Resurgence in Responsible Leasing

The office market, post-pandemic, has been witnessing a significant trend of upsurge in sustainable or responsible leasing quadrupling during three years period till 2022-23.

According to a recent  JLL – CRE Matrix report which thoroughly examined over 1,530 leases encompassing more than 225 million square feet from January 2018 to September 2023, there was a staggering 132% increase in leased area, from 3.7 million square feet to an impressive 8.6 million square feet between 2018-19 and 2022-23, thanks to the joint efforts of asset owners and occupiers to promote responsible leasing practices in the industry.

Global occupiers and institutional landlords are at the forefront of sustainable practices, with GCCs accounting for over three-fourths of the overall green leasing activity in India. Moreover, it comes as no surprise that the two largest GCC markets of Hyderabad and Bengaluru lead the adoption of green leasing practices, accounting for 64% of the overall green leasing in India.

Green leasing clauses mainly focus on waste management, energy efficiency, and data sharing aspects, with waste management and recycling obligations finding their way into most green lease agreements and some standard lease agreements as well.

“Sustainability has now firmly been incorporated into the board room agenda. Various strategies are being devised to reduce carbon emissions from the built environment, and green building certifications and green leases play a crucial role in this endeavor. “The Indian market is making significant strides towards sustainability and the increase in green-certified office penetration from 39% in 2020 to 53% in 2023, is a clear indication of this progress.  Given the important role of occupiers in ensuring operational efficiency, moving from ‘traditional leases’ to ‘collaboration-based green leases’ that enable data sharing and active collaboration between building owners and occupiers, is the need of the hour”, says, Dr Samantak Das, Chief Economist and Head Research and REIS, India, JLL.

According to Abhishek Kiran Gupta, CEO & Co-Founder, of CRE Matrix, the next two decades are going to see the focus move to green leasing. Green leases, accounting for around 15% of overall leasing today, are bound to reach around 15-20% penetration within the next 1-2 years. As both parties, landlords, and occupiers realize the benefits of green leasing,  a significant rental arbitrage to the tune of 10-15% is likely to be visible soon between green and non-green leases.

Outlook

Looking ahead, green building certification will become a de-facto requirement for prominent occupiers in their selection of office spaces. As occupiers integrate environmental, social, and governance (ESG) factors and net zero carbon (NZC) targets into their decision-making, the green lease contract will play a crucial role. It will go beyond basic energy conservation ambitions to include clauses related to social value and good governance. Occupiers and landlords will engage in active mission-aligned collaboration throughout the life of the lease with measurable goals and corresponding KPIs to ensure desired outcomes. Importantly, a building’s value will increasingly rely on its environmental performance, and collaborative green leases will be a critical part of asset management strategies.