Sustainability is increasingly becoming a key part of every business, from supply chains to manufacturing, office supplies, and office property. With many businesses setting ambitious ESG targets, offices built to high sustainability and energy efficiency standards are in strong demand and are enjoying premium rents. Will this drive commercial property owners to upgrade and retrofit existing buildings to compete with new stock?
The office market has proved quite resilient, particularly when you consider the series of shocks over the past number of years including Covid, working from home, supply chain issues, cost inflation and subsequently a rising interest rate environment, says David Martin, capital and debt advisory partner at EY Ireland.
“As the number of those returning to the office continues to increase, investors, capital providers and office developers are starting to look at the potential limited new supply that will arise in the next two to three years, particularly in Dublin,” he adds. “Therefore, highly sustainable and energy-efficient buildings will be in demand. These assets will attract finance from equity providers, banks and alternative lenders.”
Sustainability and energy efficiency are significantly influencing the commercial property market, with corporate office occupiers increasingly seeking highly sustainable buildings, says Sinéad Lew, real estate and renewables tax partner, PwC Ireland. “According to CBRE Ireland’s 2025 Market Outlook report, around 60 per cent of Dublin office take-up in 2024 consisted of highly sustainable stock, characterised by a BER rating of at least A3 and strong Leadership in Energy and Environmental Design (LEED) or Building Research Establishment Environmental Assessment Method (BREEAM) credentials. This trend is expected to persist in 2025.”
Demand outstrips supply
“It is estimated that currently, only two per cent of office buildings nationwide have achieved an A rating for energy efficiency, underscoring the critical need for renovations and upgrades to align with contemporary energy standards,” says Lew.
On the demand side, larger organisations are willing to pay a premium to ensure they are in the greenest buildings in the best locations, says Martin. “Rents for the greenest of buildings could continue to increase in the coming years as demand outstrips supply due to absorption of surplus vacant supply.
“On the supply side, the cost of delivering these buildings is increasing which will also put upward pressure on rents.”
Over the last number of years, the gap between prime and secondary rents has continued to widen – recognition of the rental premium for new build, energy-efficient office stock in a comparable location to older, less energy-efficient office stock, says Lew. “Sustainable buildings command higher rents and enjoy higher occupancy rates. Tenants, especially those with ESG targets, are willing to pay a premium for energy-efficient, sustainable spaces.
“This demand is driven by the desire to reduce operating costs and meet their own sustainability goals.”
Financing upgrades
Property owners incur significant upfront costs to upgrade and retrofit and while this can lead to longer-term savings, the initial investment required is substantial and can lead to an issue around “split incentives” – a situation where a landlord undertakes upgrade or retrofitting works to improve the energy efficiency of a property but the resulting benefits are enjoyed by the tenant through reduced utility costs, says Lew.
“This can act as a major deterrent. To try and address this issue, green leases and green lease clauses have become more prevalent. Green leases are designed to enhance the sustainability of a property by committing tenants, landlords, or both parties to obligations that promote better environmental performance and energy efficiency.”
These leases often involve shared responsibilities, co-operation and collective action, Lew says. “Savills Ireland has estimated that Irish office landlords may need to spend at least €7 billion to upgrade properties to meet required energy efficiency standards.”
High-quality office assets continue to attract finance, however secondary, lower-grade offices are proving to be challenging from a funding perspective, says Martin. “Interestingly, last year saw the emergence of several specialist real estate transition funds purposed to transform older energy-inefficient spaces into sustainable spaces. Whilst not all buildings will be suitable for retrofitting from a cost-benefit analysis, for those that are, there are sources of finance that are seeking a home for capital.
“From a sustainability and an embodied carbon point of view, it is preferable to work with existing structures. However, there is often a disconnect between this and viability.”
From a debt markets perspective, credit availability has been identified as a key challenge for borrowers sourcing or refinancing debt in the office sector, says Martin. “Amid falling interest rates, tightening credit standards have resulted in more of an emphasis on well-structured and positioned credit applications.
“Assuming yields stay where they are, we may see an increase in rents as the viability gap between the cost of construction and current capital values emerges to restore the incentive to develop and take risk.”
