ESG

Green Premiums, Brown Discounts: The Commercial Value of Sustainability in Real Estate

Sustainability is no longer a niche consideration in the commercial real estate industry – it’s a core driver of competitive advantage and asset value.

This is reflected in shifting consumer preferences. According to a 2024 Deloitte survey, a majority of Gen Z and millennial consumers state that sustainability influences their purchasing decisions, with 64% willing to pay more for environmentally-responsible products. At the institutional level, more than 10,000 organizations worldwide have set or committed to setting Science-Based Targets, many of them real estate operators and owners aiming for net-zero pathways.

With stiff competition for tenants across key asset classes, building owners are increasingly turning to sustainability strategies to differentiate their properties in a crowded market. The industry is therefore seeing a marked divergence between buildings that excel in energy efficiency, occupant wellness, and environmental stewardship – and those that lag behind. This divergence is encapsulated in two related concepts:

The green premium: The price (or rent) premium that investors and tenants are willing to pay for greener, more sustainable properties.
The brown discount: The reduction in a building’s value or rental potential when it fails to meet modern sustainability expectations or regulatory requirements.

Below, we examine why these two phenomena matter – and what defines a “green” building in 2025 and beyond.

Understanding the Green Premium and Brown Discount

Although the labels “green premium” and “brown discount” have gained widespread use in the last few years, the underlying trends go back more than a decade. In fact, a landmark CoStar study first reported in 2008 that “green” buildings (particularly those with LEED or ENERGY STAR certifications) commanded higher rents, occupancy rates, and sale prices than their non-green counterparts.

Green Premium

The “green premium” acknowledges that tenants and investors often pay anywhere from 3–20% more for buildings featuring high-performance design, low operating costs, and sustainable infrastructure, such as on-site solar, EV charging stations, and strong indoor air quality measures. A 2022 CBRE study found that LEED-certified buildings command a 3.7% rent premium when controlling for location, building age, and renovations. Additionally, research from JLL suggests that the premium can be even higher in select urban markets, especially for buildings that offer wellness-focused certifications (like WELL) or advanced digital amenities that monitor and optimize energy use in real time.

Brown Discount

The “brown discount,” by contrast, refers to the devaluation of older buildings that have neither been retrofitted nor maintained to modern environmental and efficiency standards. These “brown” spaces often come with higher operating costs, less natural light, outdated HVAC systems, and materials that can compromise tenant satisfaction or drive up utility bills. Beyond suffering from diminished appeal, such properties may also face increasing regulatory risk, especially in cities like New York, Boston, and Washington, DC, where stringent BPS policies will soon impose penalties on owners whose buildings exceed carbon or energy thresholds.

Over time, these factors can render an asset less liquid, more costly to operate, and ultimately, at risk of becoming a stranded asset that requires deep capital investment just to remain viable in the marketplace.

What Makes a Building “Green”?

Sustainability in real estate has grown more nuanced in recent years, reflecting not just energy performance but also occupant health and satisfaction, carbon impacts across supply chains, and resilience to climate risks. Below are key characteristics that increasingly define a “green” building:

Energy Efficiency Measures

Core measures include infrastructure for tracking, monitoring, and improving energy performance, in addition to pursuing strategic upgrades and retrofits where they make sense. LED lighting, high-efficiency HVAC systems, enhanced insulation, and advanced BMS systems for controls automation are all common characteristics of today’s advanced green buildings. But if you’re considering ways to enhance your buildings, don’t sleep on the power of OpEx before CapEx: according to the Department of Energy, simple operational improvements (such as recommissioning HVAC systems and optimizing controls) can cost 20 times less than capital improvements but generate roughly equivalent energy savings.

Water Efficiency

Similar to the above energy efficiency measures, green buildings also often incorporate strategies for minimizing water wastage, often by implementing monitoring technology to identify leaks or instances of high usage, integrating low-flow fixtures, or even establishing systems for rainwater capture or greywater recycling. In water-stressed regions – like California or parts of the Southwest US – these features can also offer a needed resiliency edge by mitigating drought risk and lowering water-related costs.

Building Certifications

Industry certifications remain a strong external signal of a building’s “green” status, thanks to increasingly adopted standards like LEED, BREEAM, ENERGY STAR, and WELL. New versions (such as LEED v4.1) place growing emphasis on carbon emissions and occupant health, reflecting how sustainability trends and benchmarks continue to evolve. There is ample evidence to suggest that certifications increase the marketability and value of assets – especially in suburban markets where certification may be less prevalent and thus a compelling differentiator for older building stock.

Sustainable Materials

As the industry pays closer attention to embodied carbon, using sustainably sourced or recycled materials has become increasingly important. Lower-emitting paints, adhesives, and sealants also enhance indoor air quality and tenant well-being.

