Green Buildings: The Often-Overlooked Haven in Storms

Consumer confidence indexcontinues to decline, regional manufacturersexpectprice increases and fewer orders, whilefive-year inflation expectationshave risen to their highest level in more than 30 years.Stagflationrisk is real, and JPMorganestimates a 60% probability of recession this year。

Even so, facility managers responsible for green buildings or planning to enhance the sustainability of their properties can take some comfort in the premium position green buildings occupy in the current economy.

While some investors may not be closely following green buildings, or may not yet realize they constitute a separate investment category, this sector actually offers an excellentsafe haven—both literally and figuratively. Green buildings are more resilient to extreme weather, as historical data and the fundamentals of the green real estate market demonstrate.

This seems counterintuitive—green buildings are often seen aspremiumproducts, and people tend to buysubstitute-levelnecessities during hard economic times. However, during crises, the growth rate of green buildings has rapidly accelerated. The U.S. green building marketgrew by 50%between 2008 and 2010. By 2011,one-third of all new non-residential buildingswere green buildings. This became one of the few bright spots in the worst economy in recent decades.

So what exactly happened during those difficult economic years? Demand for office space, commercial real estate, and even residential properties plummeted. Office vacancy rates in almost all major citiesexceeded 10%, and in some cities far higher. Owners seeking to lease properties needed to quickly find a differentiator from other property managers who were increasingly desperate and overcapacity. Green retrofits and new construction proved to be alow-costandeffectivemeans of differentiation, delivering substantial long-term returns on investment.

The same factors exist today; in fact, due to the rise of remote work and an uncertain tariff environment, commercial real estate may face even greater pressure than before. Although currently about20%of office space is vacant—and giventhe failure of return-to-office policies, this proportion is unlikely to decline—the situation for green buildings is quite different. According to JLL, we can onlymeet 34% of the demand for green office space. Given such enormous unmet demand, any green office space entering the market is likely to find eager tenants more quickly.

Tariffs provide another impetus for green buildings, a factor that did not exist during 2008-2009. Due to the unique characteristics of green building materials, the cost of green buildings is unlikely to rise nearly as fast as that of conventional buildings. A hallmark of green buildings is the local sourcing of building materials. The shorter the distance materials are transported, the lower their embodied carbon. Given the weight of building materials such as steel and concrete, shorter transport distances make a huge difference.

Needless to say, building materials "imported" from the other end of town are not subject to tariffs.

Furthermore, since the U.S. leads in green building materials such as low-carbon steel and low-carbon concrete, green builders will not face the supply difficulties that their counterparts importing materials from overseas will encounter.

This is not to say that green buildings can shield owners from the intertwined threats of recession, tariffs, and inflation concerns. Global supply chains are complex, and tariffs will inevitably cause disruption and delays. Recessions typically dampen demand across the board. No one wants the economy to become more difficult.

But difficult economic conditions should also prompt investors to turn to safe investments with clear, predictable returns. In a weak market, green buildings are almost the closest thing to a sure bet. They are a safe haven in the storm.