Green Premium vs Brown Discount: Does Sustainability Pay?
By James Morton
For years, the conversation around sustainable real estate has been dominated by the idea of a “green premium”—the notion that investors and occupiers are willing to pay more for buildings with strong environmental credentials. Energy-efficient systems, BREEAM or LEED certifications, biophilic design: all were seen as add-ons that boosted desirability and, in turn, rental and capital values. But a shift is underway. Increasingly, it is not that green buildings are commanding extraordinary premiums, but that unsustainable ones are being penalised. The “brown discount” is becoming just as powerful a market force as the green premium ever was.
The Evidence: What the Market Is Telling Us
The data paints a compelling picture. According to JLL research, green-certified offices command rental premiums of between 7% and 11% compared to their non-certified peers. That uplift is strongest in competitive urban markets, where occupiers are under pressure from their own ESG targets to demonstrate responsible tenancy. Meanwhile, investors report that certified assets not only attract tenants more quickly but also retain them for longer—reducing costly voids and boosting long-term returns.
On the flip side, buildings with poor energy performance are beginning to suffer a marked decline in value. In London, older office stock with low EPC ratings is struggling to find tenants, particularly as minimum energy efficiency standards tighten. Many landlords face the stark choice of retrofitting or risk obsolescence. The “brown discount” is increasingly visible in valuations, where surveyors apply higher yield assumptions to inefficient buildings, eroding capital values.
Beyond Rent and Value: The Cost of Capital
The financial divide between green and brown buildings extends beyond market rents and sales. Assets with poor ESG credentials face higher financing and insurance costs. Banks and lenders, under pressure from regulators to assess climate risk, are beginning to attach risk premiums to carbon-intensive buildings. Insurers, faced with rising claims linked to climate change, are reassessing the terms on which they underwrite buildings with weak resilience features. For owners, this effectively creates a “brown tax”: higher ongoing costs of ownership simply because the asset is out of step with the sustainability agenda.
In contrast, green buildings often benefit from preferential lending terms and access to green finance products. Green bonds, sustainability-linked loans, and favourable insurance coverage are increasingly tied to assets that can demonstrate robust ESG credentials. In this sense, sustainability does not just “pay”—it actively reduces financial risk.
Case Study: London’s Stranded Offices
London provides a stark example of these dynamics in play. As tenants prioritise ESG-aligned space, demand for older, inefficient stock has plummeted. A recent wave of occupiers has bypassed secondary offices in favour of highly rated, energy-efficient buildings—even at higher rents—driving vacancy rates in outdated stock to multi-year highs. Landlords who fail to retrofit are discovering that their once-prized assets are at risk of becoming stranded, unable to compete in a market where ESG is no longer optional.
The brown discount is not just theoretical; it is playing out in real time on the balance sheets of owners stuck with energy-guzzling buildings. For investors, this is a wake-up call: the cost of inaction is growing faster than the cost of retrofitting.
Shifting the Lens: From Premium to Protection
The narrative shift from green premium to brown discount matters. It reframes sustainability not as an added bonus but as a baseline expectation. Green credentials are increasingly seen as hygiene factors, akin to having reliable lifts or basic fire safety systems. The absence of them is what stands out, dragging down asset performance and reputation.
For buyers, the implication is clear: due diligence must scrutinise ESG risks with the same intensity as financials or legal issues. For tenants, sustainability is becoming a marker of brand alignment, staff wellbeing, and even investor relations. And for investors, the question is not whether sustainability pays—it is whether unsustainability costs more.
Conclusion: Voting With Wallets
The market is already answering the question. Buyers, tenants, lenders, and insurers are voting with their wallets, and they are increasingly favouring greener buildings. Those who invest in efficiency, resilience, and certification reap the rewards of higher rents, lower operating costs, and stronger asset values. Those who ignore the trend face eroding returns, higher costs of capital, and the prospect of stranded assets.
The message is unambiguous: sustainability is no longer a premium—it is the price of admission. In the age of the brown discount, the only way to protect long-term value is to retrofit, improve, and build green from the start.
References:
JLL. (2023). Green-certified offices command 7–11% higher rents.
UK Green Building Council. (2024). The Business Case for Sustainable Real Estate.
MSCI. (2024). Brown Discounts in Commercial Property Valuations.
Urban Land Institute. (2024). Financing the Green Transition in Real Estate.