Wildfires, hurricanes and flooding are among the extreme weather events putting the commercial real estate industry under pressure to ensure that properties can cope with the effects of climate change and further reduce their carbon footprints. In recent years, many global frameworks and standards that focus on net-zero carbon emissions and green-building concepts have been introduced and are gaining momentum in the commercial real estate community.
A JLL client survey found that 88% of respondents anticipate that carbon emissions reduction will be part of their corporate sustainability strategy by 2025. Although many of these firms have ambitious goals to keep pace with the industry at large, most are starting with a blank slate. In fact, only 19% of those polled have a strategic path to the finish line. The other 81% find themselves within a “sustainable action gap,” a discrepancy between their stated green objectives and what’s needed to reach them.
It’s going to cost a considerable amount of money to reach these goals and to finance the required investments in infrastructure.
Commercial mortgage lenders will need to be part of this process. It’s going to cost a considerable amount of money to reach these goals and to finance the required investments in infrastructure. This process will come with an inherent sticker shock, but the idea is that organizations need to look longer term to hit these targets.
Estimates on how much it will cost to reach net-zero emissions vary greatly. According to a 2020 report from the Energy Transitions Commission — a global coalition of energy producers, financial institutions and industrial companies — reaching worldwide net-zero emissions by 2050 will require $1 trillion to $2 trillion per year in new spending.
Judging by the fact that commercial real estate is responsible for nearly 40% of global carbon emissions, a considerable amount of these costs would be spent to redesign and retrofit buildings. Such a move would require the buildings of the future to be constructed with different materials and to use clean electricity where possible to power, heat and cool these structures.
A recent JLL survey of 647 C-suite organizations found that building owners and investors, as well as companies leasing space, may have similar outlooks on environmental issues, but the dynamics are a bit different. Tenants are not only driven by investor demand but also by employee attraction and retention through climate change issues, especially among younger workers. For Class A real estate investors seeking to attract top-tier tenants, sustainability will increasingly be a deciding factor for these prospective occupants.
Investors are creating plans to reduce risk and increase the value of going green while minimizing the “green premium,” which is the additional cost of sustainable action above industry norms. A newly emerging discussion involves the “brown discount,” which refers to a reduction in value for assets that lag behind their peers in the implementation of sustainable actions.
The Biden administration has made the climate change fight a priority from its first day in office. On Jan. 20, 2021, President Joe Biden issued Executive Order 13990, “Protecting Public Health and the Environment and Restoring Science to Tackle the Climate Crisis,” which put the climate change debate at the forefront of the regulatory agenda for all federal agencies.
This past October, the Biden administration doubled down on this commitment by issuing “A Roadmap to Build a Climate-Resilient Economy.” This report states that the U.S. government is using all of its tools to properly account for and mitigate climate change-related financial and economic risks, which are already affecting jobs, homes, savings and businesses across the country.
The report identified four specific climate change-related financial risks, and a forthcoming report from the Financial Stability Oversight Council will kick off a robust process for U.S. financial regulators in developing the capacity and analytical tools to mitigate climate-related financial risks. In addition, the U.S. Department of the Treasury launched a process to address climate-related risks for the insurance sector.
More recently, President Biden addressed the U.N. Climate Change Conference in Glasgow, Scotland. He stated that “in an age where this pandemic has made so painfully clear that no nation can wall itself off from borderless threats, we know that none of us can escape the worst that’s yet to come if we fail to seize this moment” while adding that this is a “decisive decade.”
The White House also has released plans that outline the administration’s long-term strategy for cutting domestic greenhouse gas pollution in half by 2030 and its goal to reach net-zero emissions by 2050. As a result of these orders, the Securities and Exchange Commission (SEC) will require publicly traded companies to expand upon the impacts and/or compliance costs associated with climate change in their SEC 10-K and 10-Q filings — bringing sustainability, environmental and social governance issues into the climate change debate.
Although there are no definitive federal guidelines on climate change, there are a wide range of measures that commercial real estate owners can take now to meet the challenge. At the local level, many cities are taking it upon themselves (in the absence of definitive federal regulations) to take aggressive positions on climate goals through similar compliance regulations, which will make investment decisions much more difficult.
As an example, New York City in 2019 passed Local Law 97, which requires buildings of more than 25,000 square feet to meet new energy-efficiency and greenhouse gas emissions limits by 2024, with stricter ceilings coming in 2030. Washington, D.C., and Boston have passed their own versions of legislation aimed at reducing emissions from buildings. The question for commercial building owners becomes, how do they comply with multiple tiers of guidelines in an efficient manner?
● ● ●
Much of the commercial real estate industry understands the need to focus on sustainability, and there is less fear about it than in the past. There also is a broad consensus among industry leaders that steps must be taken to reduce the effects of climate change.
It is anticipated that there will be much more consolidation around what it means to be sustainable in commercial real estate. More organizations will trend toward a variety of voluntary compliance mechanisms and invest in achieving these net-zero goals. It is important to note that there will most likely be more political action ahead as it relates to climate change, which could dramatically alter what today’s sustainability plans will look like in the future. ●
Dennis Firestone is a senior vice president with JLL Valuation Advisory’s environmental and property condition services team. He is a registered geologist and registered environmental manager who has more than 30 years of leadership in the environmental and engineering assessment industry.
The technical storage or access is strictly necessary for the legitimate purpose of enabling the use of a specific service explicitly requested by the subscriber or user, or for the sole purpose of carrying out the transmission of a communication over an electronic communications network.
The technical storage or access is necessary for the legitimate purpose of storing preferences that are not requested by the subscriber or user.
The technical storage or access that is used exclusively for statistical purposes.The technical storage or access that is used exclusively for anonymous statistical purposes. Without a subpoena, voluntary compliance on the part of your Internet Service Provider, or additional records from a third party, information stored or retrieved for this purpose alone cannot usually be used to identify you.
The technical storage or access is required to create user profiles to send advertising, or to track the user on a website or across several websites for similar marketing purposes.