Growing need for greener buildings

As you read this, all too like­ly from your home office, con­sid­er that the con­struc­tion indus­try is respon­si­ble for up to 40 per cent of glob­al emis­sions. Not only that, 64 per cent of com­mer­cial build­ings in Lon­don alone were built before 2000 and could ben­e­fit from being upgrad­ed. 

There’s a need for ener­gy-effi­cient and low-car­bon build­ings that are more than just con­crete, glass and steel. Green build­ings are a glob­al invest­ment oppor­tu­ni­ty that could be worth $24.7 tril­lion by 2030, accord­ing to the Inter­na­tion­al Finance Cor­po­ra­tion.

Although sus­tain­abil­i­ty was an under­ly­ing trend before the coro­n­avirus pan­dem­ic struck, the cri­sis has accel­er­at­ed the real­i­sa­tion among com­mer­cial real-estate stake­hold­ers that the built envi­ron­ment can affect gen­er­al well­be­ing; the car­bon foot­print of offices has also become an area of focus for more occu­piers. Invest­ing in green build­ings is being pushed fur­ther up the envi­ron­men­tal, social and gov­er­nance (ESG) agen­da.

Accord­ing to a recent sur­vey of 1,500 occu­piers, con­duct­ed by inter­na­tion­al law firm CMS, 82 per cent of respon­dents said the office would con­tin­ue to be a source of human con­nec­tion post-pan­dem­ic, while 61 per cent said they would be refur­bish­ing offices once peo­ple return to the work­place. 

Fur­ther­more, 65 per cent said they’d hap­pi­ly take a pay cut to work in a sus­tain­able build­ing and 62 per cent said a cor­po­rate social pur­pose was now more impor­tant than it was this time last year.

Adapting to meet demand

For the most part, insti­tu­tion­al investors don’t need con­vinc­ing. Research from War­burg-HIH Invest found 51 per cent of 100 respon­dents were expect­ing a high­er return on real-estate projects that take ESG into account and 70 per cent said ESG is now rel­e­vant to their invest­ment cri­te­ria.

Despite this, there are investors who are wary about invest­ing in green com­mer­cial real estate. And prop­er­ty devel­op­ers often need help see­ing the ben­e­fits too. As such, there’s a gulf between the demand for sus­tain­able build­ings and the sup­ply. Investors and prop­er­ty devel­op­ers will have to rethink their approach to meet the demand.

“I expect ten­ants will start nego­ti­at­ing for the office space and qual­i­ty they actu­al­ly need. This means devel­op­ers with low­er-qual­i­ty loca­tions will need to adapt to this new demand,” argues Gareth Simm, chief exec­u­tive of HE Simm Group, a lead­ing mechan­i­cal and elec­tri­cal ser­vices provider. The com­pa­ny has worked on a num­ber of com­mer­cial projects, includ­ing at the Cap­i­tal Build­ing in Liv­er­pool. 

“They will need to upgrade and recon­fig­ure spaces, bring­ing in touch-free tech­nolo­gies, nat­ur­al vena­tion and solar-con­trolled glaz­ing,” says Simm.

ESG invest­ment in com­mer­cial real estate is more than a few break­out areas and plush fur­nish­ings to improve work­ers’ well­be­ing. Low-car­bon mate­ri­als, such as tim­ber, will need to be used and ener­gy-effi­cient infra­struc­ture installed. 

It doesn’t come cheap though. And it’s because of the upfront costs of design­ing effi­cien­cies into build­ings that there’s a reluc­tance to update or plan new devel­op­ments with sus­tain­abil­i­ty in mind. Look­ing beyond the upfront cost is crit­i­cal to encour­age more cap­i­tal invest­ment. 

“While it is more expen­sive to build a sus­tain­able build­ing, bet­ter mate­ri­als and more con­sid­ered design can often halve main­te­nance and upgrade costs across that building’s life cycle,” says Simm. “But if build­ings are built cheap­ly to tick ESG box­es, and with­out con­sid­er­ing long-term main­te­nance and replace­ment costs, then a green build­ing can quick­ly become huge­ly unsus­tain­able in the long term.”

Green premium incentive

When fac­tor­ing in a building’s life cycle, from the mate­ri­als and con­struc­tion process­es used to how effi­cient­ly its infra­struc­ture oper­ates, the cost of going green can jus­ti­fy the ini­tial invest­ment. 

The prob­lem is “a high­er demand for green office build­ings from for­ward-think­ing ten­ants is yet to trans­late into mea­sur­able uplifts”, says Dou­glas Hig­gins, project direc­tor at First Base. The prop­er­ty devel­op­er is over­see­ing rede­vel­op­ment of Bristol’s his­toric Soap­works build­ing, which is being turned into a mix­ture of homes, restau­rants and work­spaces.

Things are slow­ly chang­ing. Com­mer­cial real estate is poised to ben­e­fit from an expan­sion of ESG lend­ing options avail­able for projects that not only reduce their car­bon emis­sions but meet cer­tain key per­for­mance indi­ca­tors over time. These could include how resilient a build­ing is and whether it offers a healthy, work­ing envi­ron­ment.

“It would have been for­giv­able if lenders had placed ini­tia­tives such as sus­tain­abil­i­ty on hold dur­ing this dif­fi­cult time, but this hasn’t been the case. Post-pan­dem­ic, lenders will con­tin­ue to put an increas­ing amount of time into struc­tur­ing real-estate loans that specif­i­cal­ly sup­port green and ESG ini­tia­tives,” says Lisa Atten­bor­ough, who heads up Knight Frank’s debt advi­so­ry team. The real-estate con­sul­tan­cy addressed the glob­al rise of sus­tain­able build­ings post-pan­dem­ic in last year’s edi­tion of its annu­al Active Cap­i­tal The Report. 

Build­ings that aren’t ener­gy effi­cient and are more expen­sive to run are often sub­ject to brown dis­counts where ten­ants can rent office space at a cheap­er rate. But with ten­ants inclined to look else­where and pay more for offices that pro­mote well­be­ing and sus­tain­abil­i­ty, award­ing pre­mi­ums for build­ings designed to oper­ate more effi­cient­ly should help to incen­tivise investors and devel­op­ers who are hold­ing back on going green.

“As old­er build­ings become exclud­ed by these for­ward-think­ing ten­ants in their office search­es, their void peri­ods will extend and val­ues will decline. This will give com­mer­cial real estate a clear­er jus­ti­fi­ca­tion for mak­ing that invest­ment in sus­tain­able build­ings,” Hig­gins con­cludes. 

Ulti­mate­ly, green­er build­ings will help to attract high­er rents, more lucra­tive ten­ants and envi­ron­men­tal­ly con­scious employ­ees, mak­ing sus­tain­abil­i­ty a wise com­mer­cial real-estate invest­ment.