take advantage of innovative store formats.

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Last Updated: 4/15/2022