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The Circular Economy Is Great For Real Estate’s Bottom Line, Oh, And The Planet

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May Al-Karooni just couldn’t get her head around it.

The office of the investment bank at which she worked was being refurbished, and she asked the facilities management team what was happening to everything that was being ripped out: the fixtures, fittings and furniture. Basically, she was told, the vast majority was being thrown away. It was just the easiest thing to do.

That has pretty much always been the case at every office, shop, industrial unit and commercial apartment building across the world, for as long as anyone can remember. And it is not just the interiors.

The Circular Economy Is Great For Real Estate’s Bottom Line, Oh, And The Planet
Venlo town hall

From the smallest house to the biggest office building, the tons and tons of glass, steel, wood and concrete from a building demolition or remodel are taken by a contractor to an incinerator. During the original building process for most commercial buildings, if there are materials left over, even if they are unopened and perfectly good, they are often incinerated, Al-Karooni said.

It is a massive waste of money and resources. And the only reason it happens that way is because it is easy, and because that is the way it has always been done. But that is changing fast.

Al-Karooni left her comfortable job in banking to set up Globechain, an online platform that allows companies to list materials or furniture that are not needed during a building process, or are being removed during a refit. If anyone wants them, they can have them for free; they just need to come and collect them. Think Freecycle for corporates on a massive scale: It now has 10,000 members offering materials for use, and has diverted 5.1 million kilos from landfill across 200,000 separate interactions from users.

Globechain is just one example of how the circular economy is starting to gain a foothold in the real estate industry. The implications are huge for the sector. Accenture estimates that the circular economy could unlock about $4.5 trillion of economic growth by reducing resource waste that has become latent in the modern economy. It will have a huge impact on real estate companies’ bottom line, and their environmental impact.

Both of these things are vital. Construction costs globally have risen, year in, year out — according to consultancy Drees & Sommer, 5% in 2018 — and circular economy principles can help to mitigate that.

On an environmental level, real estate and the built environment have a huge role to play in combatting the climate change emergency. Drees & Sommer analysed various data sources, including United Nations data, and said buildings produce 33% of global CO2 emissions, consume 40% of global energy, consume 50% of all materials used globally and produce 60% of toxic waste.

The bad news is, embracing the principles of the circular economy can be complex, and requires a massive change in the way the industry and governments think. The good news is, that complexity is being reduced almost daily, by technology and innovative companies like Globechain. While many of the financial and economic benefits won’t be felt immediately, some of them most certainly are.

The Circular Economy Is Great For Real Estate’s Bottom Line, Oh, And The Planet
Globechain's May Al-Karooni

First up, what is the circular economy when it comes to real estate? Essentially it is just a fancy way of saying reusing stuff. That can be incredibly complex, like building a new structure so that it can be completely disassembled and every piece of it reused, like the town hall built by the Dutch town of Venlo (get ready to think about the Netherlands a lot: The country is leading the way in this area, and the government has pledged to make the entire Dutch economy circular by 2050). That process is often called “cradle to cradle” and can equally apply to the fixtures, fit-out and furnishings of a building as the actual physical structure.

It can mean renting materials like light bulbs rather than buying them, through a “light as a service” scheme being run by (Dutch) electrical manufacturer Philips. That reduces the cost of buying light fittings up front, and it has incentivised Philips to make products that last longer: If they are leasing them rather them selling them, it costs them more if they have to replace them regularly.

Or it can be as simple as making sure the furniture that is being replaced during an office fit-out is reused by someone else rather than binned. It is all of these things and a lot in between.

“Our clients are very interested, and I could spend all of my time presenting about [the circular economy] and writing thought leadership pieces,” JLL Upstream Sustainability Associate Director Marit van Rheenen said. “But there are a lot of misunderstandings about what it is and what it entails, and that makes it hard for people to jump in.”

Planet Earth Needs Better Buildings, And So Does Your Wallet

Reducing the amount of carbon used in the building of buildings is vital for the health of the planet. When it comes to real estate and sustainability, a lot of the focus is on reducing the greenhouse gas emissions buildings produce when they are operational, via reducing their energy consumption, and this will of course be vital in hitting carbon-reduction goals which are increasingly being enacted around the world.

But reducing the amount of carbon produced in the construction of buildings is also vital: According to the Carbon Risk Real Estate Monitor, a consortium of European real estate companies, the amount of carbon produced from the construction of the world’s buildings between now and 2050 will be the same as that produced by them once they are up and running.

Concrete is a massive part of that, due to its reliance on cement, which produces about 8% of global CO2 emissions during its manufacture.

The Circular Economy Is Great For Real Estate’s Bottom Line, Oh, And The Planet
Cement production is responsible for 8% of global CO2 emissions.

But circular economy thinking could help reduce this figure. Companies like SmartCrusher are working on technologies that allow concrete to be broken down into its constituent parts, essentially sand, gravel, cement and water. If new cement doesn’t have to be produced, then the emissions from the construction process are reduced massively. New techniques are also allowing cement to be made with up to 10% ocean plastics, creating a partial solution for another great environmental problem.

In the longer term, just reusing the materials that go into constructing a building or fitting it out via cradle to cradle thinking has a environmental and financial benefit.

“It reduces risk,” van Rheenen said. “As virgin materials become more scarce, they become more expensive.”

This is where the environmental benefit and the fiscal benefit merge. It might not be you reusing the materials, but the components of a building made to be taken apart and reused can be sold on.

“As resource scarcity becomes pronounced, being able to identify value in the materials you’ve used becomes a new revenue stream and a point of value for a building,” Hillbreak Senior Consultant Lucy Matchett said.

