Colliers Capital Markets spoke with Colliers’ Sean Drygas, Global Lead, ESG & Impact, about the evolution of ESG in the commercial real estate space and what’s on the mind of owners and investors. Here are takeaways from our conversation.

Colliers Capital Markets (CCM): ESG is a major focus for investors across the globe. How is this evolving in the U.S.?

Sean Drygas (SD): Regulations are a long way off; today ESG is a voluntary commitment in most cities and states in the U.S. and domestically, it varies by state and city. We need to look to Europe for guidance and a glimpse into the future. European countries have specific timelines and measurable ESG goals in place. We can watch the dynamics play out at a continental scale in the years ahead.

CCM: How can owners today position their assets for future ESG-oriented investors?

SD: The easiest way is to reduce energy use. There is still substantial waste in many buildings (outside of the newest construction). When LED lighting reached maturity in the past decade, that was a no-brainer for owners as it had a quick payback. Plus, many utility companies offered incentives to adopt it.

CCM: What do you think is the next target for owners?

SD: Heating, ventilation, and air conditioning (HVAC) is the next focus. Around 40% of a building’s energy use is from its HVAC. There are many ways in which energy is wasted in HVAC systems — motors that can only be switched on or off rather than modulated, inefficient scheduling and temperature settings, and even quite commonly, heating and cooling at the same time. There are numerous Proptech companies with solutions that range from reporting on these opportunities to operators, to making real-time adjustments automatically via AI, to providing capital-investment plans for replacing equipment over time. The capital expense typically has solid paybacks, and some of the operating improvements require no capital through “efficiency as a service” models.

CCM: What should owners of various asset classes be considering?

SD: Solar is a first consideration for properties with lots of rooftop space, such as industrial and large retail centers. But flat roofs have a lifespan, and it makes sense to match a roof install with new solar equipment. You wouldn’t want 25-year solar equipment on a roof with 15 years of life left. There will be a steady drumbeat of installs over the next decade. The cost of solar is on a long-term downtrend, meaning it becomes more affordable over time, and the recent suspension of tariffs on imports from countries other than China helps in the short term.

The key is to make sure the economics make sense. In a triple-net-lease structure, the tenant is the one that benefits from energy savings. Finding a balance between physical, contractual, and transactional is important here. Office is getting a lot of attention, as there are steady tenant rolls, and mechanical, lighting, HVAC, building envelope, and other considerations. There is still lots of technology to be brought to bear in the future.

Residential comes down to the ratio of height to width: think of a downtown condo tower versus a suburban apartment complex.

CCM: How important are incentives and policy to encouraging change?

SD: Incredibly so. Net metering is a great example. When energy generators — think solar panels — are able to sell electricity back to the utility, or receive credit for their energy production, there is a clear cost advantage over systems installed where that is not in place. That is why places like New York and Massachusetts, not the sunniest of all 50 states, have higher adoption of solar. It is important to find a solution that is fair to both sides, the user and the utility company. And when this can be paired with battery storage, or the electrification of vehicles — a typical EV has six to seven times the storage capacity of a wall-mounted battery — resilience comes into play. With various outages from storms, flooding, fires, etc., resiliency becomes a big factor. This will be a focus for building owners going forward.

Download the report.