April 29, 2024 by Mike Phillips

One Year On, Little Has Changed In Real Estate’s Decarbonization Efforts

EDITOR’S NOTE: This is Part 3 of this year’s annual installment of an ongoing investigative series that examines one of Earth’s largest greenhouse gas emitters: the commercial real estate sector. You can read Part 1 on green loans here and Part 2 on lenders here, and read the groundbreaking initial three-part story from last year here.

2023 smashed global records as the hottest year ever recorded. But the heat did little to prompt the world’s largest real estate owners to cut their carbon emissions. 

In April 2023, Bisnow published an in-depth investigation into which of the world’s 75 largest real estate owners had a plan to reduce the carbon output of their portfolios. The research found that of the institutional investors, REITs and investment managers analyzed, 42% had no plan in place to cut emissions. 

One year later, the proportion of those same investors that don’t have a plan had dropped only slightly to 38% — small progress in the face of a planetwide challenge.

Photo: Courtesy of ULI

ULI's Lisette van Doorn

“Timelines are being pushed back,” Urban Land Institute Europe CEO Lisette van Doorn said. “You’re seeing a lot of internal work being done, people working out how much they might need to spend to improve assets. But we’re not seeing a lot of action.”

Experts Bisnow interviewed identified myriad reasons for the lack of action by big real estate firms: sustainability slipping down the agenda in the wake of a market downturn, a lack of any immediate financial imperative, and regulation creating increased burdens that actually hinder rather than help the push for decarbonization.

“I’m optimistic, but there is more the sector can do,” said Shuen Chan, the head of responsible investment and sustainability at British property giant LGIM Real Assets.

Warnings from scientists have become increasingly urgent in the last 12 months about the likelihood the world won't achieve the goal of keeping temperature rises below 1.5 degrees Celsius above pre-industrial levels by 2050. Society needs to radically change commercial practices to reduce emissions and global warming. 

But real estate hasn't heeded these warnings. Not only has there been little change in the past year in the number of firms with a decarbonization plan, but those firms that do have plans in place have failed to take steps to account for the vast majority of the emissions they create. These emissions, called Scope 3, come from tenants and the construction process.

You can see which firms have a decarbonization plan and which of those plans incorporate Scope 3 emissions using Bisnow's interactive data visualization tool below.

Emissions from construction, also referred to as embodied carbon, are of particular importance because 75% of a building’s emissions come from the carbon created through the manufacturing of materials like cement and steel.

Embodied carbon has become a more prominent topic of debate in the past 12 months, but there has been little change in the industry's business practices. 

“More participants are moving towards refurbishment rather than new development, and knowledge is increasing of the benefits among landlords and tenants,” Alstria CEO Olivier Elamine said. “But it is still a conversation happening at the edge of things.”

The global real estate downturn of the past 18 months, led by sharply rising interest rates in most major economies, has created conflicting pressures for real estate owners around cutting emissions from their assets and portfolios. 

On the one hand, there is growing evidence that the greenest buildings, particularly office buildings, command rental premiums and higher price tags than similar, less green peers. MSCI found that London office buildings with a BREEAM or LEED certification sold for an average of 26% more than similar buildings without certification as of the third quarter of 2022. 

But the idea that assets with larger carbon footprints will become “stranded” and see their values drop isn't being fully embraced across the market.

“I still don’t think you’re seeing it being priced into deals,” van Doorn said.

Despite pressure on owners of older, lower-quality assets, most still aren't pricing them at levels that would allow new owners to buy them and still have the capital to make them greener while producing a good return.

“More distress might mean that happens,” van Doorn said. “You only need it to happen in a few cases, then that sets the new level and it is priced into the market.”

But that isn’t happening. 

A generational opportunity to invest in high-carbon-emitting assets and improve their environmental credentials has come and gone. The period of low interest rates that ended in 2022 created a sea of cheap money that could have gone into retrofitting tired assets, a ULI Emerging Trends in Real Estate report pointed out. 

Owners didn’t do that because they didn’t need to. Even the price of the least desirable assets increased, as low interest rates inflated values across the board. 

Now, the cost of materials and the cost of money have risen, dramatically inflating the price that needs to be paid to refurbish assets. And while rents have also risen with inflation, there is no guarantee that the income will match the investment required.

The downturn has also created a drain on mental resources that has been just as detrimental as the drain on financial resources. 

Photo: Pixabay/Life-Of-Pix

The embodied carbon created by materials like cement and steel is still not being addressed by real estate, Bisnow's analysis found.

“It’s not so much about lack of money as lack of attention,” Alstria’s Elamine said. “We don’t have time to think about new ideas, to innovate. You just apply the things that you’ve always done before.”

There is also a paradox at work regarding the role regulation can play in pushing real estate firms toward decarbonizing their portfolios. In practice, experts said, regulation is hindering the speed at which companies can cut carbon. 

Bisnow’s previous reporting found a strong correlation between regulation on carbon emissions and firms setting targets to decarbonize their portfolio. Of the 75 companies analyzed, 47 organizations have a decarbonization target this year. Of those, 20% are cutting emissions faster than needed to hit government net-zero targets, and two-thirds are exactly in line with targets. 

But even Alstria, a company that has put decarbonization at the center of its strategy, said regulation is creating a burden that is taking time and resources away from actually cutting emissions from buildings. 

“If you look at something like [the European Union’s Sustainable Finance Disclosure Regulation] that has a massive reporting element, my ESG team is spending their time on that, not thinking about how to make our buildings more sustainable,” Elamine said. 

ULI’s van Doorn also questioned the efficacy of much of the regulation being put in place. 

“I really don’t have much faith in the regulators,” she said. “Something like Minimum Energy Efficiency Standards [a policy being implemented in much of Europe and the UK] isn’t going to get us to net-zero,” she said. 

But clearer regulation can provide a road map that gives clarity to investors and allows them to create a strategy. 

Photo: Courtesy of Shuen Chan

LGIM's Shuen Chan

“We think upcoming guidance, like the UK’s Net-Zero Building Standard, will hopefully give the market the clarity it needs,” LGIM’s Chan said.

That standard will provide the first industrywide definition of what constitutes a net-zero building.

But as much as there are individual, cyclical reasons why the process of decarbonizing real estate is slow, there are also systemic, structural reasons that must change if vital progress is to be made. 

One area where this is the case is embodied carbon, the carbon created during the construction, development and demolition process of buildings. As buildings are increasingly powered by electricity rather than gas and electric grids become decarbonized in major economies, the proportion of emissions coming from embodied carbon is set to rise over the next three decades, data from the International Energy Agency shows. 

The United Nations published a report last autumn urging the real estate and construction sector to address the issue of embodied carbon emissions. One key strategy suggested was to avoid unnecessary extraction and production of materials by not constructing unnecessary new buildings. 

Bisnow’s analysis last year found that only 16% of the world’s 75 largest real estate owners and managers included embodied carbon emissions in their decarbonization strategies.

This year’s analysis found that figure has risen to 25%, meaning cutting embodied carbon remains a minority sport for the property industry. 

For Alstria’s Elamine, it is a sign the real estate industry hasn't changed its way of thinking, and new development offering the potential for big profits still trumps the health of the planet. The big focus on producing low-carbon building materials like concrete just takes attention away from the real issue, she said. 

“Yes, there might be a need for new construction in Africa or parts of Asia [where populations are growing],” he said. “But in a lot of places, you really should question whether there is a need to build in the first place. The mindset of the industry is that we are still doing the same thing.”