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The Real Estate Industry’s Role in Decarbonizing Our Buildings

Sustainability isn’t just a buzzword. In the property sector, it will be the greatest driving force over the next decade. As nations, states and cities work towards ambitious sustainability targets to mitigate climate change, each is getting more serious about upgrading and regulating aging building stock. Meeting those goals and staying compliant with proliferating directives will take serious investment in building systems that many owners and asset managers have so far been unwilling to make. Time has created an inflection point, demanding answers and investment from real estate owners around the globe. Soon sustainability improvements will no longer be optional. 

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Buildings are being targeted by sustainability initiatives because it is estimated that energy use in buildings generates nearly 40 percent of all carbon emissions. Some say that building operations are responsible for 75 percent of those emissions. Making our buildings run more efficiently and sustainably is critical to lowering carbon emissions that are causing and accelerating climate change. Buildings are essential to our daily lives and the functions of basic society, but as Bill Gates wrote, they are bad for the environment. Building materials like concrete and steel produce lots of carbon, but it’s the heating and cooling of buildings that eat through energy, and therefore carbon, on a daily basis. 

There are roughly 2 billion air conditioning units worldwide. As the world gets more populous, richer, and hotter, experts predict that number will skyrocket to 5 billion units by 2050. Many air conditioners use refrigerants that cause more global warming than carbon, exacerbating the issue. Heating can be done with electricity, but doing so strains power grids. If a power grid hasn’t been decarbonized, electrification doesn’t achieve much. Though the cost of alternative and sustainable energy has dropped dramatically, it’s still more expensive than conventional fuels. The property sector and energy sector are both caught in a systematic problem that will take decades to solve. 

“Reducing building emissions isn’t just a problem for technology to solve. Government and corporate policies can also help a lot,” Gates wrote. “Governments have already promoted energy efficiency by setting high standards for buildings; we know a lot about how to make buildings greener, and the right policies encourage more people to do it.”

Race to 2050

Around the globe governments at every level are passing new legislation and enacting new policies aimed at reigning in emissions from the building sector. New York City was one of the first to act. In 2009, the Big Apple passed Local Law 84, requiring the city’s largest building owners to begin reporting annual energy and water consumption to the Department of Buildings. New York’s timeline of laws is a useful road map to where regulations and initiatives are headed. Benchmarking was just the beginning, you have to measure the problem before you can begin to understand and solve it. Early penalties for not reporting were light and compliance couldn’t be easier. Still, many owners fought back. New York City has been ramping up regulations ever since. Local Law 97 is the biggest challenge yet. Set to begin in 2024, any building over 25,000 square feet will be required to report and cap carbon emission or face steep fines. Like many cities, New York is aiming to cut carbon emissions significantly by 2030 and reach net-zero emissions by 2050. Hitting those targets will squeeze building owners. No one nation or city will be able to solve the problem before us. The United Nations is leading efforts to bring policies like those in New York to the globe. 

By 2030, efficient buildings that prioritize sustainability will be an investment opportunity worth $24.7 trillion, according to COP26 estimates.

World leaders gathered at the most recent United Nations Climate Change Conference, commonly referred to as COP26, to lay out the stakes for the world’s built environment. They claim that by 2050 1.6 billion city dwellers will be using air conditioning and over 800 million people in more than 570 cities will be vulnerable to sea-level rise and coastal flooding. They also claim that by 2060, 70 percent of the world’s population will live in urban areas, requiring the world’s building stock to double to accommodate them. The scale of the challenge is immense but so is the opportunity. By 2030, efficient buildings that prioritize sustainability will be an investment opportunity worth $24.7 trillion, according to COP26 estimates. Improving the resilience and sustainability of the built environment is a critical pillar in the race to zero emissions. More than 122 businesses in 28 cities and 6 different regions have committed to account for approximately 6.5 million tons of portfolio emissions annually and more than $300 billion annual turnover. Builders and developers are committing to only own, occupy and build assets that operate at net zero carbon. 

“To achieve lasting emissions reductions from the built environment, we need to develop, manage and use space more sustainably,” CEO of British Land Plc Simon Carter said. Carter leads one of the largest property development and investment firms in the United Kingdom.   “British Land has committed to making our whole portfolio net zero carbon by 2030, setting stretching targets for whole life embodied and operational carbon performance. We sign this Commitment in recognition of the importance of taking a whole life carbon approach, embedding circular and carbon intelligent practices across our business.”

