Will a Green Retrofit Lead to Higher Office Rents?

Older office buildings often struggle to command rents anywhere near those of newer Class A buildings. The gap can be substantial – sometimes 30-40% lower rates for aging buildings compared to new construction. However, strategic green retrofits and renovations can help vintage buildings narrow this divide while simultaneously reducing operating costs and attracting quality tenants.

A recent market analysis from JLL indicates that buildings with sustainability certifications like LEED and ENERGY STAR consistently outperform their non-certified peers in both rental rates and occupancy levels. In fact, green-certified buildings typically command a rent premium of 7-10% compared to similar non-certified buildings in the same market.

Beyond pure operating costs, today’s tenants increasingly demand sustainable workplaces. A 2023 CBRE occupier survey found that 87% of major tenants consider sustainability features important in their leasing decisions, up from 67% just five years ago. This is particularly true for larger corporate tenants who have made public commitments to reduce their carbon footprints.

What are the Best Upgrades for ROI

Key areas for green retrofits that deliver the strongest returns include HVAC modernization, lighting upgrades, smart building systems and improved insulation and window systems. Modern LED lighting alone can reduce electricity consumption by up to 75% compared to traditional systems while providing better quality illumination. Smart building management systems can optimize energy usage in real-time, reducing waste while improving tenant comfort.

Water efficiency upgrades, while often overlooked, can deliver surprisingly strong returns. Low-flow fixtures and smart irrigation systems typically pay for themselves within 1-3 years through reduced water bills. In drought-prone regions, these features are increasingly mandated by local regulations, making proactive upgrades a wise investment.

Bringing Older Properties Up to Date

Environmental upgrades can transform an aging property’s market position through multiple channels. First, green buildings typically see significantly lower utility costs – a crucial factor as energy expenses often represent 30% of a building’s operating costs. The U.S. Department of Energy reports that green retrofits can reduce energy consumption by 20-40%, creating immediate savings that can be shared between owners and tenants through modified lease structures.

While a full green retrofit requires significant investment, the returns can be compelling. A comprehensive study by the Urban Land Institute found that green retrofits typically yield an internal rate of return (IRR) between 10-15% when factoring in energy savings, increased rents and higher occupancy rates. The payback period for most improvements ranges from 3-7 years, depending on the specific upgrades and market conditions.

Narrowing the Lease Gap

The impact on lease rates can be substantial. According to a recent analysis by Knight Frank (as reported by Bisnow.com) average rents achieved for secondhand offices in London with C-rated energy performance certificates and below – those deemed not to be energy-efficient – are 35% below prime rentals. That gap has widened from 27% below prime levels in 2020.

The study examined 130 office retrofit and refurbishment projects undertaken in England and Wales between January 2020 and July 2024, all of which improved the building’s amenity and EPC rating from C and below to B or better. It found that the gap relative to prime rental levels was closed by an average of 18 percentage points after retrofitting and refurbishing. That leaves an average gap of 17% compared to prime rents. Retrofitting and refurbishing older offices had a positive impact on lease lengths and void periods as well.

Importantly, green retrofits can help older buildings compete on total occupancy cost, not just face rent. While a new building might command $40 per square foot in base rent with $12 in operating expenses, a well-executed green retrofit can help an older building offer $32 in base rent with $8 in operating expenses, making the total occupancy cost much more competitive while maintaining solid owner returns.

Is Now the Time to Go Green?

The timing for green retrofits is particularly appropriate given current market conditions. With office vacancy rates elevated in many markets, owners need every competitive advantage they can get. New local and state regulations increasingly mandate energy efficiency improvements for existing buildings. Getting ahead of these requirements through voluntary upgrades can be more cost-effective than waiting for mandated timelines.

Financing for green retrofits has also become more accessible. Many local governments offer incentive programs, while major lenders have created specialized green lending products with preferential terms. Property Assessed Clean Energy (PACE) financing can provide particularly attractive terms for green improvements, allowing for longer payback periods aligned with energy savings.

While green retrofits alone cannot completely close the rent gap with new construction, they can significantly narrow it while improving building performance and tenant satisfaction. In today’s market, sustainability is no longer optional – it’s a core factor in maintaining asset competitiveness and value. For owners of aging office buildings, the question isn’t whether to pursue green upgrades, but rather how to structure and sequence them for maximum impact.

For further information on this topic, please call us at 781.848.9400.