Investors look to retrofitting for a low carbon future

Government and city level regulation and greater environmental awareness among occupiers are combining to make green retrofitting an increasing priority for investors.

September 03, 2019

Ambitious new regulations on carbon emissions and a growing focus on sustainability are driving real estate investors to consider future-proofing their assets through retrofitting.

Real estate is responsible for around 40 percent of global carbon emissions, according to the World Economic Forum and cities around the world have made pledges to play their part in reduction. As more regulation is implemented, landlords are under increasing scrutiny over their buildings.

For investors with inefficient buildings in their portfolios, carrying out modifications now is “a smarter choice than not acting”, says Dana Robbins Schneider, managing director of JLL Energy and Sustainability Projects in the U.S.

“Green retrofitting existing buildings, while potentially of higher cost in the short term, creates more resilient, competitive assets in the long term while delivering measurable return on investment,” she says. “Not doing so could prove costly – with divestment in the future harder to achieve.”

In the UK, where there is a drive to achieve net zero carbon emissions by 2050, as much as 18 percent, or £157 billion of commercial real estate, in England and Wales, does not meet minimum standards.

UK real estate group Grosvenor Britain & Ireland recently announced it is aiming to achieve zero carbon for its existing buildings by 2030, while in the U.S., the headquarters of the International Monetary Fund has undergone an extensive refurbishment to improve its carbon footprint, with completion due this year.

“For investors, cutting real estate carbon emissions before regulation kicks is imperative – but getting to that point requires serious commitment,” says Schneider.

Evaluating risk

Undergoing the initial energy performance data study of a building is both time-consuming and potentially expensive. But, the risk of an asset becoming obsolete from inaction outweighs the cost, says Schneider.

“It’s really a small part of the overall budget and if you’re able to cut costs and make a building both cheaper to run and a better place for occupants, landlords are more likely to keep tenants while reducing outgoings.”

While simple measures such as installing LED lighting or upgrading the boiler can offer incremental savings, minor improvements alone won’t result in a low or zero carbon building, explains Sonal Jain, JLL UK sustainability director.

Although expensive start-of-the-art innovations are getting cheaper as they become more mainstream, investors still face the risk that buildings undergoing retrofitting in 2019 could be out of date by 2025.

“Technological advances mean that modifications such as LED lighting or HVAC controls now meet return on investment expectations,” Jain says. “However, for glazing and façade modification, these projects are still considerably expensive and tricky to implement, making it harder for investors to justify.”

Jain says that investors should also look beyond implementing energy efficient technologies to how the building is managed.

“Sub metering and close control of BMS, for example, is one way to manage energy use in more detail,” she says. “That may require more management and personnel – but could ultimately prove beneficial.”

Ongoing commitments

Retrofitting is not a one-off box-ticking exercise; it’s a continual process, says Schneider, pointing to ongoing work on New York’s Empire State Building after an extensive $550 million retrofit in 2009.

“The work is never complete and while results were evident within three years of the work being carried out, there’s always room for improvement via new tools and methods,” she says.

Today’s green accreditations such as BREEAM and LEED, as well as benchmarking such as GRESB, are helping to ensure that quality retrofitted buildings stand out from the crowd.

Nevertheless, legislation – at city rather than federal level – will have the most significant impact, says Schneider.

“It’s city level legislation that’s giving investors most food for thought.”

Future legislation in countries like the UK could also target embodied carbon, the amount of carbon emissions during construction of new buildings – potentially making older buildings appear more efficient. The UK construction industry consuming more than 400 million tonnes of material a year - around 10% of UK carbon emissions.

As things stand, a new office development may be more carbon neutral than its retrofitted neighbour. But if embodied carbon is one day taken into account; the reverse may be true.

“That would make it even harder for a new building to be deemed truly carbon neutral,” says Jain. “In the meantime, there’s a firm need for investors to take steps to cut current carbon emissions and ensure tenants remain attracted and their buildings don’t become obsolete.”