The Platform

Green apartment building in Sydney, Australia. (John Lyman)

The new reality for commercial real estate is that being green doesn’t dictate whether a space is leased.

In recent years, the trend of “going green” in commercial real estate has been the subject of much attention. However, many are beginning to question if this approach is still the right strategy to follow in a post-pandemic economy.

Various programs and “green products” are available to incorporate technology and systems that can render buildings more efficient and environmentally friendly. But is this what corporate tenants are really seeking today?

More pressing is the issue of building occupancy. With rates dropping to 96% or even 50%, owners are no longer prioritizing environmentally friendly amenities that may take years, or even decades, to recoup their investments.

The immediate need is to make the building attractive to potential tenants. The foremost priority is to lease space, implementing what will restore profitability – seeking “the gold” in leases, rather than the green.

This question challenges the prevailing enthusiasm for “green buildings.” However, the real question at hand is: What strategies should be adopted in a shrinking market that has undergone a paradigm shift many have yet to recognize, let alone adapt to its novel demands?

The “new demands” are characterized by a strategy of companies reducing their corporate footprint in buildings by anywhere from 50% to 80%. This massive decrease in demand has turned the corporate leasing market into “reverse musical chairs.” More space is becoming available, yet there’s significantly less demand for it from tenants seeking buildings capable of supporting mission-critical applications, requiring redundancy and resilience in power and high-speed connectivity.

These mission-critical applications necessitate reliable amenities like power and broadband connectivity, without a single point of failure. A building’s ability to support these necessities supersedes whether it has a pure air system or a million-dollar dimmer system.

From the standpoint of property owners or management firms in this new, shrinking competitive market for office space, the primary question becomes: “Is it not how green a building is, but how much revenue it generates?” This should be their initial query when evaluating their portfolio.

The task is to discern which properties continue to generate profits and which are losing money. Is it feasible to quickly revamp a building to attract new tenants, or is selling the best option? In extreme cases, large firms are resorting to bankruptcy to shed bad, outdated properties.

If occupancy rates plummet to 20-25%, decisive action must be taken to enhance marketability in this demanding environment. The priority is not green amenities but resilient and intelligent features that guarantee power and broadband connectivity.

Many in real estate have a rule of thumb to hold off on improvements until there’s positive cash flow. But for many properties, this time has passed, and they remain wary of additions or amenities until they escape a difficult quarter. However, this is not just a temporary struggle; many Class A and Class B buildings that are technologically obsolete may remain vacant for years.

Some experts believe they can purchase these losing Class A buildings at a bargain rate and still reap profits. But the harsh reality is that junk remains junk, even at a discounted price.

The challenge lies in recognizing that a building is technologically obsolete and that this is part of the reason it lost tenants. If you’re expecting to attract new tenants willing to pay premium prices for such a space, it’s time to reconsider your strategy.

So, what truly lies in your portfolio of properties? Before contemplating going green, ensure you’re poised to bring in the gold.

James Carlini is a strategist for mission critical networks, technology, and intelligent infrastructure. Since 1986, he has been president of Carlini and Associates. Besides being an author, keynote speaker, and strategic consultant on large mission critical networks including the planning and design for the Chicago 911 center, the Chicago Mercantile Exchange trading floor networks, and the international network for GLOBEX, he has served as an adjunct faculty member at Northwestern University.