Dive brief:
-
Demand for sustainable buildings is increasing, with tenants and occupiers willing to pay more for environmental performance indicators such as energy intensity and electrification, according to a new report from JLL.
-
However, supply is struggling to keep pace. The real estate services company Commercial box for making sustainable buildings report found that in 20 major office markets, only 34% of demand for low carbon work spaces they will be satisfied in the years to come.
-
The business case for investing in decarbonisation and resilience in real estate portfolios is “getting even stronger”, Guy Grainger, JLL’s global head of sustainability services, said in a News release of November 28. “Taking action now will minimize the business cost of increasingly frequent climate events and maximize the commercial benefit of the world’s incredibly low supply of net zero carbon buildings.”
Diving knowledge:
The report outlined three long-term considerations that JLL recommends building owners and operators prioritize when making decisions against the backdrop of an economic environment that has challenged investors and occupiers to invest in green measures.
-
The increase in demand for sustainable buildings. The surge in demand comes as corporations increasingly commit to achieving net zero goals and minimizing operating costs, with green certifications becoming less of a differentiator and more of a requirement, the report says.
A greater focus on sustainability is affecting places where the aging building stock is “unlikely to meet future regulations or expectations”, JLL said. The gap between the expected demand for sustainability work spaces and current pipeline projects equal one excess global demand for 109.8 million square feet of low-carbon office space in the 20 markets studied by the company. This translates into just one square meter in current development, for every three square meters of demand, JLL said.
This has resulted in an average rental premium of 7.1% for green-certified Class A office buildings in eight major markets in the US and Canada. JLL said
-
The rising costs of climate risk. Heat waves, floods, storms, and droughts have significant implications for building owners as they disrupt operations, cause labor shortages, and damage buildings and infrastructure, leading to higher operating costs higher for companies that have not taken appropriate mitigation measures, JLL said.
Estimates from the nonprofit First Street Foundation and an engineering firm Arupsuggest that annual costs from flood damage in the US will rise to $16.9 billion by 2052. However, climate risk “remains a blind spot” for some companies, JLL said, pointing to a decarbonisation study it conducted last year, which found that 83% of occupiers identify climate issues as a financial risk, while a 2023 PwC Pulse Survey found that only 23% of managers are developing contingency plans for climate change in the next 12 to 18 months.
-
Stricter regulations. Businesses operating in multiple cities will need to stay on top of incoming and evolving policies to avoid financial penalties and reputational damage. the report states.
Potential results highlighted by JLL they include increasingly expensive financing terms for assets that do not meet evolving standards, higher insurance premiums for non-resilient buildings or those in vulnerable locations, and more complicated long-term capital planning as risks physics become more predictable. By implementing “the right measures in the right way at the right time,” the report says landlords can minimize the impact of physical and transition risks on their buildings.
To reduce emissions and increase resilience, the report suggests that building owners and operators purchase green energy off-site, generate green energy on-site, decarbonize energy supplies, implement modifications to optimize the energy efficiency of assets and optimize operational efficiency and carbon accounting. The firm also recommends better insulation to reduce heat gain or loss, cooling features such as shutters and exterior blinds, and materials that alter the amount of heat absorbed and reflected based on outside air temperature.
JLL expressed optimism about the potential of microgrids to help cities meet higher energy demands and distribute power locally to connected buildings independent of the main power grid.
