The current high-cost debt market environment weighs on investors’ sustainability strategies

The European commercial real estate market has witnessed a change in fundamentals during the last few years. The increase in inflation and interest rates has resulted in a weaker outlook for the economy, higher cost of capital, and decline in asset values. Together, these have shaped a unique, uncertain, and challenging landscape for the implementation of sustainability strategies.

However, findings from CBRE’s 2024 European Investor Intention Survey show that nearly all investors consider sustainability criteria in their investment decisions. Though, it is clear that the investors’ decision-making has taken a different turn, as their quest to capture yield intensifies.

Only one third of investors selected core or core-plus as their preferred strategy, the lowest level recorded in the survey series. On the other hand, over half of investors signalled that they prefer to target value-add or opportunistic asset strategies in 2024. The price corrections have created opportunities to purchase secondary assets at a reduced price, with a view to delivering upgraded space that meets current and forthcoming regulatory requirements. Approximately 80% of investors who expressed a willingness to implement sustainability strategies indicated that they seek to retrofit existing buildings for compliance. There are, however, a number of challenges related to the investments into the improvement of buildings’ energy profile, such as the financial aspects: CapEX requirements, cost of capital, and the balance between the costs and the benefits. Furthermore, the heterogeneity of the energy labels in European markets (different EPC definitions and calculation methods, compliance, and data accessibility) is causing issues for investors, property owners, and lenders.

Figure 1: Sustainability initiatives considered by investors who implement such strategies

Source: European Investor Intentions Survey, CBRE Research, February 2024

Investors’ willingness to pay premiums for assets with sustainability features, as well as their magnitude, decreased year-over-year. In our 2024 edition of the Investor Intentions Survey, one fifth of investors stated that they would pay premiums to acquire assets that meet sustainability standards. This is down from approximately one third from the year prior. Equally, the overall downward pressure on pricing observed in the market, as well a shift in focus to value-add strategies, may have resulted in lower premiums investors are willing to pay.

Figure 2: Premium certain investors are willing to pay to acquire assets that meet sustainability standards (2024 vs. 2023)

Source: European Investor Intentions Survey, CBRE Research, February 2024

The majority of 2024 respondents accepting to pay premiums did indicate that they would pay at least 6% more than a comparable non-compliant green asset. This is being supported by their expectations of occupier preference and rental premium for assets that meet sustainability standards. Indeed, in our latest European analysis, we were able to quantify the impact of sustainability certifications on office rental levels – showing a 7% rental premium for European offices with sustainability certifications, compared with equivalent unrated buildings.

Key considerations

ESG strategies are cut out for tough markets. Therefore, investments in sustainability need to be strategic, long-term, and critically linked to the vision and mission of companies. European investors recognise this and are rethinking resilience in their commercial real estate portfolios. They build a good case around sustainability features and add value to their assets – not least by protecting against the risk of future obsolescence. Furthermore, they pursue sustainability initiatives that can have an indirect impact on asset value. A prime example of this is the installation of EV chargers, which can attract workers back to office. Our 2023 European Office Occupier Sentiment Survey has showed that EV charging stations are among the five most desirable locational and building-selection criteria for occupiers.

Ultimately, repricing is an opportunity to accelerate the transformation. Assets that do not meet sustainability standards are likely to be repriced even more given the level of investment that refurbishment to a certain standard requires. Investors that are willing to become the champions of decarbonisation will have the possibility to turn challenges into opportunities.

For the full analysis, explore our 2024 European Investor Intentions Survey.