Making new development and construction sustainable is the easy part. Bringing existing building stock up to modern standards is proving to be more difficult. Most buildings are uniquely designed and constructed to fit within physical parameters. Once they’re put together, changing them becomes far more difficult because of the physical limitations of the structure and site. Difficult means expensive. Retrofitting existing structures and systems towards sustainability and efficiency may save owners money in the long run but none of it matters if they don’t have the capital to make the investments required. Crafting policies that move existing building stock towards sustainability is a delicate balance between time, capital, and technology.  

Governments and regulatory bodies around the globe are building out cost-effective policy solutions that produce comprehensive but manageable retrofit procedures. Current renovation rates are woefully behind but cost prevents measures from being enacted all at once, making prioritization key. To prioritize the retrofitting and upgrade process, regulators need to consider the costs of potential energy savings of each policy and upgrade, but because each building is unique, there’s no simple formula. 

Before making sustainability investments, owners need to know if the building is structurally sound, what upgrades are needed to meet current standards, if hazardous materials are present, what work must be done in phases, where occupants can relocate, and the general state of energy usage and emissions. Subpar basic building conditions can impede retrofits or stop them altogether. That’s unlikely to buy owners much leniency with regulators tackling emissions, though it may result in extra time to comply. The hard truth many building owners and asset managers have to accept is that no one is immune from the coming regulations. 

Global problems require global solutions, the carbon emissions generated by the occupancy of buildings are part of that problem, so buildings must be part of the solution. Policies and punishments have been ramping up for more than a decade, showing no signs of reversal. The quicker owners and managers understand the part buildings will play in the solution, the better each asset will be positioned for profitability going forward. Buildings in New York City are already being marketed as Local Law 97 compliant. The rapid adoption of corporate environmental, social, and governance (ESG) goals means that attracting and keeping the top tenants will require working with them to help each other achieve sustainability and efficiency targets. Over the next two decades, a steam roller named sustainability is going to roll over much of the world’s existing building stock, at least in the wealthiest countries, flattening out carbon emissions. It’s no longer politics, it’s no longer a pipe dream. These initiatives are here, they’re happening and they’ve only just begun to ramp up. 

The rapid adoption of corporate environmental, social, and governance (ESG) goals means that attracting and keeping the top tenants will require working with them to help each other achieve sustainability and efficiency targets.

Meeting the mark

It all starts with benchmarking. Understanding the current state of the problem guides all future decisions. Every owner should be thinking about or already completing energy audits to figure out if existing systems are operating at optimum levels. Even that little step shocks many owners when they see just how much energy and money is being lost through leaks, clogged filters, faulty writing, stuck dampers, or basic waste. Upgrading energy and water systems is the most important step since they account for the vast majority of consumption and usage. Building management software can automatically optimize tenant comfort and energy efficiency, ramping buildings up and down at optimal times and cutting energy usage in unoccupied areas. 

Before any retrofit work is done, have a plan to either recycle, reuse or properly dispose of all construction waste. Knowing your building’s occupancy patterns can help leverage daylight and optimize HVAC and lighting performance. Incorporating energy-efficient lighting and occupancy sensors will cut down on wasteful energy usage by keeping lights off when no one is around. Owners should investigate on-site renewable energy options that can help offsets energy costs when demand is peaking and at its priciest. Solar shading and high-performance windows will help HVAC systems work even better, cutting down on emissions further. Cool roofs and green roofs help to mitigate the heat island effect, providing another cost-effective method to optimize HVAC performance. Older buildings may need to upgrade building envelopes and other systems, the most costly improvements of all. 

Don’t worry about figuring it out all by yourself. If you can’t or refuse to, energy auditors will be around shortly. Cities like Austin already require energy audits for all residential, multifamily, and commercial buildings. Auditors examine HVAC system efficiency, air filtration, duct performance, sealing, windows, weatherstripping, and insulation, providing owners with detailed recommendations on how to improve efficiency ratings. In New York City, buildings over 50,000 square feet must undergo energy audits and retro-commissioning thanks to Local Law 87. Failing to act on energy audit recommendations doesn’t mean much. For now at least.

