How CRE Can Rise to the Climate Change Challenge

Climate change
Climate change

While there are still controversial debates about whether climate change is real. Until recently, the commercial real estate industry did not pay much attention to the growing climate change and its impact. The noticeable changes in the climate are substantial for commercial real estate to acknowledge climate change as a concerning factor. 

From property damages to migration and abandoning of dwelling habitats, climate change has been affecting every aspect of investors’ and owners’ lives. Constantly increasing global temperature and frequent natural disasters leave a heavy toll on the real estate market.

According to CoreLogic’s Climate Change Catastrophe Report approximately $56.92 billion worth of property was damaged from natural catastrophic events in 2021. Severe climate change phenomena impacted over 14.5 million homes. 

Furthermore, the global economic losses caused by climate change disasters in 2021 totaled $373 billion, which is 27% higher than the 21st Century average. 

A recent CBRE report shows that 35% of global REIT properties are at risk from climate hazards resulting from extreme weather events such as floods and hurricanes. Moreover, natural disasters threaten nearly $60 billion of commercial real estate bonds backed by mortgages.

Such devastating reports are significant enough to nudge investors, landlords, developers, and companies to make sustainable investments to tackle climate change. 

In this blog, we will discover the impact of climate change on real estate, and how the industry aims on tackling these problems.

How serious is Climate Change?

A 2020 PewResearch study showed that around 62% of American lives are affected by climate change disasters. However, climate change affects each region differently. Hence, once believed to be an insignificant matter, climate change has quickly risen to the top of the agenda. 

As communities face floods, fires, storms, and extreme heat frequently, the physical consequences of an accelerating climate change are becoming increasingly real.  

As a result, commercial real estate investors should ‘revalue assets, decarbonize, and create new business opportunities’-McKinsey&Company. 

Real Estate’s Contribution To Climate Change

Real estate plays a massive role in climate change. The entire industry is responsible for more than 40% of the global carbon footprint. Construction materials like steel and cement used in these buildings take up approximately 11% of these emissions. 

Hence, it is evident that commercial real estate is to powering buildings and homes, the real estate industry consumes vast amounts of energy. As a result, CO2 emissions are massive.

In the US, residential and commercial real estate together result in 75% power consumption of the entire nation. On top of that, construction materials like concrete and steel result in approximately 8% of global emissions. 

The 2015 Paris Agreement introduced a shift in the decarbonization effect by aiming to decrease the global temperature by two degrees. Real estate investors, property owners, companies, and governments are committed to achieving net-zero emissions by the year 2050.

Here’s how different CRE asset classes impact climate change.

1. Office and Retail

Office and retail commercial real estate account for almost one-third of the total energy consumed by commercial buildings.

Office buildings alone are responsible for 14% of the total power consumption. 

2. Hospitality

Climate change strongly affects commercial properties such as hotels, resorts, and restaurants. 

According to Harvard Business School, tourism accounts for 5% of global CO2 emissions, while hotel and resort energy consumption account for 6% of total energy consumption.

3. Industrial 

This asset class has the most prominent environmental footprint.

Properties like manufacturing warehouses, cold-storage units, research labs, and data centers consume more energy than Iran and several other countries combined. 

Data centers are energy-intensive buildings that consume approximately 200 terawatts of electricity which account for 1% of global electricity demand.

Moreover, warehouses account for more than 10% of global CO2 emissions.

The study shows that new warehouses can substantially increase carbon emissions from day-to-day construction activities and operations. 

Impact Of Climate Change On Commercial Real Estate

Across the real estate industry, particularly in the commercial sector, climate change is having a devastating effect. The ever-increasing rate of global warming and natural disasters like hurricanes, wildfires, and floods are some of the most alarming threats posing the real estate industry. 

For instance, according to Redfin, California is at risk of wildfires with almost $2 trillion worth of property at risk.

Consequently, residents and organizations are leaving the area, causing property prices to decrease.

Furthermore, climate change has direct and indirect consequences on commercial real estate. Properties damaged by natural disasters can lose rental income, suffer devaluation, and have a limited resale value. 

Moreover, installing expensive outlays like flood defenses, and powerful HVAC systems have high maintenance costs, which in turn reduces ROI.

Natural calamities are capable of destroying commercial real estate buildings and properties driving thousands of people from their homes and offices.

Furthermore, increasing temperature leads to an increase in power consumption of HVAC systems. 

Thereby, increasing carbon emissions, which in turn increases the global temperature and continues the vicious cycle.  

