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Truth, Misdirection And Real Estate’s Battle Against The Climate Crisis

“It is easier for the world to accept a simple lie than a complex truth,” French revolutionary thinker Alexis de Tocqueville wrote in the 18th century. This idea of clinging to the simple instead of the correct in all its complexities could apply to how real estate is going about cutting carbon emissions.

A new report by the Urban Land Institute and PwC says that while the real estate industry is putting decarbonisation and the climate crisis at the centre of its thinking, it may be going about it in the wrong way.

Reducing carbon emissions has drastically increased in importance for the sector in the past 12 to 18 months, according to ULI and PwC’s Emerging Trends in Real Estate Global 2021 report. But too big a focus on the carbon emitted by buildings during their operation and not enough focus on the carbon emitted by developing new buildings is a potential problem for the industry. 


At best, the sector’s good intentions might be misdirected. At worst, it is borderline greenwashing, creating an image of being good for the environment to burnish your reputation, when you're actually not — an assertion that has already caused controversy. 

The report highlights how the “net-zero-carbon” standard for buildings and real estate companies is quickly becoming the crucial benchmark globally when it comes to decarbonisation, with more and more companies declaring that they want to become net-zero by a certain date. But this broad designation can be misleading. 

Something is net-zero when it takes as much carbon out of the atmosphere as it emits — most buildings emit more than they absorb, a problem for the environment. But this definition can become stretched when it comes to real estate. Sometimes net-zero takes in the emissions created by the manufacturing of glass, steel and concrete needed to construct a building, sometimes not. Sometimes it takes into account the emissions created by a tenant that occupies a building, sometimes not. 

This is not just semantics or an arcane discussion between sustainability experts. Data from the U.N. and the U.S. Energy Information Administration shows that about 75% of the carbon emitted during a building’s life cycle comes from its construction and demolition versus just 25% from its operations. With that ratio, it is up for debate as to whether even the most “carbon-neutral” new facility can ever save enough in emissions to counteract the carbon emitted by building it, the ULI report said.

In a webinar to discuss the report’s findings, PwC partner Gareth Lewis pointed to data from the Carbon Disclosure Project that found that 85% of a building’s emissions come from either its construction or from tenants, emissions sometimes not counted in net-zero targets. By discounting these emissions, the sector is not facing up to the problem it is creating, the report argued. 

“We need to be realistic about what we can and can’t do, and we need to avoid as much as possible just using decarbonisation as a marketing tool,” Alstria Chief Executive Olivier Elamine said. Alstria is a listed German office company and Elamine has been one of the most outspoken figures in real estate about how the sector is paying too much attention to operational carbon and not enough on the embodied carbon created in the construction of new buildings. 

“Net-zero is a concept that was invented to apply to countries, not to companies and definitely not buildings. We have a sustainability report that has a figure about emissions from our buildings, and it is a big black zero, but we would never claim to be net-zero, because we emit tons of carbon.”

Elamine is a proponent of looking wherever possible to retrofit buildings rather than build new ones, making existing building stock more energy efficient rather than creating new buildings that have lower emissions but higher embodied carbon.

“It is not hard to decarbonise real estate, and it doesn’t take a lot of money. We could just stop building. The most energy-efficient building is the one that never gets built,” he said. “That would cut global emissions by 2-3% overnight.”

That is on the basis that construction makes up about 11% of global emissions each year, and real estate accounts for 2% to 3% of that. 

Alexis de Tocqueville's ideas on whether people will choose a simple lie or a complex truth are applicable to real estate today.

Elamine ceded that in some sectors new buildings need to be built, particularly social infrastructure likes housing, schools and hospitals. But in traditional real estate asset classes, demand for space is falling, not rising.

“In Paris, London, Hamburg or New York, do we really need more office space?” he said. “Do we really need more shopping centres or hotels anywhere? I’m not sure about that. And it means you wouldn’t have that periodic crisis caused by overbuilding. And by the way, we’re making tons of money retrofitting new buildings.”

There are ways of reducing the embodied carbon of new buildings, such as using cross-laminated timber instead of steel in the frame of buildings.

Some developers, particularly in Asia, are taking things one step further and investing capital in research and development and innovation into creating building materials that are less carbon-intensive. Hong Kong-listed New World Development formed a partnership with Nano and Advanced Materials Institute Limited, a nano-technology company, to develop green building materials. It created a high-performance lightweight concrete that has lower thermal conductivity than regular concrete and reduces the need for air conditioning, Executive Vice Chairman and General Manager Adrian Cheng Chi-Kong said. That cuts energy consumption, and the injection of nano-particles into the concrete also means it takes less energy to produce.

But until such technology becomes more efficient and cheaper, building new buildings will still be a dirty business. And there is great complexity in changing the behaviour of the industry.

A big part of this is building tenants. A developer can build a building that has the potential to be net-zero carbon neutral, but if the tenant doesn’t utilise it in the right way, something the owner can’t control, then it might still carry on emitting a lot of carbon.

Then there is the fact that many tenants are preferring to take new buildings that are more operationally efficient to hit their own net-zero carbon targets, targets that don’t count the carbon emitted during the construction phase. As long as tenants favour new buildings and pay a premium rent for them, developers will keep building them. Finding a lever to change this behaviour is not simple. 

“A lot of it is figuring out how developers, owners and tenants can work together on this,” ULI Head of Sustainability Billy Grayson said. “We kind of have to figure out whose carbon this is, is it the developer’s or is it the tenant’s?”

The assertion that focusing on trying to cut operational carbon emissions is taking the wrong tack, just marketing or even greenwashing hasn’t gone down well everywhere in real estate. 

The production of building materials like concrete are a major part of global carbon emissions.

“There is clearly a debate going on around embodied carbon, and it is not getting the attention it deserves, the hidden costs that come with development,” Heitman Senior Managing Director and Head of Global Research Mary Ludgin said. “But to say that a company that isn’t developing and has committed to becoming net-zero carbon from its operations, to call that greenwashing, I find that frustrating. We all have to do what we can in our companies to address this issue.”

Ludgin said there are competing tensions in the real estate community surrounding risk that are influencing the behaviour of investors and developers when it comes to decarbonisation. 

On the one hand, developers are still building on vast swathes of the planet that  could be underwater in a few decades’ time, be they in Florida, Singapore or London, because people still want to live there. 

“We are still seeing capital take the path that is historically taken,” she said.

But on the other hand, the risk of continued carbon emissions is starting to hit home in some instances. The proliferation of hurricanes, wildfires and freak snowstorms is a tangible example that climate risk is real, she said. Increased insurance premiums are the financial manifestation of this and can hit the bottom line of an investor hard.

Institutional investors are increasingly focused on making sure that the real estate in which they invest is as low-carbon as possible, to avoid being left with assets that are “stranded,” that can’t be leased or sold because they do not comply with government regulation, Ludgin said.

“I don’t think everyone in real estate suddenly woke up and became a tree hugger,” one investment manager said in the report. “It’s about risk.”

That risk comes in different forms. One of those is the risk that when it comes to decarbonisation, real estate is choosing the wrong path.