Reusing Buildings Is Good For The Planet. But Does It Make Money?

When property owners are writing to lobby government ministers, the debate is getting serious.

Worried that local authorities are becoming increasingly resistant to owners knocking down buildings for redevelopment, the London Property Alliance sent an open letter to Secretary of State for Levelling Up, Housing and Communities Michael Gove saying that government and local planning policy should promote “retrofit first but not retrofit only”.

At issue is what emits more carbon — knocking down an old building and developing a new, super-carbon-efficient asset or retrofitting the old building to make it more energy-efficient?

The science is becoming increasingly clear.

If an existing building can be maintained and made more energy-efficient, that almost always emits less carbon than demolishing it and building even the most operationally carbon-efficient building. That's because the embodied carbon created from the concrete, glass and steel used in construction is so high, representing up to 75% of the emissions a building creates in its lifetime. 

But one thing is being ignored in the current debate, the factor that will have the biggest impact on the decisions taken by asset owners: money. 

The LPA calls for changes in policy and regulation to nudge owners and developers toward retrofitting when it is the best carbon option. Until those owners and developers are bound by policy, it will be the returns available that will govern the course of action taken.

Right now, the evidence is pointing more and more toward the fact retrofitting a building is good for the planet and for the P&L. 

“Occupiers are becoming more sophisticated and focusing on quality,” General Projects chief executive Jacob Loftus told Bisnow. “We think we can deliver buildings that are as good as any new build. If you can generate excitement and authenticity in your building, then occupiers are willing to pay for that.” 

General Projects has teamed up with private equity firm Henderson Park to refurbish and extend a building formerly occupied by Woolworth in the Marylebone district of London. The 175K SF Metropolis building will produce only about 12% of the carbon over its lifetime compared to a newly built building of the same size and is 80% more efficient than the average retrofit, the developer said. That's despite a floorspace extension of 50%.

The carbon savings come from reusing most of the existing structure and building the extension from timber, Loftus said. 

Henderson Park has undertaken other office retrofit projects in the UK capital. It bought the 137K SF Athene Place in the City district for £120M in 2017, refurbishing the building in tandem with development manager Endurance Land. The projects received a BREEAM Excellent sustainability rating and was re-leased and sold for £255M in 2020.

Henderson Park Director John Fletcher agreed that if the product created through a retrofit was high-quality, returns on refurbished buildings were appealing to investors. Henderson Park typically targets returns of 15% or better. 

Regulations like the UK’s energy performance certificate policy or New York’s Local Law 97 are pushing owners to make their buildings more operationally carbon efficient. But these regulations don’t take into account the embodied carbon created during development.

In that sense, policy could incentivise owners to knock buildings down and build an energy-efficient asset, even though the carbon emitted from construction might negate the savings on the new building’s operations. 

Market-level data indicates that retrofitted buildings with improved energy-efficiency and a sustainability certification like BREEAM or LEED command rental premiums over noncertified peers. The evidence is not quite as clear cut with new developments. 

In a recent analysis, CBRE said European buildings with sustainability certifications command a 6% rental premium to noncertified buildings. It said this was equally true for existing buildings and new builds. 

“This finding is very supportive of the retrofitting challenge outlined by the European Green Deal, which aims to make Europe climate neutral by 2050,” Dragana Marina, CBRE sustainability research lead for continental Europe, said in a statement alongside the research. 

MSCI data found that certified buildings in London and Paris sold for a 25% premium to noncertified buildings. Its analysis adjusted for the age and quality of the building, but it did not specifically strip out retrofitted buildings to see what kind of premium they commanded, if any. 

Whether retrofitting a building turns a profit naturally depends to a large degree on its purchase price. And the picture is mixed about whether buildings that need a significant upgrade to meet energy-efficiency requirements are being sold at a deep enough discount to justify the capital expenditure needed to improve them. 

“Property owners are under less pressure to sell than a few weeks ago, but there is still pressure, and they don’t have the money or the skill to take a building from a rent of £40 per SF to £80 per SF,” W.RE CEO Sascha Lewin said.

“At the current value many buildings are being sold for, the money you have to spend to get to that £80 per SF, the discount doesn’t work," he said. "But there is a gap between the rents for exciting, sustainable buildings and those that don’t meet those needs, and that is going to get bigger. So those buildings are currently overrented, and the rent of £80 per SF might go up to £100 per SF.”

Those existing owners are underway on a major exercise to work out the carbon efficiency of their existing portfolios, what needs to be done to improve them and how much it is going to cost. 

“We’ve got more than 700 assets in the portfolio, and we can’t do everything today,” LGIM Real Assets Head of ESG Shuen Chan said. “We have to identify the key assets in our funds.”

LGIM undertakes a whole-life carbon assessment to decide whether an asset will emit more carbon if it is razed and replaced as opposed to retrofitted. It has undertaken 70 net-zero audits on individual assets to decide on future strategy, Chan said, with the lessons from one asset often applicable to others. 

The investor, which has £38.5B in real assets under management, has a clear policy of retrofit first, Chan said, adding the whole-life view of carbon is one that real estate increasingly needs to adopt.

“If the focus is just on operational carbon, the sector is kidding itself,” she said. 

LGIM believes good-quality, sustainably retrofitted buildings can command higher rents once refurbishments are complete, she said, and it is putting its money where its mouth is. LGIM is spending £40M refurbishing the 129K SF Tempo building in Maidenhead, about 30 miles to the west of London, aiming for a BREEAM Outstanding rating. 

Policy and regulation are increasingly likely to nudge owners toward refurbishing rather than redeveloping assets, Chan said. But until it does, market forces are going to have to do the job instead.