If the dovetailing issues of climate change and healthy environments were a priority in 2019--in the days before COVID—they’ve gained a clear urgency in this ongoing pandemic era. Certainly, the linkage between commercial real estate and climate--both indoor and exterior--has become not just a recurring theme, but a growing one. And not just in the media, but in our daily operations, at conferences and in boardrooms.
The issue is clearly a double-edged sword for property owners and operators. On one hand, as the World Green Building Council points out, “39% of global energy-related carbon emissions are attributed to buildings.” (We can assume the reference is to commercial buildings, since Mom and Dad’s home in the wilds of Long Island doesn’t have near the carbon footprint of a Manhattan high-rise.)
Even if that percentage is off, this drops the responsibility for action directly at the doorstep of building ownership and management.
The double-edged sword comes in the fact that, due to the advancing climate risk, our buildings are in danger. This was made clear during the recently closed United Nations Climate Change Conference, COP26, in Glasgow.
Among the risks to our buildings (and obviously the surrounding communities), a COP26 supporting document published in August of this year lists such region-specific threats as flood, hurricanes and cyclones, sea level rise, and wildfire.
The work points out that traditionally, commercial building prices drop after “an event,” but this decline is typically short and minor. “Potential explanations include that climate risk was already capitalized into property values or that pricing was myopic in nature,” says the UN.
But that was then. Now, however: “There is a small body of recent evidence that certain events can lead to a long-lasting decline in prices or liquidity in geographies that have heretofore been relatively unexposed to extreme weather or climate events, or where intensity and frequency have appreciably increased. This may be a correction to previous under-acceptance or awareness of risk.” It goes on to forecast the potential impacts of such risks to cash flow and financing.
Property management responds to the threats
The commercial real estate industry, of course, isn’t deaf to the growing cry for sustainability in all of its forms. Certainly IREM, through such programs as the Certified Sustainable Property (CSP) initiative, the IREM Foundation’s Elaina’s Fund, and a variety of online courses, has kept the issue top-of-mind for membership.
More broadly, this year’s edition of Emerging Trends in Real Estate, the annual opus from PwC and the Urban Land Institute, points to property management’s adoption of sustainability programs, primarily via the post-pandemic rise in property technologies. Applications include: “the automation of energy, HVAC, air ventilation, and air filtration systems,” says the report. “The initial goal was to achieve efficiencies and effectiveness to reduce costs and support healthy indoor environments. . . . Measured by lower costs for tenants and improved air quality, this goal is being accomplished.”
ESG compliance
In fact, Emerging Trends reveals that proptech for health, wellness, climate risk and mitigation were enjoying either “extensive” or at least “moderate” adoption.
However, the report also brings up a potential glitch in the overall sustainability movement, particularly as it pertains to transparency. As we all know, environmental, social, and governance (ESG) protocols are an increasingly important part of the conversation. But Emerging Trends raises the concern that much of that conversation may be only lip service.
On one hand, more than 80% of Emerging Trends survey respondents consider
ESG in their investment decisions. “Furthermore, most respondents said they are doing it because it is the right thing to do.”
So far, so good. Then comes the “but”:
“But as one survey respondent noted: “I don’t see a whole lot of people taking climate change and flood risk that seriously, even though ESG reporting is being taken more seriously.” Doing the right thing often comes down to doing “the minimal thing needed to get the environmental plaque.”
But doing little in ESG may not itself be a sustainable stance, thanks to the ratings agencies, which are pushing the issue beyond just getting a cool plaque on a doorway or flowery words on a mission statement. “As pressure continues to grow for real estate owners and investors to address ESG concerns in their portfolios,” says Emerging Trends, “the broader investment ecosystem also is looking for ways to quantify how environmental risks might affect financial returns. Major credit ratings agencies—including S&P, Moody’s, Fitch Group, and DBRS Morningstar—have begun formally incorporating ESG factors into their credit ratings, both by integrating risk factors into their overall rating and creating separate ESG scores.”
That is certain to change the level of investor and lender enthusiasm for programs and protocols that improve the sustainability performance of buildings and by doing so, make major inroads in reducing that 39%.
Of course, property managers also have another constituency to consider: tenants and residents who, since the advent of COVID, have been asking how safe their buildings are. And we have to respond not just for the sake of NOI, but literally for safety’s sake.
Once again, property managers find themselves on the front lines of change.