Retrofit Dynamics for Landlords and Tenants

Commercial real estate is undergoing a fundamental transformation. Office buildings that once thrived on steady, long-term leases are now grappling with vacancy rates that remain persistently high. In cities like New York, San Francisco, and Toronto, occupancy rates hover near 50%, leaving landlords in a bind: how to attract and retain tenants in a world where the office is no longer the default?

Simultaneously, the pressure to comply with environmental regulations is intensifying. Governments are rolling out legislation that mandates significant reductions in building emissions and energy use. This means that landlords must act—not just to fill space, but to meet the standards of a new era. The good news? Those who move early, who embrace retrofitting not as a cost but as an investment, stand to gain the most. They’ll be the ones attracting the tenants, securing the incentives, and building long-term asset value.

 

A Double Pressure: Occupancy and Regulation

The shift toward hybrid and remote work has upended traditional leasing models. Tenants no longer need as much space, and what they do lease must work harder—it must be flexible, tech-enabled, healthy, and sustainable. The era of the anonymous, one-size-fits-all office building is over. Today’s tenants, particularly corporate ones, are looking for properties that align with their internal sustainability targets, employee well-being goals, and financial objectives.

Property owners must navigate an increasingly complex web of energy regulations, shaped by geopolitics and jurisdictional variations. Some regions enforce strict mandates with steep penalties, while others remain in flux due to shifting political movements. This uncertainty presents challenges for investors and building owners, who must not only comply with existing laws but also anticipate future changes that could impact asset values and operational costs.

New York City’s Local Law 97 exemplifies this trend, requiring buildings over 25,000 square feet to cut carbon emissions or face severe fines starting in 2024. Similarly, Canada is tightening its regulatory framework as provinces align with federal Net Zero commitments, introducing stricter building codes and performance standards.

Globally, regulations vary widely. The European Union leads with stringent climate policies, while other regions lack cohesive frameworks, creating compliance challenges for multinational property owners. Political shifts can further complicate long-term planning, as governments either strengthen or roll back sustainability mandates.

The trend is clear: energy performance is becoming a baseline requirement for commercial viability. Those who proactively integrate efficiency and carbon reduction strategies will mitigate risks and capitalize on emerging opportunities, while laggards may face penalties and reduced asset values.

These regulations are not idle threats—they come with real financial consequences. Noncompliance can mean hundreds of thousands of dollars in penalties, diminished asset values, and reputational damage. What’s more, as deadlines approach, demand for qualified retrofit contractors and sustainable building materials will spike, driving up prices. Waiting is not only risky—it’s costly.

 

Why Retrofitting Isn’t Just About Compliance

There’s a tendency in real estate to treat regulation as a box to check. But retrofits offer far more than compliance. Done strategically, they can reposition a property in the market, reduce long-term costs, and enhance tenant appeal.

Upgrading mechanical systems, improving insulation, installing energy-efficient lighting, and integrating smart building technology all deliver meaningful operating savings. These savings create flexibility for landlords to adjust lease terms or reinvest in building amenities.

More importantly, green buildings are increasingly attractive to tenants. Major companies now evaluate potential office space through the lens of their climate goals. If a building is not aligned, it’s off the list—regardless of price.

In addition, certifications like LEED, WELL, or BOMA BEST do more than offer environmental credibility. They indicate to tenants that a building has been designed with occupant health and comfort in mind. Features like improved air circulation, daylight access, and reduced volatile organic compounds contribute to better employee performance, satisfaction, and retention—metrics that matter deeply to today’s HR-driven leasing decisions.

And then there’s asset protection. Properties that fall short of upcoming energy standards are at real risk of becoming stranded assets—buildings that are too expensive to upgrade and too inefficient to sell. Retrofitting is not just a response to regulation. It’s a hedge against obsolescence.

 

Strategic Principles for Retrofit-Driven Success

Landlords need a blueprint to navigate this shift. Drawing inspiration from McKinsey’s "Six Imperatives for Real Estate Players," here are six areas of strategic focus:

1. Invest in High-Impact Retrofits: Prioritize improvements with the best ROI—HVAC modernization, thermal envelope upgrades, lighting retrofits, and building automation systems. These projects often pay for themselves through reduced energy bills and maintenance costs.
2. Adopt Smart Technology: Sensors, IoT devices, and AI-enabled energy management tools provide real-time insights into building performance. This data allows for predictive maintenance, peak load reduction, and continuous optimization.
3. Reimagine Space Use: Retrofit projects should consider how people use space now—not how they used to. Flexible layouts, collaborative zones, and shared amenities reflect today’s hybrid work realities and make space more adaptable to tenant needs.
4. Unlock New Revenue Streams: Underused areas can be repurposed as coworking lounges, event spaces, or even converted to residential units. Retrofitting creates the infrastructure to support more dynamic use of space.
5. Elevate Tenant Experience: Retrofit plans should include features that promote comfort, wellness, and transparency. Smart thermostats, air quality monitors, and digital platforms for tenant feedback demonstrate a commitment to occupant experience.
6. Stay Ahead of Compliance: Don’t treat regulation as a surprise. Proactive landlords are already mapping their buildings against upcoming codes and integrating compliance into capital plans and ESG reporting.

 

Putting It into Practice: First Steps and Incentives

The pathway to a future-ready building starts with one key step: a professional energy audit. This audit evaluates current performance, identifies inefficiencies, and recommends upgrades by cost, impact, and complexity. With this roadmap in hand, landlords can phase retrofit investments intelligently—starting with low-cost, high-impact upgrades like LED lighting, weather sealing, and smart controls.

Crucially, financial support is more available now than ever. In the U.S., the Inflation Reduction Act offers billions in tax credits and rebates for commercial energy upgrades. In Canada, programs under the Greener Homes and Canada Infrastructure Bank banners are funneling money into retrofit projects. These incentives can reduce capital costs, improve ROI, and de-risk investment.

Landlords should also communicate these plans clearly to tenants. Framing retrofits not as disruptions, but as investments in tenant satisfaction, sustainability, and cost savings, can improve lease renewals and increase alignment with tenant ESG targets.

 

Conclusion: The Clock Is Ticking—But So Is the Opportunity

There is no avoiding the fact that retrofits are coming. Whether driven by regulations, tenants, or operating costs, the case for action is clear. But not all retrofits are equal. Those planned thoughtfully, with long-term goals in mind, can transform properties from liabilities into leaders.

Landlords who act now will benefit from lower costs, greater tenant interest, better financing options, and stronger compliance positioning. They’ll be in control of their retrofit narrative—rather than scrambling to meet mandates under pressure.

The first move? Book an energy audit. Understand your building’s baseline. Then, begin the journey of transformation—not just to meet standards, but to set them.

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References

• Brañes, S., Chiarella, D., Sanghvi, A., & Vickery, B. (2023, March 7). Six new imperatives for real estate players. McKinsey & Company. 
• C40 Knowledge Hub. (n.d.). Case studies on the benefits of energy retrofitting of buildings in Latin America. C40 Cities. 
• Alvéole. (n.d.). Top benefits of green building certifications for property managers. 
• UK Green Building Council (UKGBC). (2021). Building the case for net zero: Retrofitting office buildings. 
• Green Building Initiative (GBI). (n.d.). The many benefits of green building certification.