A study by The Guardian reports that 80% of biodiversity losses and 50% of the world’s carbon emissions come from the commercial and industrial real estate industry. 

Extensive extraction of fossil fuels and other natural resources to support operations and construction are the root cause of the industry’s carbon footprint. 

Besides the extraction of fossil fuels, secondary factors like greenhouse gases, water abstraction, and air pollutants also contribute to climate change.

According to The Guardian, these three are responsible for almost 90% of CRE’s environmental impact costs.

How Commercial Real Estate Can Tackle Climate Change

The devastating effects of climate change are far too significant to ignore now. 

As a result, industry participants like investors, property owners, developers, tenants, and directors of organizations are looking to implement concrete actions to combat climate change. 

They are driving change in the industry with their demand for sustainable living and eco-friendly lifestyles and trends. 

Therefore, the CRE industry is adopting sustainable investments and practices to not only fight climate change but also meet the demands of customers and investors.

The following steps can help you minimize the carbon footprint of the CRE industry.

1. Introducing Sustainability Methods In Construction

The construction industry is one of the biggest users of natural resources, which is why there are growing concerns in the industry over climate change. 

According to a recent Mckinsey study, the productivity rate of the construction industry has increased by a mere 1% in the past twenty years.

On the bright side, this can provide an opportunity to disrupt the entire industry by introducing decarbonization practices and incorporating ESG values.

Although such practices may charge higher upfront costs, in the long haul sustainable buildings have a 7% higher value when compared to traditional buildings. Compared with typical buildings, they consume 29 to 50% less energy, 40% less water, and emit 33 to 39% less carbon dioxide.

2. Analyzing assets and portfolios in light of climate change risks

Climate change poses both physical and transition risks to the physical performance and value of a real estate building. 

Physical risks of climate change include rising sea levels, extreme weather conditions, and natural disasters that directly compromise the longevity and infrastructure of buildings. 

On the other hand, transition risks of climate change include changes in human behavior, economy, technology, regulation, and other responses to climate change.

Hence, commercial real estate investors must value assets and their portfolio expansion keeping in mind such climate change risks. So if you are a CRE investor

  1. They should focus more on resilient properties that can withstand current and future climate change scenarios.
  1. A potential investor should also analyze the local government authorities’ ability and willingness to finance and implement resilience initiatives.
  1. When securing financing for their investment, investors should prioritize lenders or credit partners who will support value-add investments that improve the building’s longevity.
  1. An investor should also analyze the risk appetite of stakeholders such as lenders, insurers, etc.

3. Utilize Sustainable Materials, Technologies, And Designs

Investors can tackle climate change and its adverse effects by investing in renewable energies, biodegradable materials, and green technology.

Various tools can analyze and assess potential carbon dioxide emissions. As a result, they can predict a construction project’s overall carbon emissions and recommend low-carbon materials and products.

Moreover, incorporating recycling, reusing, and repurposing design in property constructions can save on construction wastage and future repurpose plans.

Incorporating technology and tools like AI and IoT can improve a building’s power consumption and operation efficiency. Thus helping reduce its carbon footprint.  

4. Investing In Climate Resilience

To survive the long wave of climate change, commercial real estate businesses and investors must adapt to certain practices in making their portfolios resilient. 

Adopting Net Zero Emissions is a good start for real estate investors and companies.

As per the 2015 Paris Agreement, newly constructed buildings aim to achieve 100% Net Zero Carbon Emissions in their operations.

To achieve such drastic results, the real estate industry needs to incorporate green energy and have a detailed understanding of their exposure to climate risk. 

5. Investing In Tools Analyzing Climate Risk Data

By incorporating climate intelligence tools you can gain valuable insight into existing climate risks and take quick decisions. Thus, it protects your investment from future climate risks. 

By analyzing weather patterns, climate risk models can predict future risk exposures. Moreover, climate models provide personalized climate hazards data based on your preference and need. 

For example, investors who own properties farther inland may be more concerned about heatwaves and extreme cold temperatures. Those exposed to coastal properties may be interested in understanding hurricane patterns and rising sea levels.

The Lilypads Bottomline: Future-Proofing The Commercial Real Estate Industry

While the adverse effect of climate change is threatening the entire real estate industry. CRE businesses and investors who are proactive and address climate change can gain a competitive edge. 

The effects of climate change are more evident than ever on tenants’ decisions to rent. Therefore, to ensure the survival of your business it is necessary to identify opportunities to decarbonize and assist in the transition to a low-carbon economy.

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