Indoor Air Quality

Especially since the COVID-19 pandemic, building owners are prioritizing air filtration and ventilation – often going beyond minimum code requirements. Integrating natural light, low-emitting materials, and advanced HVAC filtration systems can reduce absenteeism and boost tenant satisfaction.

Sustainable Transit Access

Finally, proximity to public transportation, bike storage, and EV charging facilities are all seen as key “green” amenities, especially by younger tenants who increasingly prioritize car-free commuting and reducing their carbon footprints. These can further help owners and occupiers alike in defraying Scope 3 emissions.

Best Practices for Real Estate

Despite growing awareness of the brown discount, the real estate industry has yet to experience a universal tipping point at which older assets are devalued en masse. However, signs point to an accelerating trend: in one chilling example, the New York City Comptroller’s Office projected that 70% of buildings could face noncompliance with NYC’s Local Law 97 by 2030 if they fail to undergo major energy retrofits. Fines for noncompliance could be substantial, posing a direct threat to an asset’s NOI and value.

To stay ahead in this evolving landscape, consider these key strategies:

Conduct Sustainability Assessments

Before acquiring or refinancing an asset, perform a comprehensive sustainability review. This should include energy benchmarking (using publicly available data via ENERGY STAR or similar platforms), carbon footprint assessments, and resilience checks (e.g. flooding or extreme heat risks). This is an area where technology can help; understanding gaps and opportunities is virtually impossible without a foundation of accurate, verified energy performance data.

Prioritize Greener Acquisitions

When evaluating acquisitions, properties that have already demonstrated strong energy and sustainability performance and compliance with local building standards can command higher sale prices – often justified by reduced retrofit needs. While these may be less “opportunistic” in terms of turnaround potential, they also come with lower risk, especially in major markets like New York, Boston, Washington DC, California, Chicago, and the Pacific Northwest, where stricter regulations and codes are in place or imminent.

Implement Energy Analytics Technology

Before embarking on costly retrofits, maximize operational efficiencies by using advanced analytics and controls. Platforms like Noda or other real-time monitoring systems can help identify anomalies, optimize equipment runtime, and ensure buildings perform at peak efficiency. An ACEEE study into the impact of smart technologies on buildings suggests that energy analytics platforms alone can reduce energy consumption by 5-10% in typical commercial properties.

Evaluate Retrofits

For older buildings, retrofits may be unavoidable if you wish to avoid the brown discount. Common projects include:

Upgrading to LED lighting with smart controls
Improving insulation or installing high-performance windows
Modernizing HVAC equipment or switching to heat pumps
Installing onsite renewables, such as rooftop solar
Upgrading BMS systems for more advanced automation and control

These measures can not only reduce emissions and costs over time, but also attract tenants who value low utility bills and healthy, comfortable indoor environments.

Stay Abreast of Regulations and Incentives

Jurisdictions worldwide continue to pass new building performance standards, emissions caps, and energy codes (including the EU’s revised Energy Performance of Buildings Directive, and new BPS policies under consideration at the state and local levels in the US). Simultaneously, financial incentives – including rebates, tax credits, and green bond financing – can help offset the capital costs of sustainable improvements. Successful organizations will make it a point to keep a pulse on evolving regulations and to maximize available funding and incentives where possible to strengthen the business case for upgrades and retrofits.

Think Long-Term

Finally, though short-term returns for investors are paramount, savvy real estate owners are also actively weighing the long-term implications of all of the above dynamics. Climate risks, the growing regulatory burden in the US and abroad, and changing consumer preferences will inevitably impact real estate within the next 5 years and beyond. Strategic investments made today (that may be tougher to sell to stakeholders in the immediate term) may prove to pay off in the long run, helping to guard against future write-downs and obsolescence and ensuring that assets retain their value in the years to come.

Final Thoughts

The rise of the green premium and brown discount phenomena highlights the market’s broader pivot toward sustainability, occupant well-being, and long-term resilience. Investors and property owners who recognize these trends stand to benefit from higher rents, stronger tenant retention, and better financing options. Meanwhile, those slower to adapt will risk seeing their properties lose value and market relevance, facing not just increased operating costs but also regulatory penalties and potentially heightened vacancy rates.

By focusing on building sustainability, leveraging technology, making strategic upgrades, monitoring key market and regulatory trends, and considering the long-term implications of all of the above market dynamics, real estate investors can future-proof their operations and ensure success in a rapidly-changing environment.

About Noda

Noda is a data and analytics company on a mission to make every building smarter, more efficient, and more sustainable. Recently ranked in the top 10 tech companies leading the charge on climate action, its AI-powered suite of products surface unique insights that empower real estate teams to reduce costs, decrease time spent on routine work, and find and act on opportunities to save energy and carbon. Discover how Noda's solutions can unlock the potential of your assets and accelerate the transition to net zero. Visit us at noda.ai to learn more.