The pandemic has caused deep disruption to the real estate industry, and the recovery will be taking place in a context that may well include paying unprecedented levels of attention and expense to addressing carbon footprint.
A 44-page report just released by the Urban Land Institute (ULI) and PwC titled "Emerging Trends in Real Estate" is based on proprietary data and insights from 1,600 real estate industry experts. It "explores how COVID-19 accelerated many existing trends like retail footprint reductions while it spawned new ones, such as an increased focus on social justice and health and wellness, and stopped others in their tracks, like the appeal of big cities."
Along with digitalization and online shopping as accelerators of existing trends, ULI and PwC say the pandemic recovery narrative is "hugely reinforcing the real estate industry's environmental, social, and governance (ESG) agenda. More companies than ever before are putting climate change and decarbonization strategies at the heart of the way they do business as they respond to the pressures of the pandemic."
A growing focus on net-zero carbonization
The report covers a lot of ground. Here, we'll take a high-line look at what it had to say about office space, including this:
"The overriding theme from interviews conducted is that the industry is looking beyond occupancies and returns, and it is starting to address its wider responsibilities. A growing focus on decarbonization in the real estate industry in the last 12-18 months has been driven primarily by providers of finance and the biggest tenants, but also by climate change becoming more tangible in the form of more frequent extreme weather events."
Net zero is fast becoming the most important standard for buildings in terms of climate change and decarbonization, the report says. It adds that government and United Nations research shows that about 28% of the world's carbon emissions come from building operations and that regulation of such real estate by city, regional, and national governments is expected to accelerate.
Tenant expectations and the emergence of 'green leases'
The report makes these two key observations about how this could deeply impact the office space business:
- Tenant behavior changes to include embodied carbon when assessing net-zero targets, will massively reduce the real estate industry's incentive to develop new buildings.
- Green leases can be used to incentivize tenants to switch to renewable energy sources and reduce their own energy consumption.
The report says that, assuming around 80% of the buildings standing in 2050 have already been built, retrofitting existing structures to be energy efficient would have a huge impact on meeting net-zero carbon goals.
But net-zero goals themselves are still being worked out, and once they're commonly understood, it will take collaboration among a complex network of developers, owners, suppliers, and government to make change happen.
The Millionacres bottom line
Significant lead times for changes in regulations and to buildings themselves mean none of this will happen overnight, but the increasing pressures of climate change and a market expecting it to be addressed will definitely impact investing and other strategies around real estate.
Indeed, here's a warning contained in the report: "Investors are increasingly conscious of the risk of 'stranded assets' that cannot be brought into line with regulations and for which there will be no buyers or occupiers. This is already starting to show impact, with the general view that greener buildings are increasingly being seen as more saleable."
And while the focus of this report is on major companies and big global markets, remember, all real estate is local, and the imperatives the market perceives about addressing climate change will affect everyone everywhere.