Structural mismatches between long-term energy investments and short-term financing hinder essential upgrades in commercial real estate, impacting asset value and cash flow.
A growing concern in the commercial real estate (CRE) sector is the disconnect between long-lived energy investments and the short-term financing that typically supports them. This misalignment is increasingly recognized as a barrier to necessary upgrades that enhance asset value, resilience, and cash flow.
In previous discussions, the focus has been on the benefits that proactive investment in energy performance can yield for property owners. These benefits include reduced operating costs, improved tenant retention, and more stable cash flows. However, despite the clear financial advantages, the market continues to exhibit uneven performance investment. The root of this issue lies not in owner reluctance but rather in the traditional financing structures of the commercial real estate industry.
As energy costs rise and Building Energy Performance Standards become stricter, the pressure on inefficient assets mounts. Owners are increasingly aware of the risks associated with poor building performance, yet the market struggles to respond effectively, even when the economic rationale for upgrading is evident.
The crux of the problem is a structural mismatch between the long-term value creation of performance improvements and the short-term nature of conventional CRE financing. Most energy performance upgrades offer benefits over extended periods, with high-efficiency heating, ventilation, and air conditioning (HVAC) systems, electrification, and building envelope enhancements typically lasting 15 to 25 years. The savings generated from these improvements—such as lower operating expenses and enhanced resilience—accrue gradually over time.
However, traditional financing methods do not align with this reality. Conventional bank loans are often structured with five- to seven-year terms and variable interest rates, focusing on current cash flow rather than long-term risk mitigation. This approach is understandable from a lender’s perspective, given regulatory capital requirements and interest-rate risks. Yet, it creates a fundamental mismatch: property owners are expected to finance long-term infrastructure with short-term capital, leading many to defer necessary actions or pursue inadequate incremental measures.
Compounding this issue are the underwriting limitations prevalent in the commercial lending landscape. Many lenders lack standardized frameworks to assess performance improvements as viable financial assets. Factors such as avoided energy costs and regulatory penalties are seldom modeled as sustainable cash flows. Consequently, performance investments struggle to compete for capital against more familiar and traditional uses, despite their attractive risk-adjusted returns.
This situation is not merely a failure of individual institutions; it is indicative of a broader market design issue. Addressing this challenge necessitates the introduction of capital that is structured differently, underwritten with a longer-term perspective, and deployed with a focus on asset performance.
Specialized financing mechanisms are crucial in this context. Tools like Commercial Property Assessed Clean Energy (C-PACE) financing are designed to align repayment schedules with the useful life of energy improvements. By tying repayment to the property rather than the borrower and extending loan terms to match asset longevity, these structures mitigate refinancing risks and enhance project economics.
Green banks and similar public-purpose finance institutions play a complementary role by absorbing early-stage complexities and supporting technical diligence. They can catalyze private capital by addressing risks that traditional lenders may be ill-equipped to handle. Through mechanisms such as credit enhancement and co-investment, these institutions help transform performance upgrades from bespoke projects into financeable assets.
Public-private partnerships in climate finance further extend this model. When public capital is strategically employed—not as a substitute for private lending but to facilitate it—significantly larger pools of commercial capital can be unlocked. The goal is not to replace banks but to enable their participation by reducing friction, standardizing risk, and aligning incentives.
While these tools exist in many markets, their scale and integration are often lacking. Performance financing is frequently treated as a niche solution rather than a fundamental component of the commercial real estate capital stack. As a result, property owners often encounter these options too late in the process, typically when regulatory deadlines are imminent or refinancing pressures are high.
The consequences of such delays can be substantial. Projects rushed under time constraints tend to be more expensive, harder to finance, and less effective. Capital deployed reactively seldom achieves the same financial or performance outcomes as capital invested proactively.
A more resilient financing model would integrate performance financing early in the investment process. In this scenario, long-tenor capital would support core infrastructure upgrades while traditional lenders continue to finance the remaining asset components. Technical assistance would guide investment decisions before they become urgent, allowing performance risks to be addressed proactively rather than being priced in later through higher spreads or reduced leverage.
This evolution is no longer optional. As performance standards tighten and energy costs escalate, the gap between the needs of buildings and the capabilities of traditional financing will only widen. Without structural changes, more assets risk becoming stranded—not due to a lack of demand, but because their capital structures cannot accommodate the necessary investments to remain viable.
The shift towards a performance-driven real estate market does not require a complete overhaul of financial systems. Instead, it calls for aligning capital with the realities of building longevity. As performance becomes a central driver of cash flow quality, asset resilience, and long-term value, financing that fails to adapt will increasingly fall behind the market it aims to serve. Conversely, financing that evolves will help shape the next generation of competitive and sustainable commercial real estate.
According to Rokas Beresniovas, the need for change in the commercial real estate financing landscape is urgent and essential for future viability.