Lack of Climate Finance Regulation Can be New Opportunity for CRE Investors

David Cohn
Jun 25, 2021
Industry Insights

It’s very clear that commercial real estate needs to work harder and faster to go green. Right now, the CRE sector is still responsible for almost 30% of the annual energy consumption in the US.

There’s been poor progress made on decarbonizing commercial buildings in the country. And on a global scale, the building sector recorded its all-time high operational emissions record in 2019.That said, some trends paint an encouraging outlook.

There’s been plenty of support for companies that offer lifecycle analysis and long-term planning to assist their CRE investor-clients in making strategic investments that generate environmental and financial returns.

These firms—many of which focus on developing and executing net-zero carbon strategies to help clients profitably meet the requirements of the future—have been flourishing.

There has also been a marked growth in the level of interest shown by commercial real estate developers and investors on sustainable building construction.

Climate-aligned operations have likewise become more established among landlords, building operators, and building owners.

On top of this, climate-aligned environmental property tech and other digital solutions designed to enhance building performance have gained more traction.

Additionally, the customer-centric “space as a service” business model used by WeWork other office-leasing companies has gotten much more support.

These trends are expected to intensify even further as the pandemic forces the CRE market to come up with ways to enable social distancing and other public health measures while adapting to the demands of sustainability- and health-conscious consumers and investors.

Commercial property analysts expect CRE digitization to continue. There should also be more investments put into environmental, Social, and Governance (ESG) efforts.

Going forward, the value of digital building management solutions and proptech innovations should continue to strengthen as well.

How will the momentum be sustained?

Investors and private commercial lenders have to think about what sustainability should look like for CRE in the coming years.

It’s imperative that CRE players start making use of any unexploited or untapped building decarbonization strategies and resources going forward.

Private finance seems to be an underleveraged but widely available resource.

Blackstone, which is currently one of the biggest commercial real estate investors globally, wants to reduce the carbon footprint of all its holdings (equity and real estate) by a whopping 15% within three years of acquiring them.

The Greenprint Center for Building Performance (which operates under the Urban Land Institute) has been extremely successful in its drive to reduce carbon emissions by 50% by 2030. This has prompted the organization to set an even higher goal of achieving net-zero by 2050.

Notably, Greenprint’s membership represents more than $1.2 trillion in commercial property assets under management.

Invesco (a major US investment manager) launched the first green building ETF globally on the New York Stock Exchange to cater to the growing demand of global investors for sustainable commercial property investment opportunities.

Allianz Real Estate is on its way to reducing its portfolio emissions by an impressive 25%. It is using a structured ESG strategy that was modeled after the decarbonization pathways of the CRREM (Carbon Risk Real Estate Monitor)research and innovation project.

The US-based investment firm Nuveen, which holds a multibillion-dollar commercial real estate portfolio, is keen on implementing deep energy retrofits, onsite renewable generation, and other similar measures to ensure that its properties achieve net-zero by 2040.

All of this is promising, but a lot still needs to be done. As of 2019, only 13.8% of commercial office buildings and 3.3% of investment-grade multifamily properties in the top 30 markets in the US have been certified green based on CBRE data.

A survey conducted by the Urban Land Institute and PricewaterhouseCoopers indicates that on the whole, sustainability compliance is not a priority for many CRE players.

They are less concerned about adapting their properties to climate change because they are busy dealing with more immediate issues.

In order to turn the tide, it’s important to highlight the willingness of major institutional CRE investors to focus on climate change preparedness.

And luckily, the current administration seems to understand that this.

The White House is expected to soon release an executive order on how the federal government will regulate climate-related financial risks.

The president has already started to tap the SEC to oversee how institutional investors use ESG investment practices. This development has been welcomed by sustainable finance experts from around the globe.

Climate alignment across the commercial real estate industry can only be achieved with responsive and robust climate finance regulation.

According to the most recent corporate sustainability assessment by S&P Global, the comparative absence of such a system in the United States may be causing American real estate companies to lag behind their Asian and European counterparts in terms of sustainability performance.

The lack of a clear financial regulatory framework addressing climate-related challenges in the US presents both a challenge than an opportunity for investors to push for decarbonization in the industry.

Why? Because commercial real estate investors who are successful in implementing such sustainability frameworks will likely be involved in developing and implementing industry regulations as well.

This was the case in the EU—it will probably play out similarly in the US.

For those who understand the climate-related challenges facing the CRE sector, this may be a good chance to mitigate the damaging effects of delayed regulatory support.