Commercial Real Estate (CRE) companies face an uncertain outlook, as a difficult economic backdrop, changing working habits and rising costs loom large.

However, our recent research, based on a survey of businesses in the sector as well as interviews with industry leaders, suggests companies are focusing on sustainable growth as they rise to these challenges.

“This is a diverse sector with large and sophisticated real estate and housebuilding companies at one end and much smaller businesses with a handful of properties at the other,” says Charlie Foster, our Head of Commercial Real Estate. “The mentality may be different, but they all need to find ways to respond to similar sets of problems.”

Our research suggests that many CRE companies are now doing exactly that. They are recognising the link between improving sustainability and their rising energy bills, and they are exploring the benefits that digital transformation could deliver.

One critical question for CRE businesses is how they will reduce the environmental footprint of their properties – not only as regulation increases their responsibilities in this area, but also because the issue is becoming a point of competitive differentiation. The survey results show 98% of CRE businesses worry that poor sustainability credentials could prompt customers to go elsewhere and 11% think this loss could begin within the next year.

Tenants are increasingly  requiring information from their landlords on the environmental performance of their buildings, explains Janine Cole, Sustainability and Social Impact Director at real estate company GPE. “From the outset, the conversation is around net zero, carbon emissions and energy management,” she says. “Tenants feel increasingly strongly about these issues, but they also know they’re going to have to report on them at some stage.”

Homebuyers are similarly focused, says Andrew Day, Sustainability Director at award-winning housebuilder The Hill Group. “Buyers are increasingly raising green mortgages and they want a property that truly does what it says on the tin.”

Importantly, however, the sustainability challenge does not stop at the environmental question. Only 50% of CRE businesses surveyed see being ‘a purpose-led company’ as an important pillar of sustainability. And only 46% have started to think of sustainability as more than an environmental issue, a narrow view that Janine worries could cost them.

“Our approach is to integrate environmental and social aspects,” she says. “Customers are asking us about how we can work with them on their broader sustainability aspirations, including social drivers.”

With many tenants looking for reduced or more flexible space, for example, GPE sees opportunities to create “communities within our building”, giving tenants the chance to interact with organisations such as social enterprises.

• Be ready to provide tenants and homebuyers with clear metrics on the environmental performance of buildings.
• Look for more opportunities to improve that performance, both on new projects and existing buildings.
• See sustainability as a broader challenge, encompassing social aspects.

The rising cost of energy is a key issue for CRE businesses – 92% of those surveyed say they have been severely or noticeably impacted by rising energy costs, compared with 70% of respondents across all sectors (see chart below).

To what extent has your company been impacted by rising energy costs? (% of respondents)

CRE businesses face their own energy costs, of course, but they also face pressure from tenants and house buyers to help them lower their bills.

However, Janine sees this as a golden opportunity to build stronger relationships with customers. “We’ve worked hard to help our occupiers understand what rising energy costs mean to them,” she explains. “Our technical services team goes out and meets with customers to explain what they can do to reduce their bills – it’s really opened up the conversation.”

At Hill, meanwhile, Andrew also urges his industry to see the energy crisis as a way of connecting more meaningfully with customers. “New homes offer savings of around £2,500 a year compared with existing stock,” he says. “It’s crucial that we build to those standards; if we don’t, we face a good deal of reputational risk and financial exposure.”

Consumers and businesses alike are looking for support and reassurance from the CRE sector, companies such as GPE and Hill argue. They want to know how existing buildings can be managed more effectively – for example, can companies embracing flexible working use less space and what improvements could drive reduced costs in the future?

There is also a clear opportunity to link the debate on energy costs back to customers’ focus on sustainability. Right now, more than two-thirds of CRE businesses (68%) frame the investment decision around green energy solutions largely in terms of cost savings rather than the broader agenda. That could mean missing out on a longer-term sustainability dividend.

• Build closer relationships with customers by helping them to manage energy bills.
• Explore how the transition to greener energy sources could reduce future bills.
• Focus on energy in the broader context of sustainability, rather than only in terms of cost.

Leaders of CRE businesses believe one important step towards improved sustainability would be a greater embrace of digital technologies. So far, only 48% of CRE firms say they have invested in digitisation and are looking to make further investments; that’s well below other sectors examined in our research.

Janine sees clear links between increased take up of digital solutions and improved sustainability performance. For example, securing better data from the built environment will help businesses to monitor and manage performance, she points out. “We are also rolling out digital twins at some of our buildings so that we can improve sustainability performance and communicate more transparently with our customers on outcomes,” she says.

Elsewhere, GPE is once again focused on connecting with customers. “We’re spending time on CRM systems, for example, because we see this transition from real estate being a landlord-tenant relationship to a relationship with customers.”

For Hill, Andrew says one big opportunity with digital transformation is to manage supply chains more effectively. “We’ve got to be able to demonstrate responsible procurement. We need to proactively manage our supply chains.”

Finding use cases such as this is how the CRE sector will build the business case for digital investment. For now, while 74% of businesses surveyed are pleased with the way digitisation gives them a better view of operations and improves decision-making, only 36% are focused on what it could mean for the customer experience.

• Identify a wider range of potential applications of new technology, from customer-facing use cases to operational and supply change management.
• Tie digital investment to the business’s other priorities, including sustainability.
• Be prepared to experiment with innovation to identify where investment will generate the greatest returns.

While CRE businesses undoubtedly face a broad range of challenges in the current market environment, the sector’s leaders regard these issues as interwoven, rather than as disparate problems to be solved individually. A greater focus on sustainability could be one way to bring energy costs down, for example, with digital technologies providing a means to drive this process more effectively.

“The opportunity as these businesses become fit for the future is to find these new points of competitive advantage,” comments Charlie Foster. “Regulation is driving change, customers are asking for change, but there is an opportunity to be proactive and to get ahead of those demands.”