Go Green or Your Bottom Line is Red

It’s a fact: retrofitting buildings to be sustainable is far more cost efficient and environmentally friendly than building new ones. Although there are a number of projects in the works for entirely carbon neutral new builds, most of these are still in the development stage, and are expensive and unable to be produced rapidly. For newly introduced energy performance certificate (EPC) standards, the vast majority of buildings that will be assessed already exist. Focusing the industry’s efforts on making these buildings smarter and greener is a vital step to lessen the 40% of global emissions that the building industry is already responsible for. 

Savills UK announced that it will take an estimated £30 billion to get London offices up to standard by 2030. From then on, buildings that operate under an EPC Grade B will no longer be eligible to receive rent or be re-let. Currently only 4% of office buildings in London operate at these standards, meaning that the wide majority of commercial buildings could find themselves suffering if green upgrades are continued to be ignored.

These issues aren’t just a worry for the future, buildings that have been slow to up their sustainability efforts are already facing obstacles. Victoria Bajela, commercial property analyst at Savills, commented that the 90% of leasing activity is being focused on the best quality buildings. Additionally, a guide published by WSP estimated that unsustainable properties could face a ‘brown discount’, and could receive up to 30% less investment than their greener counterparts. So will we see a scramble 8 years from now, or will the drastic increase in energy costs wake up the sector to act?

These problems of functionality, efficiency, and sustainability are not isolated to certain cities, they are a global problem. 75% of New York City’s office buildings were built before the 1980s, and 45% before World War II, according to Colliers. Whilst these buildings have stood the test of time in their durability, their efficiency and ability to meet the standards of the modern workforce are severely lacking. A building built before global warming was a priority cannot be expected to operate at a level that is in keeping with sustainability targets. Thankfully, however, you can teach an old dog new tricks, and the importance of retrofitting to lessen energy costs and usage cannot be understated.

An estimated $18 trillion is needed for CRE retrofitting, with a further $94 trillion required to protect buildings from the effects of climate change. $112 trillion is a huge bill for the CRE industry to front. As time to keep global temperatures under a 1.5°C increase quickly passes, there needs to be incentives to get building managers to start making decisions that make their buildings greener. Banks and investment bodies are already offering various green loans and bonds to sustainable projects – something we have already explored in a previous article – but what else is there?

One serious retrofit motivator is government regulations, and Europe has been a leader in putting sustainability first when considering commercial real estate, but other countries are catching up. In 2019, New York introduced the Climate Mobilisation Act (CMA), part of which included Local Law 97, in which buildings larger than 25,000 square feet have to meet ambitious sustainability targets. Now, with the CRE sector using the excuse of low building occupancy to get out of it, this demonstrates yet another example of the sector baulking at its environmental responsibilities. 

In the UK’s bid to target inefficiency in buildings, the City of London Corporation is set to launch their Skills for a Sustainable Skyline Taskforce. Lead by Deputy Chair of Policy Chris Hayward, the taskforce is a three-year long project to undertake evidence-based research into the building sector, so that interventions can be taken within all areas – from employees, to planning, to retrofitting – to aid the industry in achieving net-zero across all of the City of London Corporation’s operations by 2027. 

Pressure on governments to introduce tax reliefs for sustainable efforts is also a prevalent concern. Despite the ROI of making a building smarter is rapid and promising, there is still a hesitancy from building managers to implement new systems to keep up with sustainability standards. Tax reliefs could get building management teams to update their buildings to be smarter and more energy efficient. After all, money, and the bottom line, is often the greatest motivator. However, as it stands in the UK, building refurbishments and alterations experience standard rated VAT costs, whereas new developments are zero rated. This may pressure developers into demolishing and rebuilding properties instead of enhancing the properties that already exist, releasing embodied carbon into an already stressed atmosphere. Alongside stricter government regulations, tax reliefs could be the carrot to get the CRE sector to substantially cut its carbon emissions and reach net-zero. 

The CRE sector is clearly facing a few significant bumps on the road to recovery from the Covid-19 pandemic. But it has been too slow for too long to embrace change. From a dramatic drop in office occupancy, to the globe barreling towards a dangerous thermal threshold, it’s time to take action to lessen the environmental and economic impacts of the building sector. Retrofitting doesn’t have to break the bank. Governments, building managers, and investors alike need to understand just how important it is to look after the buildings we have now, not just the ones of the future. The sooner we start working together to address the climate issues that CRE is responsible for, the greater chance we have to roll back from the climate disaster we are facing.