The recent emphasis on environmental, social, and governance (ESG) is shaping the methodology of new construction. Its pivotal role in the net lease market is not only impacting investors, but extremely influential for tenants as well. Especially in 2023, net lease stakeholders have been increasingly recognizing the importance of integrating ESG principles in the development of new properties.
Environmental Impact
With increasing demand for greater sustainability and quality, developers are focusing on opportunities during the construction phase to minimize environmental impact. Globally, the construction of real estate accounts for 37% of carbon emissions and 34% of energy demand.(Source:CBRE) Over recent years, contractors are incorporating eco-friendly practices and technology to reduce their carbon footprint. This includes the utilization of energy-efficient systems, sustainable building materials, and the implementation of green building standards such as LEED (Leadership in Energy and Environmental Design), WELL Building Standard, or BREEAM (Building Research Establishment Environmental Assessment Methodology).
Regulatory bodies, such as the U.S. Green Building Council (USGBC), have established guidelines to encourage environmentally responsible construction practices. Compliance with these standards not only aligns with ESG goals but can also enhance the long-term operational efficiency of facilities. Investors can improve this with the tenant’s help by implementing sustainability clauses or “green leasing” which can enable the tenant to supply day-to-day energy data for reporting, assist landlords in recovering costs of energy improvements, and promote overall environmental progression. (Source: WP Carey)
Strategically improving assets by reducing energy emission results in improved operating expenses and increased ROI. Decarbonization, the process of eliminating carbon dioxide and greenhouse gas emissions, adds value to net lease properties and enhances an investment portfolio. Implementing measures such as more air insulation, heat pumps and solar panels can support decarbonizing buildings.(Source: McKinsey )
Social Responsibility
The construction of net lease properties significantly impacts local communities as well. For instance, healthcare properties hold a unique social responsibility due to their role in providing essential services. The construction phase offers an opportunity to integrate features that enhance accessibility, safety, and overall community health. Stakeholders consider factors such as proximity to public transportation, disability-friendly infrastructure, and community engagement programs.
Governance and Regulatory Compliance
Development of net lease properties involves considerable adherence to specific regulations governing certain facilities. Healthcare properties are subject to regulations imposed by agencies such as the Centers for Medicare & Medicaid Services (CMS) and the Occupational Safety and Health Administration (OSHA). These agencies require developers to comply with standards covering areas such as patient safety, infection control, and accessibility. Failure to meet these governance requirements not only poses legal risks but may also impact the long-term sustainability and credit-worthiness.
Conclusion
As demand increases for ESG implementation, investors and developers will keep prioritizing these pillars throughout construction.We have already seen these impacts to have long-term effects on both communities and the broader real estate market. Adherence to regulations positions properties to be among the highest responsible and reliable assets for investors and tenants. As the net lease market continues to evolve, integrating ESG principles into construction practices is becoming not just a choice but a strategic imperative for sustainable and resilient real estate development.
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