By making investments in needed improvements now, the commercial real estate industry could alter the course of climate change.
As an unintended consequence of economic growth underpinned by energy derived from hydrocarbons, atmospheric concentration of carbon emissions has risen to the highest level in human history. A warming planet has numerous dire consequences, including weather that creates destructive and, at times, deadly flooding, wildfire, and extreme heat events, with increasing frequency. These conditions illustrate the human and economic costs of inaction, and the unpredictability of a more perilous future.The built environment is responsible for roughly 40 percent of annual carbon emissions, more than any other industry sector. Notwithstanding increasing attention to sustainability initiatives worldwide and widespread action thereon, carbon emissions globally continue to rise. Commercial real estate and other industry sectors must continue to urgently engage in designing and funding solutions to lessen carbon emissions and bend the curve.
Our industry is at an important inflection point. Years of prosperity following the GFC have been recently upended by the near-term and enduring impacts of the pandemic. Although uncertainty remains about the trajectory of the U.S. economy, many companies are experiencing a recession in earnings that affects their decision-making in negative ways for the real estate industry—cost-cutting behavior often leads to space reduction, and the full impact of remote and hybrid work is yet unknown.
Real estate values have reset due to higher capital costs and demand challenges in specific sectors. Thus, a dearth of activity makes pricing difficult to determine and financing difficult to achieve. During these times, it is easy to be distracted, reactive, and caught in the uncertainty of the moment. But it is our responsibility as leaders to remain focused on both short-term issues in navigating a more challenging economic environment and the long-term problem of limiting climate change through curtailing carbon emissions.
Many of us were attracted to real estate as an opportunity to make a significant and lasting impact on the places where we live, work, and play. We must take steps to avoid unmanageable impacts of a warming planet and to become more resilient, adapting to manage the unavoidable impacts ahead.
Although it may be more challenging to consider proactive sustainability investments in uncertain times, it is exactly now that investments in our future success must be made. The business case for investing in sustainability initiatives is clear.
Alignment with client demand
The quality and financial performance of real estate assets is increasingly correlated with sustainability performance. Resource efficiency, decarbonization, indoor environmental quality, and climate resilience matter to more and more of our clients, many of whom are implementing their own sustainability strategies.
We can collaborate with clients in support of their sustainability objectives, including in decarbonization and electrification or distributed energy resources, performance optimization platforms, and low-carbon building materials.
As climate technologies evolve, we can select and deploy a promising set of new solutions to attract and retain clients. Investing in sustainable improvements to existing properties and incorporating sustainable design into new developments can differentiate properties and lead to faster leasing and price premiums in even the most challenging markets. For a consistently increasing percentage of real estate users, buildings with leading sustainability performance constitute a gating issue.
Access to investors, costs
Value protection and access to capital is increasingly influenced by climate-related factors. Companies that effectively manage and disclose sustainability indicators are more attractive investment options as more climate-conscious equity and fixed-income investors consider climate risks in their investment decisions.
Assets and portfolios that are more vulnerable to climate change will face increased insurance costs and grow less attractive to clients and investors. Asset valuation and access to capital may be affected by a mix of physical and transition risks that can be managed through leadership, knowledge, and foresight.
Regulatory compliance
As public climate change awareness continues to grow, government agencies and policymakers are drafting and implementing climate-related regulation. A new regulatory landscape is taking shape where SEC climate rules will enhance and standardize climate disclosures, and building performance standards in many U.S. cities will introduce penalties for buildings with high energy and carbon intensities. New codes and ordinances will require adoption of advanced high-performance building practices for new development and major renovations. Organizations addressing climate change proactively will be better prepared to navigate regulatory transition risks, penalties, permitting requirements, and escalating operating costs.
Protecting workforce
As leaders, our workforce is our most important asset. Competition for talent remains robust, and a focus on sustainability and social good is an important differentiator for companies looking to attract and retain top talent, especially younger generations who are more engaged in these issues. Maintaining a defined sustainability strategy can enhance employees’ feelings of pride and meaning in their work, as well as a stronger connection to the company’s mission.
I believe in the power of our industry to rise to the occasion, invest in needed improvements, and change the course of climate change, and I believe ULI is an important convener for this work. In 2021, I made a personal contribution to launch ULI’s Net Zero Imperative, which aims to accelerate the decarbonization of the built environment in cities and to democratize sustainability best practices for all organizations that own and use buildings. With a toolkit of interventions to support a path to decarbonization, the program supports actionable and measurable projects to reduce climate change–causing carbon emissions and, thereby, to support the long-term value of our investments.
The opportunity cost of inaction is too high. This is why I believe so strongly in the value that ULI’s Randall Lewis Center for Sustainability in Real Estate and the Net Zero Imperative provide to leaders and organizations. The tools exist to make improvements that not only will benefit future generations through climate resiliency but also will support the financial vibrancy of organizations today.
We must view today’s challenges also as opportunities to differentiate our organizations. We can do the right thing, as well as the smart thing for our organizations and the built environment by making a significant and lasting impact through bending the curve on climate change.
OWEN D. THOMAS is the chairman and CEO of BXP, and former chairman of ULI.
