29 November 2021/ Inspirations

How sustainability concerns are shaping real estate trends

The conversation about sustainability has never been louder, and it’s something we’re looking to amplify at Realla. Following CoStar’s recent webinar on the importance of ESG and the COP26 summit, here are nine of the most prominent ways that sustainability concerns are shaping trends within the real estate sector.

1. Offsetting will be key

While the gold standard of sustainability is an organic drop in carbon emissions, it’s not realistic in every scenario. With a growing need for real estate space such as warehouses, more buildings are being erected to meet demand, resulting in inevitable emissions. But there are things that can be done to make the building process more sustainable.

Concentrated efforts to source sustainable materials and promoting a circular economy, to name just two things, will be crucial in minimising the overall impact of new buildings. Savills says “insetting”, where a company invests in carbon reduction within its own value chain, is a new, cost-effective way for real estate firms to do this.

2. Tenants are seeking out more information

Occupiers want to know more than if their building has good coffee machines.  Now, tenants are demanding more information on crucial topics such as safety and sustainability.

This could include:

  • Educating themselves on EPC (energy performance certificate) ratings
  • Information about new ratings such as the those concerning health and wellbeing
  • Understanding how to make their own actions more sustainable

Large global firms are also leveraging their power as building occupiers to force change from the inside. JLL says that, as part of the negotiations on its new London HQ, which it will move into in 2026, it placed specific demands on the building owner. These requests will ensure it will continue to make sustainability progress throughout the course of JLL’s 15-year lease.

3. Real estate businesses are refocusing their sustainability efforts

As the climate crisis becomes more urgent, unsubstantiated claims are out of style in a big way. Now, Savills says that all companies have become “360-degree brands”; essentially, every part of an organisation, from social media to bricks and mortar buildings, need to align with and demonstrate its sustainability strategy.

There are also calls for real estate to introduce more specific ways of monitoring and measuring energy and water usage. While EPCs and BREEAM ratings are a great way to get at least some standardised insight into a building’s sustainability, they don’t tell the whole story. Now, real estate companies are beginning to capture their own data to complement external assessors’ ratings. They’re also looking to new benchmarks, such as GRESB, to paint a more in-depth picture of their actions.

4. Indirect emissions must be a key focus

For many real estate or property companies, a large proportion of their emissions come from their tenants or occupiers. To comply, there’s a lot of pressure on real estate companies to encourage tenants to understand how they can reduce their carbon footprint. If they fail to do so, their Scope 3 emissions are unlikely to move in the right direction.

Guy Grainger, Head of Sustainability at JLL, warns that funding for companies without net-zero plans in place could disappear within just two years. To combat this, commercial landlords must help their tenants embrace sustainability too. Small actions, such as installing motion-sensor lights and upgrading insulation and windows, could add up to significant carbon reductions across their entire portfolio.

5. Sustainable buildings will command premium prices

Making sustainability accessible to everyone will be a central tenet of a successful strategy. However, there’s clear evidence to show that people are willing to pay more to secure space in climate-conscious buildings, giving property developers even more incentive to build them. While it can be more expensive initially to build properties that are aligned with net zero goals, the evidence also shows that they are quicker to recoup costs.

There is a rent premium for sustainable buildings, as evidence suggests that these properties are more in demand and get snapped up more quickly. But to attract these environmentally conscious investors, real estate companies need to demonstrate how they’re embracing and promoting sustainability. Greenwashing insignificant actions just won’t cut it.

6. Renewable solutions are being built in

WiredScore calls the COP26 summit “a call to arms for real estate”. To rise to the challenge, real estate companies are thinking holistically about how they can act. A key part of this will be ensuring sustainability is a central focus from the moment a building’s plans are drawn up.

Some property companies are demonstrating how to embrace sustainability from the get-go. Their actions include installing solar panels on buildings, putting beehives on roofs to help local bee populations and encouraging local biodiversity by incorporating green space into their designs.

7. Regulators and funders are helping to champion sustainability

Industry bodies will have an even more important role to play in cultivating a sustainable future in real estate. The British Property Federation, for example, is pushing developers to adopt zero carbon building standards, helping them better understand and assess climate risk in their decision making and promoting circular design and building processes.

The real estate industry is also likely to put more pressure on governments to force the hand of those unwilling to act. Carrot and stick approaches, with carbon tax and financial incentives working at both ends, will drive people towards more sustainable options. It’s also vital that key collaborators with the real estate world, such as those in the finance sector, have the knowledge needed to support real estate customers.

8. All businesses need to consider their buildings’ sustainability

It’s not just the real estate businesses themselves that need to concern themselves with how sustainable properties are. Any company that occupies a commercial building now has a responsibility to take real estate companies to task. Knight Frank’s global survey found that 40% of businesses already have a net zero carbon target in place, but it’s not enough.

The IPCC’s Sixth Climate Assessment report says “climate change is already affecting every inhabited region across the globe”, showing that no country or region can claim that sustainability isn’t their problem. Acting in a climate-conscious way cannot be an afterthought anymore and it must be built into the core approach of every company.

9. Finance companies are rewarding sustainability

Major lenders are looking at how they can use their funds to drive change within the real estate industry. At least one UK high street bank has started to link EPCs to their lending criteria for real estate businesses, incentivising them to make energy efficiency a priority. Some key figures in the industry even believe that buildings that do not meet a certain minimum standard of sustainability will struggle to find funding at all – let alone access preferential rates.

It's not just the institutions that are holding real estate companies to account. Knight Frank shared a fascinating stat from The Wealth Report 2021, which revealed that 43% of wealth advisors say their ultra-high-net-worth clients are more interested in ESG-focused property investments.

If you’d like to learn more about the world of commercial property, check out our other tenant guides for more insight into key topics.