The commercial real estate sector is both a victim and a contributor when it comes to climate change. Sustainable practices can help mitigate these impacts, but a holistic approach is necessary for meaningful transformation.
Multiple reports highlight the growing influence of climate change on CRE investments. Nearly a third of all REIT properties globally face risks from environmental events like floods and hurricanes.
What’s more, CRE bonds valued at close to $60 billion are backed by mortgages that could be jeopardized by natural disasters.
The impact is bidirectional: while commercial buildings significantly contribute to global carbon emissions, the sector itself is vulnerable to climate-related risks. According to the Department of Energy, the buildings sector consumes around 76%of all electricity in the U.S. and emits 40% of the country's greenhouse gases.
In this blog, we explore the relationship between CRE and climate change, the way climate variables can affect CRE asset values, and the steps property owners can take to promote sustainability and energy efficiency.
A LightBox survey indicates growing but still limited awareness about the importance of climate risk in the CRE industry.
Only around 22% of survey participants believe climate risks are highly significant in CRE decision-making. This relatively low figure suggests that the majority of stakeholders in the industry are not yet fully recognizing the potential impact of climate risks on their investments.
Environmental consultants are increasingly asked to evaluate climate-related risks, most commonly focusing on flood and wild fire hazards (especially in coastal regions).
However, most investors have yet to systematically include climate risks in their financial assessments of properties. The study shows that only a few investors currently conduct Property Resiliency Assessments as part of their due diligence.
Despite the current lack of widespread adoption, the rise in environmental consultations points to a slowly growing interest in understanding and mitigating climate risks.
More CRE investors are likely to incorporate climate risk assessments into their due diligence processes as awareness expands and better assessment tools become available.
Research from the Deloitte Center for Financial Services indicates that the CRE properties—particularly healthcare facilities, warehouses, retail spaces, and offices—have a significant environmental footprint.
Hospitals and healthcare centers are some of the largest energy consumers in the CRE sector. They contribute significantly to carbon emissions, using approximately 10% of all energy consumed by commercial buildings.
The HealthCare Climate Council states that an average hospital consumes "2.5 times more energy per square foot than an office building." Over the past decade, greenhouse gas emissions from healthcare have increased by 30%, constituting 10% of U.S. carbon emissions and 9% of other noxious air pollutants.
Warehouses (especially those with climate control features) are heavy energy users. Their numbers have grown partly due to the e-commerce boom during the pandemic. Although generally less energy-intensive than office buildings, their energy efficiency is often compromised by outdated technologies. Their construction is also a source of greenhouse gas emissions, especially in areas prone to extreme weather.
Data centers stand out as particularly energy-intensive due to their server and climate control requirements. Consuming around 200 terawatt-hours of electricity per year, they account for almost 1% of global electricity use and 0.3% of global carbon emissions. If current trends persist, they could account for a substantial portion of the global ICT sector's future electricity consumption.
Office and retail buildings consume close to one-third of the energy used by U.S. commercial buildings. Beyond energy consumption, these buildings also require substantial resources for construction and daily operations. Office buildings alone are responsible for 14%of total energy consumption and significantly contribute to global energy use.
The hospitality industry (including hotels and resorts) contributes significantly to climate change, making up 8% of global greenhouse gas emissions. In the U.S., these commercial buildings account for 6% of the total energy consumed by the sector.
Financial slowdown in CRE sector while facing a complex relationship with climate change. CRE sector contributes to global warming through construction and operational activities, yet it also stands to suffer from climate repercussions like rising sea levels and extreme weather events.
A study from Columbia Law School's Sabin Center for Climate Change Law underscores this complexity. It notes that extreme weather events like floods and heatwaves can both damage existing buildings and increase the risks for new and ongoing projects.
As the climate crisis worsens, these adverse effects are set to escalate, amplifying the urgency for sustainable practices in the industry.
Building on this idea of heightened risk and urgency, a recent report from the Urban Land Institute examines the relationship between climate risk and commercial property investments.
This study suggests that building resilient infrastructure is key to mitigating the damage from extreme weather events. It further advises property owners and investors to conduct comprehensive financial assessments to understand the costs and benefits of such resilience measures.
The report also highlights the importance of considering view points from a variety of stakeholders, such as insurance companies and local communities, to make well-rounded investment decisions.
Reducing utility costs can be a vital strategy for enhancing the profitability of commercial real-estate investments. Investor scan look into incorporating eco-friendly practices that may have modest initial costs but are likely to result in substantial long-term savings.
According to a 2021 Business Insider article by Karen Ho, sustainably-designed buildings consume significantly less energy and water while also generating less waste.
By incorporating advanced technologies such as smart LED lighting and energy-efficient HVAC systems, these buildings not only lower ongoing utility bills but also become more attractive to potential tenants, which can lead to higher occupancy rates and increased rental income.
Sustainable practices can also have a domino effect on multiple factors that contribute to the net operating income of commercial properties. For instance, energy-efficient buildings are more attractive to tenants who prefer eco-friendly practices, thereby potentially increasing occupancy rates.
Higher occupancy often translates to growth in rental prices. Sustainable buildings may also benefit from tax incentives or reductions, further boosting NOI.
On top of all these, reduced maintenance needs mean lower service charges, while the marketability of green buildings can enhance liquidity. Costs for renovations may also decrease along with utility and insurance expenses. All these factors combine to create a compelling financial case for sustainability.
Energy Star provides a list of simple, cost-effective strategies for enhancing energy efficiency in commercial buildings. These include straight forward actions like turning off lights when they're not in use and optimizing thermostat settings during non-business hours.
Regular maintenance checks can extend the lifespan of energy-consuming equipment while fine-tuning operation schedules can help reduce overall energy usage.
Even small behavioral changes, like modifying cleaning schedules to minimize electricity consumption or educating tenants and staff about energy-efficient practices, can contribute to a building’s overall efficiency.
Consumer and investor sentiment is increasingly tilting towards sustainability. Many people are now more aware of the implications of climate change and are willing to pay a premium for goods and services that are eco-friendly.
Similarly, investors are progressively adjusting their investment criteria to include robust environmental, social, and governance standards.
The lack of climate finance regulation can be a new opportunity for CRE investors and property owners to align their portfolios with this growing demand, possibly achieving higher valuations and better long-term returns as a result.
To stay competitive and meet the increasing demands for sustainable practices from tenants, investors, and society at large, the CRE market needs to take a proactive approach to managing its environmental footprint.
Early adopters of energy-efficient technologies and sustainable practices are more likely to see higher ROI on commercial real estate, better tenant retention, and a more resilient portfolio in the face of environmental challenges.
In the face of climate volatility and greater focus on sustainable practices, it's also crucial to have a financial partner who understands both your investment goals and the changing climate realities.
At Capital Investors Direct, we specialize in quick and easy commercial real-estate loans that are tailored to your unique needs as well as the environmental considerations of your project.
Whether you're looking to invest in energy-efficient technologies or need financing for a property with resilience measures against climate risks, we can tailor a solution for you.
