The Emergence of Green Leases
We are constantly on the lookout for trends that can spark ‘forced adoption’ of a solution or a technology within a given industry. Most recently our interest has been piqued by green leases, which essentially formalize tenant and owner commitments to improve energy efficiency, sustainability practices and energy usage.
Elements within a green lease can vary widely and there are no accepted standards, per se, but suggestions for language and approaches can be found at The Insitute for Market Transformation and Green Lease Leaders. Measures, commitments and language specified within a green lease can capture virtually anything from energy sourcing (e.g. solar vs. coal)
to energy efficiency targeting, water conservation, indoor air quality, waste reduction, etc. They can even expand into wider ESG categories, aiming to add value to how the building contributes to the surrounding environment and community.
Green leases offer a catalyst for proptech and ESG companies driving innovation within the built environment. Incremental compliance and reporting requirements are clearly leading indicators for adoption and create a tailwind for several of the companies we follow.
Measurement. In order to ensure compliance and resolve potential disputes within a green lease, both renter and owner need to be able to understand how and what is being used. Installing sub-metering for energy and water use is an obvious first step and one with clear secular growth. A less obvious, and perhaps more interesting opportunity relates to data sharing and benchmarking. A tenant within a sub-metered, triple-net facility, for example, may not only be interested/required to report on their specific energy usage, but also the facility’s overall energy usage. The inverse also holds true for an owner looking to report to investors on usage from their individual tenants. This need for information sharing and transparency is a major opportunity for companies like Enertiv, Green Badger, Measurabl, and SmartWaste.
Capital Improvement. Green leases can provide pass-through mechanisms that incentivize capital investment from the owner. These can include typical HVAC as well as onsite solar and battery storage. The addition of language to this effect is an interesting approach to help drive investment in triple-net buildings such that the entire cost is not borne by the owner. Companies that stand to benefit here range from large conglomerates such as Schneider Electric all the way down to cutting-edge innovators such as Evercloak, CleanO2, Audette, and CarbonQuest.
Certification. Green leases can immediately turn “nice-to-have” certifications such as LEED or BREEAM or Energy Star or WELL into “need-to-have.” This is especially critical in regions/municipalities without high regulatory requirements/performance standards and extends into energy auditing as well. Potential winners here include Green Badger, qFlow, Pearl Certification, and Vizcab.
In terms of US market penetration for green leases, data is relatively scarce. Does anyone out there have a good source for us? However, a recent piece from JLL estimates that upwards of 42% of Asia Pacific occupiers and large developers have signed leases incorporating green clauses and another 43% plan to adopt in some capacity by 2025. Is this a window into what’s ahead for North America? Whether driven by branding, end-market pull, government regulation or altruism, there is little doubt that tangible commitments to sustainability will increasingly become common practice within lease agreements. This may prove to be one the most powerful forces in driving the adoption of new and better technology.
From your friends at GroundBreak Ventures