Rising Energy Costs Impact on Commercial Real Estate in 2023

Rising Energy Costs Impact on Commercial Real Estate

2023 will see rising energy costs having an impact on Commercial Real Estate Markets. As the world continues to support a turbulent economy in the shift toward sustainable energy, all sectors of capital markets are feeling the effects. Commercial real estate specifically, isn’t just experiencing movements in price, but also a changing popularity in regions and sub-sectors.

As our own personal lives will continue to be impacted by climate change, so too will the real estate market. It’s currently estimated that 35% of global REIT properties are exposed to climate hazards – exemplified most recently in south Florida by Hurricane Ian. The severity of environmental disasters serves as an indication of the current state of climate change. This can therefor offer some insight into how energy production may change in the future.

The shift toward sustainable energy has undoubtedly procured an inflated cost of living across the board. There is no denying that rising energy costs will have some impact on commercial real estate, but how exactly will they affect the market? Well, current data has a lot to say for that.

Let’s take a look at the current dichotomy of rising energy costs and commercial real estate.

How does Climate Change Impact the Commercial Real Estate Industry

The primary objective of this article is to address rising energy costs in relation to their impact on CRE. First, however, we must address the cause behind the rising energy costs.

The very nature of commercial real estate encourages it to play a cat and mouse game with the climate. CRE – especially the industrial sector – contributes to climate change through a massive release of carbon emissions. On the other side of the equation, climate change can significantly impact the value of all commercial real estate with rising sea levels, natural disasters, drought, and other extreme weather events.

This paradigm has caused consumers, investors, and government officials to demand environmental responsibility from the commercial real estate industry. For this reason, there is currently a huge incentive for commercial developers to ‘go green.’ Let’s take a peek at a few of the numbers supporting this claim:

  • 85% of consumers have shifted their purchases toward sustainability
  • 25% are willing to pay a premium for sustainability

Economists also point out that going green can tremendously decrease maintenance and operating costs within the CRE industry. Crexi reports that sustainable buildings consume 29 to 50% less energy than typical buildings.

Energy Related Factors Impacting Commercial Real Estate

There are a multitude of factors impacting the rising energy costs we see in the Unites States today. Some of the more prominent revolve around the U.S.’s ability to both import and create its own energy. As far as which sectors are being hit the hardest, analysts report the commercial office space as being the most vulnerable. This is likely due to net-lease agreements where the tenants are paying for the spikes in utility expenses.

CBRE, a company that specializes in real estate services, conducted a survey recently that may give insight into how energy prices are currently impacting the market. Their study found that 12 of the major U.S. markets are undergoing a “flight to quality” currently. According to the report, “Office users are paying higher rents to move into smaller, better-quality spaces that are more energy efficient.”

Utility costs have long been a major consideration for investors and operators of office buildings. It’s currently estimated that utility costs account for around 33% of operating costs in most urban areas. Considering the trajectory of current energy costs, that number is only expected to increase.

Once again, this places an increasing amount of importance on developers in commercial real estate to make the shift toward sustainable energy. It’s no longer just the consumer who wants to see CRE make the jump; now the numbers back the claim too.

Sustainable Opportunities in Commercial Real Estate

There is no denying that the majority of the market is a bit behind the ball in terms of sustainable energy. With that being said, there is still plenty of opportunity to take advantage of the shift in energy sentiment we are currently seeing in the market.

Tax Credits

Tax credits for those willing to make the jump towards sustainability are quite incentivizing. The current business investment tax credit for renewable projects is at 26%. That number has equated to $15 billion in new renewable energy project investments each year, for the past several years. Current estimates expect this trend to continue in the future, as more legislation around the push toward renewables is expected to soon pass.

It should be mentioned that the majority of renewable projects currently underway are headlined by solar. Developers in residential real estate are also enjoying a similar tax credit in that regard.

The current opportunity in solar is vast and includes both rooftop panels and one-thousand-acre solar farms. States like California, Utah, Arizona, and Colorado are already seeing dramatic improvements in the electrical grid through an increased production of solar power.

Future opportunities for sustainable energy within CRE will revolve around a lot more than just solar. Market experts are currently advising CRE professionals to embed considerations of sustainability into their decision making and strategic planning moving forward.

Those leading the development of new commercial projects will have both the responsibility and burden of finding more efficient ways to build, manage, and operate. Investors, lenders, developers, and even tenants and employees will all require to be engaged in the mission towards sustainability. Without such cooperation, all parties will feel the effects of the tomorrow’s rising energy costs.

Looking for more information on the current state of today’s Commercial Real Estate Market?

The inflationary effects that stem from rising energy costs have consumers weary – and for good reason. As energy costs continue to rise, we will all be paying for it at the pump, on our utility bills, and in the grocery store line.

With that being said, there are still a number of opportunities exposed in the market today by those who’ve already invested in sustainable energy solutions. Our team at ICRE Investing is well versed in the Phoenix market and has connections across the globe. Whether you are looking for a more energy efficient office space to lease or are hoping to find a sustainable investment for the future, we’ve got you covered. Feel free to reach out any time!