Sustainability within Commercial Real Estate and How it “Works”
Chances are you have heard the word “sustainability.” But do you know what it truly means or how it is integrated or impacts commercial real estate? Or better yet, do you know why it is critical for companies who wish to remain profitable in the near and long term to integrate it as a core pillar of their business plans? Hopefully by the end of this article we can provide guidance for the current conversation around sustainability alongside what it really means for not just businesses and consumers, but also for the world of commercial real estate as well.
The word sustainability is simply defined as “meeting the needs of the present without compromising the ability of future generations to meet their own needs.”[1] Businesses of all shapes and sizes should be able to understand this sentiment from a sheer long-term profitability perspective: If you want to survive and thrive you need to drive impact today, but also be able to stand out from the competition and drive success far into the future. Any shortcuts in the near term that could potentially impact the long term should be avoided. Now, sometimes short term actions will produce unforeseeable consequences. For instance, perhaps you’ve shifted production to a new supplier to reduce labor costs to then realize in the future they are not set up to produce your product as it evolves or material needs change to adhere to regulations. The result could be having to shift to yet another new supplier and due to inflation, and perhaps size of your business as it currently stands, the investment far exceeds what it would have been if you had partnered with your new supplier from the beginning. Markets change and businesses need to adapt. Sometimes you can’t predict the future and will be faced with course corrections that impact profit, company morale and market differentiation, but what we now know through case studies and studying the impact of sustainability on businesses is that when companies invest in sustainability they are set up to drive the new definition of corporate success, the Triple Bottom Line, even if they don’t have that crystal ball.
Stanford University defines the Triple Bottom Line as: Profit, People and Planet.[2] It recalibrates what it means to be successful with all three pillars weighted equal in importance. It notes that in today’s global economy, alongside future needs, businesses must not only continue to drive their profit, but must also look out for the interests of their workforce and the global consumer while simultaneously adhering to the needs of the planet to continue to allow the human race to survive. It also dictates that as companies build their business models, the business models remain flexible.
No business probably better defines success against the 3Ps and a flexible business model as Tesla. One August 2, 2006, Tesla announced their plans to create electric vehicles via scalable production as a means to drive sustainable transportation.[3] Note in this simple statement Tesla addresses upfront the “Planet” pillar by wanting to drive zero-emission vehicles to support reduced carbon emissions (i.e. sustainable transportation) since carbon emissions are a primary driver of global warming (and subsequently the concern over species’ survival, natural resource depletion and human health). First producing the high-priced Roadster amongst a niche buyer, the Tesla team ensured flexibility by outsourcing most of the production and switching suppliers as needed to maintain quality, costs and timelines. They also went against the industry norm by selling direct to consumers rather than relying on the dealership model to ensure there wasn’t competition on the showroom floor to sell gas versus electric and utilized trained staff to promote a learning environment to sell not only the benefits of all-electric, but their brand as the catalyst for the movement.
As profit began to grow (“Profit” of the 3Ps), Tesla used those funds to ultimately move more down-market to appeal to the greater buying public (the “People” pillar of the 3Ps) and reinvest in production and design. Further, the move to all-electric resulted in carbon credits per US regulation which they were then able to sell to other automakers as another revenue stream alongside energy storage systems.[4] Details abound with how Tesla also focused on elements of the software, negated consumer worry with programs such as 24-hour roadside assistance and grew their charging station network to support not only their drivers but also the surge in electric vehicle awareness and desire.
As Tesla flexed and pivoted based on real-time needs, they never forgot their core focus: developing the electric vehicle market as a means to sustainable transportation. This is perhaps most evident in their decision to not patent their technology and instead encourage innovation and build capacity amongst suppliers.
“Tesla will not initiate patent lawsuits against anyone who, in good faith, wants to use our technology…. Our true competition is not the small trickle of non-Tesla electric cars being produced, but rather the enormous flood of gasoline cars pouring out of the world’s factories every day…. We believe that Tesla, other companies making electric cars, and the world would benefit from a common, rapidly evolving technology platform.”[5]
So you may be thinking, great, everyone knows Tesla spurred innovation and drove the transition to electric vehicles, but how does this relate to sustainability in commercial real estate? The core lesson is that when companies focus simply on what worked in the past and only on profit, they make decisions that don’t break the mold nor do they look to the future needs of society. Toyota dominated the auto market, but when Tesla entered the scene to not only provide mobility, but also do it sustainably, their profit and valuation rose. As of March 2024 Tesla is valued at $539 Billion (usd) versus Toyota at $413 Billion (usd).[6] For commercial real estate, the typical model has been to outfit spaces to fill with as many tenants as possible while also allowing businesses to drive productivity through how many people are able to work within that space. But what if, instead of simply driving commercial revenue through the number of businesses and how many people those businesses employed on-site, we looked to the other 2 pillars of the 3Ps – People and Planet?
Studies show that when people are healthier and happier at work, they are more productive and absenteeism is reduced which helps drive further productivity.[7] The workplace no longer becomes a place for what you can do for a company, but rather what that company and that space can do for people. In relation to supporting human needs, commercial buildings that integrate aspects such as high-efficiency lighting, sustainable materials and a focus on nature, are setting themselves to not only differentiate themselves from the competition and better align with consumer needs, but are also showing their investment in their long term success. “From energy and water savings and improved air quality to overall durability, sustainable materials have been proven time and time again to last longer. Green materials (such as recycled decking and roofing) not only endure for years exposed to the elements but require much less maintenance. In addition, because many of them are free from harmful chemical treatments, they are healthier for the environment (and the inhabitants they serve).”[8]
By now it may seem quite clear that investing in sustainability within commercial real estate could potentially lead to fame and glory similar to that of Tesla, or, at worst, drive the health of a building to encourage productivity of the businesses that occupy its floors. From there, businesses will understand and justify not only price per square foot, but also the location of their workforce – ideally within your building. Finally, even if you are excited to begin, the task may seem daunting. But start small, or start big. But whatever you do, simply start investing in the health of your building, its people and, of course, the health of your revenue.
[1] “Sustainability.” United Nations, https://www.un.org/en/academic-impact/sustainability#:~:text=In%201987%2C%20the%20United%20Nations,development%20needs%2C%20but%20with%20the, 25 March 2024.
[2] Stanford University. “Sustainability Strategies: Develop initiatives to transform your Business.” Stanford Executive Course, Fall 2023.
[3] Elon Musk, “The Secret Tesla Motors Master Plan (Just Between You and Me),” Tesla, August 2, 2006, https://www.tesla.com/blog/secret-tesla-motors-master-plan-just-between-you-and-me (March 13, 2022).
[4] Erwin Hettich and Günter Müller-Stewens, “Tesla Motors: Business Model Configuration,” The Case Centre, 2014.
[5] Elon Musk, “All Our Patents Belong to You,” Tesla, June 12, 2014, https://www.tesla.com/blog/all-out-patent-are-belong-you (March 13, 2022).
[6] Nasdaq. “TSLA,” “TM.” 25 March 2024.
[7] CDC, “Workplace Health Model.” 25 March 2024, https://www.cdc.gov/workplacehealthpromotion/model/control-costs/benefits/productivity.html.
[8] New School of Architecture and Design, “10 Benefits of Green Building.” 15 January 2019, https://newschoolarch.edu/10-benefits-of-green-building/
