Uncertainty currently surrounds the role of sustainability in commercial real estate. With changing federal policies, the conversation around green investing is now more nuanced than in previous years.
Recent data shows 70% of CRE investors now use ESG (environmental, social, and governance) criteria, up from 56% in 2021. While this data suggests that institutional demand remains strong, the goals of green investing have shifted. Decarbonization remains critical, but it’s now more about risk management, ROI, and differentiation than about meeting government incentives.
This shift in reasoning raises critical questions for the industry. To what extent are green projects still a priority? What do LPs care about now? How are developers adapting? The following article provides answers to help you navigate this new investing climate.
Is ESG still a priority in commercial real estate?
The short answer to this question is yes, but the underlying motivations have fundamentally shifted.
Federal vs. state and local policies
Despite federal policy shifts toward fossil fuel production, private capital markets continue driving ESG adoption. One reason is that states like California, New York, and Massachusetts enforce aggressive building performance standards and carbon reduction mandates.California’s legislation has established specific targets, including achieving carbon neutrality by 2045., with other states following its lead.
Additionally, local regulations create immediate financial implications. NYC’s Local Law 97 assigns direct penalties for buildings that fail to meet energy performance targets, making ESG compliance a risk management imperative.
Why decarbonization still matters in CRE
Decarbonization remains important to institutional investors and urban developers, driven by three main forces:
Regulatory pressure: In many prominent areas, building performance standards create direct financial consequences for non-compliance, with penalties that directly impact NOI (net operating income).
Tenant and investor demand: Global investors and corporate tenants with ESG mandates actively seek low-carbon, energy-efficient assets, creating competitive advantages for compliant properties.
Risk mitigation: Climate risks (e.g., wildfire, flood, heat) are now standard in underwriting. Properties that fail to decarbonize face valuation and insurance penalties and may risk future obsolescence. With buildings producing 39% of total carbon emissions worldwide, the focus has shifted to resilience and long-term value preservation.
What types of green investments are attracting capital in 2025?
Investors are now more selective with green projects. Clear ROI and immediate operational benefits take precedent over aspirational sustainability initiatives.
New construction vs. green retrofits
Construction costs and interest rates are up. As such, retrofitting existing buildings is gaining traction as the preferred sustainability strategy.
When compared to new construction, retrofits feature faster implementation, lower upfront capital, immediate operational savings, and access to incentive programs (like PACE financing and regional tax abatements).
In this tight market, investors see retrofits as a more definitive path to positive ROI than taking on a costly new sustainable construction project.
LEED, WELL, and the evolution of certifications
Certifications continue to hold value, particularly for Class A assets and institutional portfolios, but their role is evolving. LEED & WELL Certifications continue to provide signals of quality and ESG credibility, especially for institutional investors seeking standardized benchmarks.
However, the focus has shifted toward buildings that demonstrate measurable performance rather than simply checking certification boxes. Green building certifications like LEED or Energy Star produce higher occupancy rates, earn higher rents, and increase the probability of lease renewal.
Financing trends: Is the “greenium” still real?
Green financing options are still available, but banks and institutional lenders have become more selective. They still offer better rates for energy-efficient buildings, recognizing their lower risk profile and stronger cash flows. The key change is that lenders now want better performance data and clearer business cases instead of just accepting certifications at face value.
Several public-private financing programs continue to make green projects financially attractive across most major US markets:
- PACE financing (Property Assessed Clean Energy) for energy efficiency improvements is available in over 30 states, including California, New York, Texas, Florida, and Illinois, with nearly 10,000 participating cities and counties
- Commercial Buildings Energy-Efficiency Tax Deduction offering up to $5.81 per square foot is available nationwide with no location limits
- Investment Tax Credit (ITC), giving a 30% credit for renewable energy equipment, is a federal program available in all 50 states
- Regional utility rebate programs for equipment upgrades offer rebates that cover 25-75% of equipment costs, depending on the state and utility company
How are LPs and investors approaching ESG in 2025?
The bifurcation of ESG expectations
A clear divide has emerged in how different investor types approach ESG. Large institutional LPs and international capital sources (especially from Europe and the U.S. coasts) remain ESG-focused. However, they are asking more detailed questions about operational performance rather than just using labels. These investors want concrete data on carbon intensity, energy use, resilience measures, and transparent reporting.
Meanwhile, smaller domestic investors, particularly in politically conservative markets, have moderated their ESG focus somewhat, prioritizing yield and liquidity over ESG positioning.
