The often-overlooked shelter from the storm: green buildings
Consumer confidence is plunging. Regional manufacturers anticipate higher prices and fewer orders, while five-year inflation expectations are at their highest in more than 30 years. Stagflation is a real possibility, and JP Morgan estimates a 60% chance of a recession this year.
For all that, facilities managers who oversee green buildings or are counting on increasing the sustainability of their properties can take some comfort in the premium position that green buildings command in today’s economy.
While some investors may not look closely at green buildings or realize they comprise their own investment category, the sector provides an excellent shelter from the storm. (That’s literally and figuratively. Green buildings are more resilient to extreme weather.) History and the fundamentals of the green real estate market prove as much.
This may seem counterintuitive; green buildings are often considered a premium item, and people tend to flock towards replacement-level necessities during hard economic times. Yet the green building growth rate increased quickly during the crisis. The U.S. green building market grew by 50% from 2008 to 2010. By 2011, a third of all new non-residential construction was green. It was one of the few bright spots in what was otherwise the worst economy of recent decades.
So what happened during those rough economic years? Demand for office space, commercial property and even residences plummeted. Office vacancy rates crested 10% in virtually every major city, and went far higher than that in some. People looking to rent out real estate needed quick differentiators from other increasingly desperate property managers with excess capacity. Green retrofits and new builds turned out to be a cheap and effective differentiator that carried with them substantial long-term ROI.
Those same factors are in play today; indeed, thanks to the rise of remote work and the uncertain tariff climate, the pressures on commercial property will likely be stronger today. While roughly 20% of office space is vacant today – and, given the failure of return-to-office mandates, it is unlikely to come down – the same cannot be said for green buildings. According to JLL, we will be able to meet just 34% of the demand for green office space. Given that enormous unmet demand, the likelihood is any green office space that comes on the market will find an eager lessee more quickly.
Tariffs provide another driving force for green buildings, one that did not exist in 2008-2009. Thanks to the unique characteristics of green building materials, the price of green construction is unlikely to go up at nearly the rate of ordinary construction. A hallmark of green construction is local sourcing of building materials. The less these materials have to travel, the less embodied carbon they have. Given how heavy construction materials like steel beams and concrete can be, cutting travel distance makes an enormous difference.
Needless to say, building materials “imported” from across town aren’t subject to tariffs.
What’s more, as the U.S. is a leader in green building materials – like low-carbon steel and low-carbon concrete – green builders will not struggle to get supplies in the same way those importing from overseas will.
This isn’t to say green building will leave owners unscathed from the perilous combination of recession, tariffs and inflation concerns. Global supply chains are complex, and tariffs are sure to cause snarls and delays. Recessions usually depress demand across the board. No one is wishing for a tougher economy.
But a tough economy should also drive investors towards safe investments with clear, predictable returns. Green building is as close to a sure bet as you’ll see in a tough market. It’s a shelter from the storm.
Mahesh Ramanujam is president and CEO of Global Network for Zero and past president and CEO of the U.S. Green Building Council. Views are the author’s own.