The world’s real estate industry is facing the challenge of reducing carbon emissions as part of achieving the global goal of limiting the temperature rise to 1.5 degrees above that of the pre-industrial era. Currently, the real estate market accounts for approximately 40 percent of global CO2.
JLL estimates that the outlay incurred in the sector’s pursuit of climate neutrality could total USD 3 trillion. Furthermore, according to the International Monetary Fund, further delaying the implementation of climate policy will negatively impact economic growth. Upgrading the skills of the workforce and developing technology will therefore be key to accelerating the rate of modernisation, which must triple from the current 1 percent to at least 3 percent. Only such growth will ensure the fulfilment of the Paris Climate Agreement, whose aims are to keep global warming at safe levels.
With as much as 11 percent of the world’s carbon dioxide emissions stemming from building processes, the most effective solution to this problem – from the point of view of a ‘global carbon bill’, – is to step up efforts to retrofit existing assets, rather than replacing them with new buildings. However, the lack of consistent standards may prove to be an obstacle.
To build on the drive for decarbonisation, the modernisation of buildings and the adaptation of real estate to changing needs are steps that companies should take in the near future to safeguard their business long-term. From the perspective of corporate strategy, ESG factors are no longer just buzzwords. In fact, they are having an increasingly important impact on both operating costs and the ‘resilience’ of the properties themselves to rising energy costs.
“The current energy crisis has highlighted the need to move away from fossil fuels and toward renewable sources, as well as the need to increase energy efficiency and reduce energy demand. In addition, commercial assets with excessively high emission factors have become less attractive assets from a tenant’s point of view and in turn from an owner’s perspective as well. Thus, the risk of generating less stable rental income is on the increase. For owners, this is a huge risk, as it affects assets with an investment horizon of several decades. There is therefore a strong financial and business case for upgrading buildings to meet current and future requirements,” notes Jakub Frejlich, Director of JLL’s Strategic Advisory, and responsible for designing and implementing ESG strategies for companies.
Financial risk for failing to act on decarbonisation
Decarbonisation, understood as decarbonising and improving the energy efficiency of existing assets, is crucial in the process of eliminating the ‘brown discount’ phenomenon, i.e. the reduction of the rental amount in properties due to the failure to implement the methods required by the market. In 10 major cities in Europe and North America, as much as 90 percent of office space is more than 10 years old, and even offices completed five years ago are unlikely to meet the zero-carbon requirement in the near future. According to GRESB’s 2022 data, the global ESG benchmark for real estate financial products, 2025 is the estimated average expiry date for the market attractiveness of offices worldwide in terms of meeting CRREM (Carbon Risk Real Estate Monitor) energy efficiency standards. A decrease in interest in high-carbon buildings is therefore an increase in demand for zero-carbon structures. The imbalance of supply and demand will present an opportunity to raise rental quotas for those spaces that have managed to effectively implement net zero solutions and provide a point of rental decline for non-compliant buildings.
New business models for achieving climate neutrality
Both landlords and tenants can gain by working together to create new business models and identify methods of co-investment. There is a clear need for both parties to align their goals and work together to achieve climate neutrality. Tenant co-investment is an important factor in changing existing rental economics. JLL report: Retrofitting Buildings to be Future-Fit.
Retrofitting Buildings to be Future-Fit is a report by JLL, prepared by experts from the real estate market leader, which comprehensively analyses the topic of building retrofits in terms of asset decarbonisation. It examines three levels of retrofitting – from lightweight retrofits that focus on optimising efficiency, to those requiring major renovations that translate into increased energy efficiency, reduced emissions and cost savings over the long term. The report also features realisations from around the world that demonstrate the benefits to occupants in terms of price, cash flow and attracting new tenants.