“Buildings decrease in value,” Drees & Sommer Head of Engineering Marco Abdallah said. “You can temporarily increase the value by renovating it, but at the end of its life, you call the guy from the landfill, and you pay him to take everything away, so it’s a liability. A cradle to cradle building always keeps the value of the raw materials, so at the end of the life of a building there is a still a positive value because we can still sell the parts and materials. If you relate that to the increase in construction costs, you can participate in that growth.”

He used the Venlo town hall as a tangible example: The lender to the building agreed to put a 5% value on the building at the end of its life, rather than zero, an uplift that was reflected in the size of the loan. Regarding the interiors, which are all cradle-to-cradle certified, the suppliers agreed to take them back after 10 years and repay 18% of the original cost. For massive office occupiers like WeWork, which will be refitting hundreds of buildings annually in a few years time, this has a potentially huge saving implication.

With Globechain, while companies give away materials for free, they can offset the value against tax in the UK, and also don’t have to pay the cost of disposing of materials.

“We are now in the position that we are not having to chase people, they are coming to us,” Al-Karooni said.

Clients include retailers like Arcadia, the UK’s most profitable housebuilder, Berkeley Homes, and huge public sector organisations like the National Health Service.

The Circular Economy Is Great For Real Estate’s Bottom Line, Oh, And The Planet
Philips runs a service where companies can rent rather than buy light bulbs.

As for renting lighting, van Rheenen said this had reduced some clients’ lighting bills by up to 50%, which for large corporate occupiers would be a substantial saving.

Of course, examples like that of Venlo’s town hall are at the moment fairly isolated, and not everyone is going to buy into the theory immediately.

Not Everyone Is A Believer

“When you talk to the head of sustainability they get probably too excited,” EDGE Technologies Chief Executive Coen van Oostrom said, speaking in particular about cradle to cradle building. “Then when you talk to the head of the investment committee and tell him this will be a big advantage in 30 years, he asks, how is that going to benefit my model.”

Buildings like its EDGE Olympic scheme in Amsterdam use circular principles; for this redevelopment, it reused materials such as taking the stone facade and turning it into ground-floor paving.

“The current model of valuation isn’t built to take this into account,” van Oostrom said. “It is the same as sustainability in general. When we started, people in the investment committee didn’t put a value on it, but now to sell a building that isn’t sustainable is hardly possible. In 10 years the circular economy will have a place at the table, and we think over the long term these buildings will be worth more.”

But as real estate ownership becomes more consolidated and the big companies, particularly pension and sovereign wealth funds, own ever-greater portfolios, then the investment case becomes clearer.

“If you are a developer that is just doing one project in a city, then you might not see the benefit,” Hillbreak’s Matchett said. “If you are a long-term holder thinking in decades, it is different.”

There are practical elements that will hold back the progress of circular economy thinking. JLL’s van Rheenen points out that if a large corporate occupier, for example, wanted to try and utilise the principles throughout its business, the amount of partners that it could work with and do this are still few in number, and doing things at scale makes the biggest difference, but is difficult.

The Circular Economy Is Great For Real Estate’s Bottom Line, Oh, And The Planet
The EDGE Olympic office building in Amsterdam

Al-Karooni said the biggest issue she comes up against relates to guarantees: Because materials that go unused in one construction project but are then passed on to a new owner are considered secondhand, they are not covered for insurance and risk liability in the same way, and changes in regulation might be required to facilitate this.

The Human Factor

But the biggest drawback is human behaviour, the understandable difficulty in getting people and companies to change behaviours that have become embedded.

“You are dealing with behaviour change,” Al-Karooni said. “Companies have to communicate to their contractor, this is how we want to do things now, because it has always been easier and cheaper to just chuck things. But if you just let people use the system, even without any training, they get it. We find people use the system three times and they get it, and never go back [to the old way of doing things].”

EDGE has started introducing materials passports to its new developments, meaning that everything used to build a facility is tagged and logged, meaning it can be reused later. It also allows it to see exactly what is going in to its buildings, the materials used to build the materials as it were, something it did not previously know. It is a fantastically complex process, and puts pressure on a company.

“Sometimes you think, you don’t really want to scratch the surface,” van Oostrom said. “When you do, you realise that we put some pretty weird things in our buildings.”

And delving into all this is challenging in every way, including to the people behind the project.

“It is very difficult to produce buildings that are energy neutral and also use circular processes and are built using truly sustainable materials,” he added. “I already hammer my team to get a building to be energy neutral, and to build things on time and on budget. Their life is already hard, and then I turn round to them and say, now you have to tag everything and you can’t use half the materials in the world and they think, give me a break. That is about human resources as much as financial resources.”

This thinking might seem out of the ordinary now, but society and business can change very quickly. Four years ago, plastic grocery bags were something people complained about, but seemed an immutable part of modern life. Then in 2015 the UK government introduced a 5p-per-bag tariff on consumers that used them and the number given out by supermarkets dropped 85%. There is a social stigma and a financial penalty to being seen using one, and plastic water bottles and non-recyclable coffee cups are next in line. And soon, so will be real estate.

“People focus on the plastic bags they give out, but the supermarket building itself is far worse when it comes to toxic waste,” Drees & Sommer’s Abdallah said. The company estimates that 2020 could be a “tipping point” year when real estate companies that don’t have a sustainability strategy in place start to be punished by both investors and consumers.

The circular economy can help avoid that kind of pushback, and it can be cost-effective too.