Brad Dockser is the CEO and Co-Founder of GreenGen, and an active Urban Land Institute trustee advising on sustainable real estate.
For decades, the conversation around return on investment (ROI) in commercial real estate has been narrow. Payback periods, upfront costs and capital constraints dominated the discussion. The question was almost always: “How much will this cost?”
I believe that lens has run its course. The reality is that sustainability, decarbonization and the energy transition are reshaping what financial performance means for real estate. The real question is: “What value will this create?”
Through my work supporting real estate investors, I see this shift every day across global real estate portfolios. New regulations, tenant expectations, investor demands and climate realities are redefining value creation. Investors who learn how to strategically embed sustainability across the full real estate lifecycle can not just meet compliance but also impact their profitability. And, critically, they’re learning that often, the upside isn’t just in lowering operating expenses, but in how decarbonization reshapes the capital stack: in some cases, unlocking green loan eligibility while reducing the cost of debt, tightening exit cap rates and driving premium valuations.
The Conventional ROI
Traditionally, ROI in real estate meant focusing on upfront costs, using payback period as the key metric and a lack of capital to deploy at scale.
This framework misses the bigger picture. It treats sustainability like an expense, rather than evaluating how those investments will impact asset value. It also overlooks the realities of implementation. When funding ignores these realities, projects can stall in the equity gap no one modeled, and the promised ROI never materializes.
The New ROI: Value Across The Lifecycle
While conventional ROI still matters, today’s macro trends and expanding stakeholders require a modern ROI—one that captures the full spectrum of value drivers, especially the impact on cost of capital. When exploring potential projects, investors should also consider:
• Total Asset Value: Upgrades that cut energy use and lower risk can translate into higher net operating income (NOI) and valuations.
• Capital Stack Impact: Sustainable attributes may qualify assets for green financing and help lower the weighted average cost of capital, a critical lever in investment performance.
• Increasing Stakeholders: Regulators, insurers, tenants, investors and other parties are increasingly involved in decisions around building performance and resilience, creating new opportunities and challenges.
• Risk Management: Volatility in energy prices, physical climate risk and fines relating to benchmarking or building performance standards, like New York’s LL97, all represent new categories of expense. Avoided costs often go overlooked, but they’re real.
• Insurability: This is increasingly impacted by growing climate risk.
To help put this into perspective, consider the following: We can estimate the value of a property by dividing a property’s NOI by the capitalization rate. So, let’s say you have a 6.25% capitalization rate (which I find is the average in commercial real estate) and spend $5 on an energy-efficiency upgrade that increases NOI by $1. You could ultimately see $16 of asset value ($1 divided by 6.25%). When that NOI lift is paired with cheaper debt, broader buyer demand and cap-rate compression, the financial impact could compound into a repricing event.
Let’s make it practical: If you spent $1 million to upgrade a hotel, and that upgrade increases the property’s value by $2 million, did you spend $1 million or create future earning potential at exit? Now, imagine if the same project qualified you for a lower interest rate and attracted more buyers at exit.
Why The Capital Stack Matters
In today’s market, the real leverage of sustainability is how it changes the capital stack—the blend of equity and debt that finances an asset.
• Potentially Lower Cost Of Debt: Properties that meet green standards may qualify for preferential lending terms. A 10- to 25-basis point reduction in borrowing costs can equate to significant savings over a hold period.
• Higher Debt Service Coverage Ratio (DSCR): Lower energy costs and more predictable operations can help strengthen DSCR, which can allow borrowers to take on more favorable financing.
• Green Loan Eligibility: Many lenders now have dedicated green loan programs, which may have reduced interest rates and can expand the pool of available capital.
• Exit Cap Compression: Buyers are increasingly factoring sustainability and climate risks into acquisition decisions. Properties with lower operating risk and strong sustainability and resilience credentials have the potential to sell at tighter cap rates.
Challenges To Prepare For
I’ve found investors often face two major challenges when adopting this ROI approach: stakeholder alignment and actionability.
Too often, strategy, audit and project execution are managed by separate teams. This bifurcation increases the risk of failure. Strategists may lack the technical insight to design feasible initiatives that can be implemented at the asset, while those executing may not see how their work fits into the broader portfolio-level vision. The problem compounds when multiple vendors are involved and accountability blurs.
Aligning all parties around a shared financial and operational plan is essential. Even the best strategies fail if projects aren’t feasible. Bringing technical expertise into capital planning from the onset—such as through a trusted, integrated partner that shares this mindset or by embedding these principles into the team’s approach—can help ensure projects are both actionable and measurable, and it can enable clear communication of financial value to all stakeholders.
Financial Performance, Redefined
Financial performance in commercial real estate is about more than just higher asset value. It’s about higher occupancy, stronger tenant demand and making a property more investable. It’s also about ensuring underwriting reflects the complexities that inevitably arise during project execution because returns remain theoretical if the capital stack and delivery strategy aren’t aligned.
With regulation tightening worldwide, the cost of inaction is rising. Doing nothing is no longer free; it’s a liability that increasingly risks creating stranded assets. The right lens is not, “What will it cost to get in compliance?” but rather, “What value will this create when done strategically?” In today’s market, investors should consider how to embed sustainability into the capital stack to engineer a lower cost of capital while also pricing execution risk so upgrades move from plan to reality.
The energy transition is not a cost to be managed; it’s a value creation opportunity. Investors who understand and act on the new ROI can differentiate their assets and prepare their portfolios for the future.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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