Sustainability Increasingly Part of the Commercial Real Estate Investment Cycle

This applies throughout the development process from planning, permitting and financing to construction, leasing, property and facility management, and an exit strategy with a sale to an investor.

Sustainability issues now impact all market actors to varying degrees at a time when rising costs have been a significant concern for the real estate and property-related industries; ESG could have further pricing implications for the markets, according to analysts.

The direction of the trend is undeniable, however; successful development projects need to be ever more sustainable and ESG-compliant, and older buildings must be brought up to this standard wherever possible.

“Tenants, landlords and investors in all CEE countries are increasingly focusing on the quality of buildings. The gap between older/outdated and modern/efficient buildings is becoming increasingly wide in terms of a multitude of factors, from rents to attractiveness for tenants and occupancy rates to capital values,” says consultancy Colliers.

“In turn, we view this as a decisive factor in pushing for more retrofitting of older buildings, which may become viable. Timing-wise [….], the green push is coming in a difficult context for the market, given how high interest rates are. Furthermore, we need to acknowledge how relevant the green characteristics are on the financing side, as banks need to take into account not just the value of the building itself, but how efficient and future-proof it is,” the agency adds.

The environmental aspect is becoming more important for tenants, which is why Atenor Hungary has started signing “green leases” in its developments, comments Máté Galambos, leasing director at the developer.

Mindful Tenants

“While we [….] are always trying to find new ways of decreasing our carbon footprint and we include lots of green solutions in our standard office fit-out specifications, tenants have also started to be mindful about technical features that affect energy consumption, which is a great sign,” he confirms.

“Sustainability efforts have emerged more rapidly following the energy crisis, through which tenants started focusing more on maintenance and utility costs, which was not the case before, so I guess in every bad, there is good,” Galambos adds.

Views differ regarding the definition and application of the various elements of ESG.

“I think we have to add to our sustainability certification vocabulary one or two more certifications or verifications; the EU Taxonomy verification is more and more requested by the financial institutes or the investors, as this verification is about sustainable business activities and this is needed if beneficial financial or investment conditions are applied to a project or portfolio,” comments Zsombor Barta, a sustainability assessor and ambassador (and former president) of the Hungarian Green Building Council.

“As ESG is also a hot topic, certifications that support the ‘S’ (Social) part of the ESG screening and data provision will also gain importance, such as Access4You certification, a system that certifies the overall accessibility of the built environment,” he notes.

“In the end, we need more third-party verified data for ESG or other sustainability reports because credibility and transparency are extremely important parts of these new reporting schemes or investment requirements,” Barta adds.

ESG, sustainability and the EU Taxonomy are often raised as new requirements at the planning stages. Therefore, these elements must be adopted from the early design stages to ensure smoother and more cost-effective integration and compliance.

By applying the Well accreditation system, which is dedicated to interiors, organizations can measure and improve their health performance across multiple locations.

Impact on People

“Using our robust set of Well features and our proven process, organizations can map, measure and quantify their health and well-being efforts,” argues the architect and green assessor, Regina Kurucz. “With this data, they can measure their impact on people while also comparing their progress internally and against industry peers, from an accountability perspective.”

Sustainability accreditation is already the norm in office development and is increasingly becoming so in the industrial sector, with developers and park operators building more highly specified Breeam- and Leed-accredited complexes.

ESG-compliant buildings command higher rents and returns on investment. The 45,000 sqm MG3 warehouse at HelloParks Maglód, on the eastern outskirts of Budapest, is the first industrial property in Hungary to achieve the highest Breeam “Outstanding” sustainability rating for New Construction.

HelloParks says embodied carbon emissions for new buildings will be reduced by 25% from 2025 and 50% from 2030 compared to the developer’s earlier buildings, which already meet levels similar to Western European developments. In addition, each facility will have an average solar capacity of 2.5 MW installed. The goal is to achieve net-zero emissions for the operational carbon footprint of new buildings by 2028 and ensure a 100% renewable energy supply, the developer says.

“The real estate sector is the biggest energy consumer in the EU; hence, it carries a significant responsibility to fulfill climate neutrality criteria,” says Anna Bencze, head of sustainability at HelloParks.

“Such an achievement calls for a substantial reform of current practices, which we have perceived as a promising opportunity from the beginning. The industry must anticipate forthcoming scenarios that would satisfy the interests of the environment, local communities and businesses alike. Our explicit goal is to motivate the entire industry through our ambitious targets,” she adds.

With more education and pressure from banks, tenants and investors, landlords will realize the need to comply with the EU Taxonomy and that spending on ESG compliance is not only a cost but also a highly profitable investment, argues Hubert Abt, CEO at New Work and Workcloud24 AG.

“In today’s landscape, investors are using ESG as a screening method for choosing where to invest. Properties which do not have any ESG efforts or activities are passed over for projects that are dedicated to ESG and which incorporate sustainable practices into their concept,” he adds.

This article was first published in the Budapest Business Journal print issue of February 9, 2024.