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The main aim of this paper is to examine how commercial sustainability innovation projects in real estate and construction industries utilise the contemporary market‐oriented innovation models based on the service‐dominant logic.

A survey of a large set of sustainability innovation projects was conducted and analysed.

The results show that over a third of the examined projects lack all the necessary innovation components recognised in the literature. Furthermore, very few projects utilised concurrent market feedback in the development phase. The study suggests that sustainability innovations fail commercially in built environment, because they lack active customer participation and value network involvement, and they aim for incremental instead of radical improvements.

Future research should address available ways for companies in the real estate and construction industries to take advantage of their unused potential in climate change mitigation business through innovation.

Organisations striving for sustainability innovations should aim at radical instead of incremental innovation, and focus on customer participation and involvement of the value network. The innovation processes in the construction sector could be organised better by utilising tested service‐dominant models.

This study is among the first to address innovation elements based on the service‐dominant logic in analysing projects aiming at sustainability innovation in real estate and construction industries.

The need for flexibility between organisational units is well established in corporate real estate. While the cost of flexibility is rather straightforward to approximate, measuring economical value of the flexibility is not straightforward. The purpose of this paper is to explore how real options analysis can be used for valuing flexibility in a real retrofit investment case, present a research process for valuing the flexibility in the retrofit investment case, and evaluate the empirical usability of real options valuation results compared with traditional discounted cash flow valuation results.

The research is conducted as a case study. A newly introduced real options valuation method, the fuzzy pay-off method is used for analysing data from a Finnish office building retrofit investment case. The major difference in the selected method is that it uses fuzzy set theory instead of probabilistic theory, and the main advantage is the practical applicability, i.e. only three scenarios (minimum, best guess, and maximum) are needed for the valuation of flexibility. In the case, the scenarios are determined using a seven-phase research process that incorporates data available (e.g. rental agreements, building information) to a corporate real estate unit. The research process involves defining vacancy scenarios for rental agreements, transforming them into potential income achievable with flexibility, estimating cost of flexibility, comparing the potential income with the costs, and valuing the real options.

The main finding of this paper is that real options analysis; especially the fuzzy pay-off method can be used for assessing the monetary value of flexibility. The applicability of the fuzzy pay-off method into a practical investment case was found straightforward because assignment of probabilities into different uncertainty scenarios was unnecessary. In the empirical case, it was found that flexibility investments were profitable only when parts of the building instead of the whole building were designed flexible. The present value of the pay-off from flexibility ranged from negative 58/sqm to positive 130/sqm, depending on the tenant.

Real options literature, especially in the real estate and construction sector, has requested for new applications of real options analysis in practical setting. This paper adds to that request with an example of evaluating flexibility in a retrofit investment case. The empirical analysis produced in this paper was perceived valuable by case study investor and can be used as a guidance and motivation for further applications of real options in the industry.