The Intergovernmental Panel on Climate Change (IPCC) has set the target for Greenhouse Gas (GHG) emissions to plateau no later than 2025, halve by 2030, and reach net-zero by 2050. The built environment is a significant contributor, responsible for 39% of global greenhouse gas emissions. The World Green Building Council has therefore issued a challenge: by 2030, all new buildings must be net-zero carbon in operation and embodied carbon reduced by at least 40%, while all buildings must be net-zero by 2050.
For the commercial real estate (CRE) sector in particular, this is a difficult proposition. Simply replacing everything with brand new high-spec buildings is not feasible, either economically or environmentally. According to UKGBC, approximately 70% of the UK’s non-residential building stock was constructed before the year 2000. Put another way, more than 80% of the buildings that will exist in 2050 already exist today. As a result, much of the sector will have to retrofit.
To give just one example, according to David Bownass, head of UK Net Zero Design Consulting, JLL, “the pace of office redevelopment needs to at least double from levels seen over the last ten years”.
According to figures from UCL, the five largest UK CRE sub-sectors in terms of energy consumption are offices (27,620 GWh, 17 per cent), retail (27,340 GWh, 17%), industrial (25,740 GWh, 16%), hospitality (16,980 GWh, 11%) and health (17,380 GWh, 11%).
Energy benchmarking
To drive those numbers down, the BEIS and property industry groups are building on existing legislation such as Energy Performance Certificates (EPCs) and Minimum Energy Efficiency Standards (MEES). Energy benchmarking for operational use “is extremely likely to come into force,” say UCL, “first for offices and then for other sectors.” At present buildings in the F and G rating category cannot be let and must be improved. UCL believe it likely that this will be lifted for D and E grades, but admit that this measure alone won’t get these buildings to net zero. The Government’s 2021 ‘Building Back Greener’ strategy sets a minimum energy efficiency standard of EPC band B by 2030 –better, but still not good enough.
“Real estate is fundamentally about creating better places for people, but we cannot thrive without a thriving planet”, argues Joey Aoun, net zero implementation lead at Savills Investment Management. “Adopting sustainable construction materials, circular approaches and efficient practices such as dismantling, adaptability, prefabrication and modularity [are needed] to minimise the embodied carbon emissions in the built environment.”
The pain points of doing so, however, include “works that are costly, and often require vacant possession, which again only adds to the financial cost”, says Chiara Essig, head of strategic sustainability services, EMEA, at JLL. But she adds that combining decarbonisation measures with existing capital improvements and refurbishment plans will reduce the marginal cost. Brett Ormrod, net zero carbon lead for Europe, LaSalle Investment Management, agrees that such “pain points contribute to delays on action towards decarbonisation”, including rising interest rates.
However, while action might be expensive, inaction is far costlier. Emily Hamilton, head of ESG at Savills Investment Management, points out that while $100 trillion is the estimated investment required to reach net zero by 2050, it compares to a $178 trillion cost of inaction: “It doesn’t take a maths genius to see the business case for scaling investment now… the initial investment required for energy-efficient retrofits can be recouped through a combination of energy savings and rental premium within a relatively short timeframe.”
Indeed, JLL’s 2022 Future of Work Survey found that 74% of organisations said they would be willing to pay a premium for leasing a building with leading sustainability or green credentials, and 22% said they already have. CBRE found a 21% rent premium for certified office buildings compared to non-certified assets over a five-year period. In Copenhagen, Barcelona and Amsterdam, the premium was as high as 29%, 27% and 26%, respectively.
Regulation
There are regulatory winds blowing, too. The European Financial Reporting Advisory Group (EFRAG) has proposed European Sustainability Reporting Standards (ESRS). At the same time, the International Sustainability Standards Board (ISSB) is moving to deliver global sustainability-related disclosure standards, while the US Securities and Exchange Commission (SEC) is proposing similar rules that would impact the CRE sector.
Deloitte comments that this is leading firms such as Brookfield and JP Morgan Chase to “help manage energy usage and carbon in the properties they occupy in anticipation of potentially increased disclosure requirements and to meeting ESG and sustainability goals.”
As the Deloitte survey notes, however, “it can be unclear whether this includes only landlord-controlled emissions or those controlled by both tenant and landlord.” The tenant-owner relationship is crucial to decarbonising the CRE sector, says Ormrod: “We must take steps to turn what has historically been a transactional relationship between tenants and owners into a collaborative partnership.”
The NABERS UK standard, which provides an efficiency performance rating from one to six for offices, recommends an energy split between “base building” and “tenant spaces”. The UCL report also highlights ‘green leases’ or ‘performance-based leases,’ which enable landlords and tenants to meet environmental targets cooperatively by sharing energy data and upgrade costs. As Essig comments, “landlords’ and occupiers’ sustainability objectives are usually well-aligned, so it’s just about getting the right people in the room.”
The ultimate goal is worth keeping top-of-mind, too: what a zero-carbon built environment will look like in 2050. For Aoun, it will be “a sustainable and resilient future. Buildings will be energy efficient, powered by renewable sources, and constructed with low-carbon materials and efficient techniques”. Similarly, says Ormrod, “we can hope to have re-imagined our buildings’ relationships with nature, realising a true balance between the natural environment and technology both operationally and physically.” It is a future worth building for.
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