Leaders of the commercial real estate industry attending COP 27, the United Nations climate conference being held this year in Sharm El-Sheikh, Egypt, said a variety of challenges and opportunities lie ahead in the industry’s drive toward sustainability.
The challenge is massive. Scientists estimate that buildings are responsible for 40 percent of greenhouse gas emissions—14 gigatons per year in operations, and another 14 gigatons from construction materials, according to Roland Hunzicker, director of the built environment for the World Business Council for Sustainable Development.
The European Commission estimates that 70 percent of existing buildings need to be retrofitted in order to meet carbon reduction goals. That is starting to happen, real estate observers say, but not nearly fast enough.
Retrofits Are Moving Slowly
“We’re miles behind,” said Guy Grainger, global head of sustainability services and environmental, social, and governance (ESG) policy for global real estate advisory firm JLL. In the Northern Hemisphere, he said, “[w]e’re not even close. We should be retrofitting 3 percent of buildings a year in the developed cities, and we’re under 1 percent at the moment.”
Several panelists noted that energy-inefficient property could pose a major risk to property owners—and the economy. “Clearly, if there’s a big regulatory change in the market, then people are going to be left with these assets. And it’s going to be a massive shock to the system,” said Alan Belfield, chairman of the Arup Group, a global property development consultancy.
Even now, older properties that have not been retrofitted are becoming less saleable. “I would say six months ago you could sell on stranded assets, and some fool would buy them,” Grainger said. But that is changing: “We’re seeing real evidence of that not happening now, particularly in Europe,” he said.
But there are also reasons for optimism.
Belfield said that in response to research done on materials and energy efficiency, new buildings use 40 percent less operational carbon than they once did.
Owners of existing stock are also making progress: Over the past 13 years, members of ULI’s Greenprint Center for Building Performance—a global alliance of owners, investors, and strategic partners representing over $1.5 trillion in real estate assets—managed to reduce their collective year-over-year greenhouse emissions by more than 50 percent. “In 2021, Greenprint members reduced same-store GHG emissions by more than 4 percent, and they are doing it in a cost-effective way that is increasing their property’s value,” said Billy Grayson, executive vice president, centers and initiatives, for ULI.
Pricing Carbon
Panelists agreed that one of the highest priorities now is finding a way to fold the price of carbon into property valuations.
“When people have got these tools, they can understand they can add value, they can avoid the risks, and it should lead to action on retrofits and upgrades, if we get this right,” said Arup’s Belfield.
Data is being collected, organized, and standardized by such groups as the Partnership for Carbon Accounting Financials, but panelists said it is still a work in progress. “To get hold of this data is difficult, it’s fragmented. To do these calculations is time-consuming, it’s hard to find, and there’s no quick, universal way of doing this,” Belfield said. “And that’s what we’re trying to do: we’re trying to get something that integrates the cost of decarbonization and all the other risks into the same bin so we can do property valuations.”
Building Cooperation
But it is not just a matter of aligning buyers and sellers over a carbon price methodology. “We need to include the underwriters, the appraisers, and the brokers to help them communicate that effectively to each other, and to use their frameworks to be able to actively, clearly communicate that value to those buyers and sellers,” Grayson said.
As part of the C Change program, ULI Europe has launched its Transition Risk Assessment Consultation Guidelines and the accompanying discussion paper, Breaking the value deadlock: enabling action on decarbonization. Learn More
ULI Europe CEO Lisette van Doorn said, “We hope that the industry can better price and mitigate transition risks using our guidance and future tools.”
“I think that building that ecosystem and making sure that they’re all talking the same language and looking at transition risks in the same way is going to be very important. Then we need owners and tenants to figure out a way to collaborate more effectively,” Grayson added.
“Tenants bear all the costs, but they don’t have the ability to influence major decisions to decarbonize the building once they’ve signed the lease,” Grayson noted. “And owners don’t really have a financial incentive to invest in decarbonization once they have a stabilized tenant who is controlling that energy use and managing the energy, so that’s another important partnership we need to foster.”
Growing Upside
For industry players that can navigate this tangle, however, a lot of opportunity lies ahead, according to several panelists.
“The biggest problem I’m hearing right now in green finance is, ‘I have a ton of capital, and I cannot find the projects to finance, no matter what sort of incentives I put on my capital,’” Grayson said.
“We’re seeing a real lack of good-quality, grade A net zero carbon buildings in every sector,” said Grainger. “If you can produce that now, the upside is huge. It’s way higher than we ever thought.”
“If you’re brave enough to take that step, even in this market, you will reap the rewards because there is very little supply out there,” said Grainger.
“In nearly every market, there are green buildings setting new records. So the upside is huge. But I don’t deny that the downside is also huge,” he said. “The cost of inaction is way bigger than many investors are currently calibrating in their own portfolios—and I think in their debt portfolios as well, by the way.”
