With the green shoots of an upturn in the commercial property market finally starting to emerge, the outlook for 2025 and beyond looks reasonably bright. However, not all properties are equal, and the strongest demand will likely be for offices built to high sustainability and energy efficiency standards. What will this mean for the industry and how are developers responding?
The office sector was one of the first commercial real estate sectors to be significantly impacted by ESG requirements, says David Martin, EY Ireland capital and debt advisory partner. “Ensuring that new buildings are sustainable and energy efficient is key to global efforts to tackle climate change. Sustainability in modern offices takes many forms but has predominantly been introduced at the design stage rather than through renovations.
“This raises questions about the future of older, less sustainable, buildings and whether older buildings could become obsolete if they fail to meet the environmental standards expected – not just by regulations but by organisations and their employees.”
However, over the last few years, it is not just sustainability concerns that have impacted commercial property values, says Martin. “It is important to note that values, particularly in the office sector, have been hit by the global pandemic, the advent of working from home and the interest rate environment.”
With the built environment accounting for approximately 40 per cent of greenhouse gas emissions, it’s not surprising that the sustainability of buildings and commercial property receives significant policy and commercial focus, says Russell Smyth, head of sustainable futures at KPMG. “Sustainability is now a financial imperative in Irish commercial real estate across all sectors.
“Newly built or refurbished buildings with strong sustainability credentials command higher rents, lower vacancy rates and provide greater resilience against an evolving regulatory environment. Assets with poor energy efficiency risk obsolescence and material capital devaluation.”
Sustainability has reshaped commercial real estate investment in Ireland, says Smyth. “Properties without strong sustainability credentials increasingly struggle to access institutional capital, as investors and lenders increasingly prioritise green assets or those with clear decarbonisation pathways. Market evidence shows a ‘brown discount’ for inefficient assets, with institutional investors building sustainability into their diligence processes and discounting pricing by the cost of post-acquisition green [capital expenditure] programmes.”
“The majority of large commercial tenants in Ireland now prioritise greener buildings to support their own net-zero commitments, while benefiting from tangible energy cost savings.”
Transactions in commercial property have improved in the last six to nine months, which includes real estate private equity actively seeking discounted commercial property assets in Ireland, says Martin. “In some cases, these assets are priced below replacement cost. A recent example of this includes One and Two North Dock offices, in Dublin’s docklands, which are rated Ber A3, and traded at €420 per sq ft in 2024.
“We have observed that, in some cases, ‘secondary Dublin office’ yields have expanded from a peak of 5 per cent to 8 per cent over the past three years, resulting in some asset valuations declining by up to 60 per cent.”
Sustainability is increasingly impacting commercial real estate valuations, with valuers placing greater emphasis on energy rating certificates, Martin says. “Buildings that are not sufficiently energy efficient are being marked down and could, in time, become ‘stranded assets’. This leads to direct and indirect impacts on investment strategies and liabilities.”
The issue of “stranded assets”, created by climate change and the transition to a low-carbon economy, has escalated considerably on both the international and national agenda in recent years, says Martin. “It is believed that there can be up to 80 per cent carbon saving in the redevelopment of an existing building compared to the demolition and construction of a new build. Both [capital expenditure] and retrofitting will create significant capital requirements for equity providers, and investors as well as lending opportunities for both banks and non-bank lenders.”
Prime, energy-efficient grade A offices in central locations command premium rents and are expected to see rental growth across 2025 and 2026, says Smyth. “Conversely, older stock with poor energy performance faces declining tenant demand and rental stagnation or depreciation, particularly as circa 18.5 per cent of Dublin office stock is currently lying vacant.
“Data has always been a challenge for ESG in real estate. That is changing with the ever-increasing tools in developers’ hands such as Environmental Product Declaration, embodied carbon calculators and in-use energy software. The upshot is developers can distinguish their new projects in the market and can certify their portfolio ESG performance and achieve higher rent,” says Smyth.
Tenants, along with their employees, are also pushing landlords for more modern space – with access to natural light, sophisticated air ventilation systems and independently verified sustainability standards, says Martin. “These expectations are leading to a sector bifurcation between buildings that can meet the needs of the future and those that cannot. This bifurcation of the office market will be further underscored as we are likely to see increased capital being spent on retrofitting older office buildings to meet industry-required environmental specifications.”
Green building policies, the leasing of workspaces with green building accreditations and investment in solutions to improve energy efficiency have and will continue to dominate the commercial property space, he says. “Foreign direct investment also continues to be a key market driver in the office market, with inbound investment from the US and elsewhere serving as an important bellwether for the commercial property sector.”
Smyth says the Irish market is witnessing a growing divide between sustainable, newly built stock and outdated, inefficient buildings. “Properties that fail to meet modern energy performance and carbon reduction targets risk becoming stranded assets.
“Retrofitting will be essential for older buildings to remain competitive, but the cost of green [capital expenditure] programmes is significant and, in many cases, unviable until rents increase substantially.”
More than 80 per cent of buildings that will exist in 2050 have already been built, meaning that retrofitting will be pivotal in achieving net-zero targets, says Martin. “Refurbishing a building creates far fewer emissions than constructing a new one. Older buildings refurbished to include modern and sustainable technologies are set to be the real sustainable buildings.”
As more companies embed ESG aims and emission reduction targets into their strategies, we can expect capital to continue to be invested in sustainable real estate solutions, the retrofitting of inefficient spaces and property technologies for measuring and improving buildings’ operational carbon footprint, Martin adds. “Older buildings will require substantial capital expenditure to meet market expectations and future regulatory standards. This will necessitate not only refurbishment but also structural changes, creating opportunities for investors that are prepared to take on development risk to enhance investment returns and for lenders willing to finance the works.”
With Ireland’s Climate Act actively pushing for net-zero emissions by 2050, it is no longer sufficient for organisations to set ambitious net-zero carbon targets without a clear pathway for how to achieve them, says Martin. “With the ESG agenda at the forefront of business strategies, the impact of embodied carbon on the carbon footprint of a building needs to be taken into consideration.
“As occupiers are increasingly demanding green and sustainable spaces, the divergence between ‘green’ and ‘brown’ assets in terms of occupancy, rent levels and capital values is expected to further widen.”