That being said, even yield-focused investors recognize the financial benefits of energy efficiency and operational improvements. The bifurcation is more about language and emphasis than fundamental strategy.
From labels to performance: What LPs really want
The evolution in LP preference is clear: performance over optics. As sustainability reports transition from marketing documents to legal compliance requirements, LPs are demanding more substantive data.
Today’s sophisticated LPs expect:
- Carbon data and energy use metrics with verifiable tracking
- Climate resilience planning and implementation evidence
- Transparent reporting with third-party validation
- Track record evidence of actual ESG performance outcomes
With these elements in place, LPs feel comfortable moving forward with sustainable projects.
The impact of rising rates on sustainability-focused projects
Higher interest rates and construction costs have created headwinds for all real estate development, but green projects face additional challenges. Yet, energy efficiency has emerged as an unexpected defensive strategy in volatile markets.
Green projects face familiar headwinds, plus a few extra
Sustainability-oriented development experiences the same pressures as all new construction: higher interest rates, elevated material costs, and construction delays. In addition, green projects face higher upfront material and tech costs, longer payback periods, and more complex financing structures. The additional costs are sometimes hard to justify.
Why energy efficiency is an inflation hedge
Despite these challenges, energy efficiency has emerged as an attractive defensive strategy. Properties with superior energy performance provide stable NOI protection through predictable utility costs, inflation resistance as savings compound over time, and operational resilience during volatile periods. These advantages attract tenants in competitive markets.
The economics of retrofitting existing buildings have become even more compelling as they’re faster, cheaper, and often incentivized compared to ground-up development.
Regional outlook: Where green CRE is thriving
Geographic location significantly influences both ESG adoption rates and the economic viability of green investments, with the coasts and Sunbelt leading the way.
Coastal and urban markets still lead
Regulatory pressure and tenant demand remain strongest in major metropolitan areas. Cities like NYC, San Francisco, and Boston continue driving adoption through mandatory building performance standards with financial penalties, sophisticated tenant bases with internal ESG requirements, and higher property values that justify efficiency investments.
These markets also benefit from greater access to green financing programs and utility incentives that offset upfront costs.
Sunbelt momentum through local incentives
Sunbelt markets are gaining momentum through state renewable energy incentives and corporate relocations. ESG-focused tenants are moving to cities like Austin, Atlanta, and Phoenix.
These regions offer strong retrofit opportunities in aging commercial buildings, where modest investments can create significant performance improvements. Local incentive programs make these markets increasingly attractive for green investment strategies.
What’s next for green real estate investing?
The industry is moving from aspirational sustainability goals toward operational execution and measurable outcomes.
ESG will be about execution, not optics
Sustainability reports, once seen as marketing documents, are now scrutinized by legal departments due to regulatory implications. Future success belongs to organizations that deliver measurable outcomes through data-driven decision-making. This means using real-time building performance metrics and integrated sustainability planning from acquisition through disposition.
Technology will play an important role here. Adoption of tools for monitoring, reporting, and optimization will become table stakes, while stakeholder transparency with verified performance data separates leaders from laggards.
How GPs can stay ahead
In the ESG space, successful fund managers are developing three core capabilities:
- Tools and technology – Implementing ESG platforms that provide portfolio-wide analysis, project tracking, and regulatory compliance monitoring
- Reporting excellence – Creating comprehensive, auditable reporting systems that satisfy both LP requirements and regulatory compliance needs
- Communication strategies – Developing clear, data-backed narratives that demonstrate ESG performance and competitive advantages to current and prospective investors
Sustainable commercial real estate is becoming a business necessity rather than just a trend. Organizations that master data-driven ESG reporting and maintain transparent communication with investors will see the most success.
Green investing beyond the buzzwords
What lessons can ESG commercial real estate pros take from recent trends?
Key ESG takeaways for 2025:
- Risk management drives adoption more than regulatory compliance or investor pressure
- Retrofits offer superior risk-adjusted returns compared to ground-up green development
- Performance data matters more than certifications or sustainability labels
- Regional market dynamics create distinct opportunities and challenges
- Technology integration is essential for competitive ESG execution
For real estate investment managers, success depends on executing sustainability initiatives that create measurable value for investors while building resilient, future-ready portfolios. The tools, financing, and market demand exist. Competitive advantage lies in strategic implementation and consistent execution.
Agora’s investment management platform provides the tools and analytics needed to track ESG performance and manage compliance requirements. Contact our team to learn how you can enhance your green investment initiatives using the right tools