Doing the bare minimum

In the U.K. minimum efficiency standards (MEES) began in 2018. Every structure is audited, given a grade ranging from A to G. If a property is below E, rated an F or G, landlords are restricted from getting continued tenancy until the asset’s Energy Performance Certificate Rating has been raised to the minimum. That’s how serious the U.K is about tackling sustainability. Without efficiency, the asset cannot be commercialized. Your building must be this efficient to operate. Initial estimates are that between 20 to 25 percent of properties in England and Wales fall below the current E rating standard. Experts predict over time the MEES will move up to higher letters. The law is a flagpost towards where the world is headed. If successful, the policy will be replicated. 

The European Union uses its own Minimum Energy Performance Standards (MEPS). Like in the U.K., failure to meet minimum standards will put a building’s certificate of occupancy at risk and limit all commercialization opportunities until the asset is brought into compliance. By 2030 every building in the E.U. must earn a rating of G or higher. The E.U. estimates 15 percent of the region’s existing building stock is below the G level. Over time the MEPS will be raised, just as in the U.K. Other governments pursuing or enacting energy standards for buildings include Australia, Malaysia, the Philippines, India, and others. So far the United States has not seen minimum energy standards on a national level through individual states like California pioneered early iterations of the policy as early as the 1980s. 

The Biden Administration is ramping up efforts to rein in carbon emissions from the building sector. President Biden announced the launch of the Building Performance Standards Coalition, a partnership between 33 state and local governments aimed at creating a cleaner, healthier and affordable building sector. The coalition of governments will cover 20 percent of the nation’s building footprint. The move is an effort to fulfill Biden’s promise to retrofit four million buildings and two million homes during his first term. What U.S. standards will look like or if they’ll even exist will be watched closely by the American property sector. Something like the minimum standards across the Atlantic would be monumental, but any changes are likely to be driven by state and local regulations. 

It’s not easy being green

Lack of financing is the biggest hurdle for practically every sustainability initiative. Governments and regulators are putting their money where their mouth is by establishing billions of dollars worth of funds to help owners meet sustainability goals. The proposed new Social Climate Fund will mobilize €72.2 billion from the EU budget for the period 2025-2032 to support the renovation of the worst-performing commercial and residential buildings. The Renovation Wave has become a major topic of conversation at the E.U., with bureaucrats and regulators envisioning the total overhaul of 220 million buildings by 2050. That’s almost 150,000 buildings a week. 

“Stimulating renovation of homes and other buildings supports economic recovery and creates new job opportunities,” Executive Vice-President for the European Green Deal Frans Timmermans said. “Moreover, energy renovation leads to lower energy bills and in the end, the investment pays for itself. By targeting the obstacles to renovation and providing financial support for the necessary upfront investment, today’s proposal on the energy performance of buildings aims to boost the rate of energy renovation across the EU. Its focus on the worst-performing buildings prioritizes the most cost-effective renovations and helps fight energy poverty.” 

Similar policies are being worked up in the United States. Building performance standards are already law in Washington, D.C., New York, and St Louis. Currently, the General Services Administration is working with the Department of Energy to accelerate the adoption of sustainable technologies. The two agencies have spent $13 million at 17 federal facilities to test a variety of upgrades. The hope is to use the findings from the tests to modernize the federal government’s building portfolio to become zero-emission by 2045, setting a new defacto minimum energy standard. “By outfitting federal buildings with technologies to reduce water and energy consumption and shrink carbon emissions, the federal government is leading by example and saving taxpayers money by lowering energy bills,” United States Energy Secretary Jennifer Granholm said. 

The General Services Administration hopes federal buildings can be a testing ground for free-market solutions. “New and innovative companies can test out their new products and services in federal buildings. By doing that, they are able to then scale up and sell in the private sector. We want federal buildings to be able to be a laboratory for these new innovations,” said GSA Administrator Robin Carnahan.

Decarbonizing the world’s existing building stock will be a Herculean effort, like each nation launching its own mission to the Moon. We’ve only just begun to see the extent of new policies and regulations. Audits, upgrades, and renovations will not remain optional for long. Incentives for early adopters will likely give way to punishment for buildings that lag behind sooner than later. The single-biggest source of carbon pollution in the United States is the building sector. No amount of lobbying, denial, or delay is going to prevent regulators and governments from tackling the decarbonization of buildings head-on in their monumental efforts to eliminate carbon emissions. 

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