The 26th meeting of the “Conference of the Parties” (COP26) in Glasgow last November reinforced commercial real estate (CRE) as a major mechanism to achieve the global goal of net-zero emissions by 2050. Pledges of $130 trillion among financial institutions to support the initiatives delivered serious scale to the efforts.

The next decade will be a critical period of change, with ongoing uncertainty amid the big evolution in technology, data, and laws. Many CRE market players will shift their strategies, affecting capital flows into and out of the asset class. COP26 is European-centric at present, but it offers hints of what is next for the United States.

In a CRE-focused session, noted CRE professionals from the United Kingdom and European Union shared their perspectives on achieving COP26 decarbonization goals and demonstrated that they were further along than the United States in many ways. Although some of the Old World’s playbook will not directly transfer to the New World, the challenges and lessons are similar. The following key themes relevant to CRE capital markets materialized:

1. Approaching critical mass: Net-zero planning in CRE is becoming more of the norm than an exception. The United Kingdom’s Better Buildings Partnership (BBP) hosted the COP26’s CRE session. The BBP has experienced growth to 44 member firms (with 11,000 properties worth about £270 billion), all committed to achieving net zero across their portfolios. Coincidently, green bond issuance hit $1 trillion in 2021, rising in lockstep with corporate adoption of reporting standards like the Task Force on Climate-Related Financial Disclosures and the emissions laws like the aggressive “Fit for 55” regulations of the Energy Performance of Buildings Directive (EPBD).

Impact: Eventually, access to capital will likely require sustainability plans attached to property portfolios to satisfy lenders and investors. Nonsustainable buildings will also face rising expenses and impaired marketability, and vice versa for highly sustainable buildings. Many unknowns have prevented the CRE valuation community from fully pricing in climate or transition risk, but efforts to quantify the cost of “net-zero-carbon audits” have begun. As buyer concern and regulation reach “critical mass,” valuations and bids will adjust. For example, in the United States, the imminent cost of adhering to the Climate Law Mobilization Act and Local Law 97 in New York City will need to be considered seriously by investors and lenders. Similar laws and energy benchmarks are percolating across other U.S. cities.

2. More (good) data needed: The most common theme was the need for detailed energy usage data. Having a strong, flexible data infrastructure to be able to adapt to unknowns over the next 10 to 40 years, either from an energy usage or regulatory standpoint, will be key. Having rich, relevant data is the start of every net-zero framework, such as the World Economic Forum’s Action Plan for Net Zero Carbon Buildings.

Impact: Proptech investment—already skyrocketing in the United States—will likely accelerate, focused on energy and building management systems, the “internet of things” (IoT), and smart sensors that guide where improvement may be needed. Also, certain data elements will be required for investor and lender reports for climate disclosures and risk assessments.

3. Targeted retrofits will flourish: To highlight the importance of effective retrofitting, it was estimated that “80 percent of buildings in 2050 exist today.” Current retrofits focus on the roughly 65 percent of energy consumption that stems from heating and cooling, lighting, and appliances. High-impact retrofits start with insulation upgrades, on-site renewable energy, and encouraging hybrid work to reduce usage.

Impact: Most new capital will flow to funding retrofits. One organization estimated the investment in green retrofitting will approach $25 trillion globally. The Urban Green Council estimates that retrofit costs for New York City buildings, given new emissions limits, will be in the order of $1.50 to $18 per square foot ($16 to $194 per sq meter), given a wide range of needs. C-PACE financing provides a tested model that others may follow, though it presents hurdles for some first-mortgage lenders. A first for C-PACE in New York, $89 million of financing was closed during summer 2021 for efficiency upgrades for 111 Wall Street.

4. Consistent, transmissible reporting: The ability to correctly and consistently measure greenhouse gases (GHGs) stemming from properties, along with a compatible carbon trading system, will be crucial. The G-20 nations were admonished to help standardize carbon trading systems worldwide, rather than the 60 or so systems used at present. Common standards and nomenclature are critical for both efficiency and equity concerns. As stated on one panel, “You cannot reduce what you can’t measure, and you cannot finance what you don’t know the cost of.”

Impact: Acquisition due diligence will increasingly consider energy usage, retrofit, and, in some cases, carbon trade costs. Certain building types in certain locations will fail to meet net-zero standards, and some system of high-integrity carbon offsetting will be required, with cost transparency for CRE capital markets. Firms that offer high-quality retrofit assessments will be in high demand.

5. Net zero takes a village: All participants will be affected across the CRE value chain. Therefore, all should carry risks (costs) and rewards, and share information and responsibility.

Impact: Who pays for these costs—owners, tenants, the private sector, or the government? European owners trying to recoup their refurbishment costs directly from tenants have faced leases with established provisions for sharing needed repair and capital expenditure (capex) costs—but not for government-mandated or voluntarily adopted sustainability improvements. U.S. landlords will face similar challenges, but often the benefits may be recouped at the top line with stickier tenants and higher rents.

KEVIN FAGAN is senior director and head of commercial real estate analytics for Moody’s Analytics.