Over the past decade, the real estate industry has taken substantial strides toward reducing carbon emissions and energy consumption—all while increasing asset value. There are three keys to keeping this progress on track: waste reduction, legislation and investor activity.
In a new report from the Urban Land Institute’s (ULI) Greenprint Center for Building Performance shows a 17 percent improvement in energy use intensity, among other metrics. Now celebrating its tenth anniversary, The Greenprint Center comprises an alliance of leading real estate owners, investors and financial institutions committed to improving environmental performance across the global market.
The latest Greenprint performance report measured and tracked the performance of 8,916 properties owned by Greenprint’s members. Not only did these firms improve their energy performance over the past 10 years, the results show that members are still on track to reduce carbon emissions by 50 percent by 2030.
“For the past ten years Greenprint has worked with the real estate investment community to help expand and improve upon sustainability best practices within the commercial real estate sector,” said Daniel M. Cashdan, president, HFF Securities (a JLL company) and chairman of The Center for Sustainability and Economic Performance, which houses the Greenprint Center. “As the race against climate change’s various impacts on our cities picks up, the focus of global fiduciaries has become sharpened. Greenprint, as part of our Center for Sustainability and Economic Performance, exists to serve as a resource hub for investors across the globe.”
Greenprint members identified three trends that are pushing real estate companies to stay innovative. Firms looking to integrate sustainability into their core business should make significant moves towards a circular economy, lobby legislators for more progressive regulations and employ investor pressure to further environmental, social and governance (ESG) initiatives.
To fully address the environmental impact of buildings, the real estate sector must minimize the waste of materials. This includes incorporating a “reduce, reuse, recycle” mindset for building materials: reduce the use of materials to what is really needed, reuse available materials whenever possible and recycle any waste to minimize value lost.
Firms should calculate the embodied carbon in their supply chain, that is the emissions created during manufacture of building materials and their transport for construction. Life cycle assessments can help owners quantify the environmental impacts of buildings from creation to disposal.
Low-carbon construction materials can help mitigate a firm’s embodied carbon. One example is the use of timber framing for structures in lieu of or to significantly reduce the use of concrete and steel, both of which have high-carbon manufacturing processes. Buildings made of mass timber products such as cross-laminated timber have strength and stability comparable to steel and concrete while also storing carbon absorbed by the trees while growing.
“The 2021 International Building Code will allow innovative mass timber buildings up to 18 stories, increasing the opportunity for our built environment to act as a carbon sink,” said Melissa Kroskey, technical director, WoodWorks. “Lightweight mass timber also offers a unique opportunity for developers to add vertical density over existing buildings, further reducing the embodied impacts of new structures.”
McDonald’s redevelopment last year of their flagship location in Chicago, located in River North, incorporated the first use of cross-laminated timber decking in the city. City officials gave the okay for the material on such a small project, but—even nearly 150 years after the Great Chicago Fire—remained reluctant to allow it in taller buildings.
In the absence of federal guidance, more than 30 major cities have set energy benchmarking policies for buildings. Cities are also beginning to set minimum performance standards that become more stringent over time.
Chicago is finally about to start fully implementing a portion of its Energy Benchmarking ordinance. Signed into law in 2017, the Energy Rating System is intended to track and make public the energy efficiency of large buildings (those 50,000 square feet or larger).
The city will issue ratings between late August and mid-September, based on benchmark data that the buildings were required to supply to the city by June 1, 2019. After receiving their ratings, building owners will be required to post their Chicago Energy Rating placard on site in a prominent location following a six-month grace period.
“The real estate industry is eager to help combat climate change and make sure that the industry contributes their share of the reductions needed to achieve global goals in carbon reduction,” said Jonathan Flaherty, senior director of sustainability and utilities, Tishman Speyer. “However, governments frequently apply local solutions to global problems, with unintended consequences. We look forward to working with policymakers to help create a consistent regulatory framework that can achieve public- and private-sector goals.”
Investors are asking real estate owners and asset managers for more information on their real estate funds’ ESG programs. Many investors now see ESG initiatives as material to long-term investment returns and work with asset managers to balance ESG and financial returns.
For example, across CalPERS’ $378 billion investment portfolio, ESG is considered paramount to long-term investment returns. This is certainly the case for the CalPERS real estate portfolio because sustainable features, like LED lighting upgrades that reduce utility costs, can have a strong influence over a building’s cash flow.
“We are a fiduciary. Meeting our obligations to our beneficiaries by generating strong returns is our North Star,” said Beth Richtman, managing investment director, sustainable investments, CalPERS. “We focus on the sustainability of our real estate portfolio because we don’t want to leave money on the table or have an unnecessary environmental footprint.”
Seeking competitive utility costs, ensuring tenant wellness and productivity, promoting walkability and other tactics affect an asset’s occupancy as well as rental rates. Because these metrics influence cash flow over time, investors should consider potential ESG projects during underwriting.