CRE Faces Mounting Pressure To Cut Emissions 'Without Actually Knowing How to Get There'

Governments and investors around the world are putting increased pressure on owners of commercial buildings to reduce their emissions. The U.S. federal government has shown it can be done if owners are motivated enough: On Thursday, the agency that operates the government’s 370M SF real estate portfolio said it has cut the emissions of those buildings by half between 2008 and last year.  

This milestone, part of the Biden administration’s goal to reduce overall emissions from the federal government’s operations by 50%, highlights how much the commercial real estate industry is struggling to keep up with public and regulatory pressure to shrink its carbon footprint.

A new UN Intergovernmental Panel on Climate Change report released this month found that emissions from the commercial real estate and building industry are declining at a slower rate than needed to stave off the worst effects of climate change. The IPCC is calling for the global emissions to reach a peak by 2025 and then begin to decline, an earlier deadline than it has previously set.

“Commercial real estate writ large is not moving fast enough,” to meet that deadline, said Billy Grayson, executive director of the Urban Land Institute's Center for Sustainability and Economic Performance. “There’s a lot that needs to be done.”  

With that goal looming and with new regulations coming from local governments, building owners are under more pressure to reduce their emissions quickly, and they are pushing for emerging technologies that can address building emissions to reach maturity sooner rather than later.

“They have all set these goals without actually knowing how to get there,” said KP Reddy, founder of proptech venture capital firm Shadow Ventures. “So we think the squeeze will be on the real estate developers and real estate managers to deliver on the promises that others have made.”

The pressure is coming from all angles. Major institutional investors like Fannie Mae, Freddie Mac and Blackrock have set ESG goals for their real estate portfolios and tenants are beginning to demand more sustainable office and residential spaces as well.

At the same time, increasingly stringent emissions reporting laws in cities like New York, Boston and D.C. and proposed regulation like the Securities and Exchange Commission’s green risk disclosure rules may finally be forcing the commercial real estate world to invest in solutions.

Jamestown Head of Sustainability Becca Rushin said new regulations have helped executives in the commercial real estate world connect the dots between emissions goals and their bottom line.

“For years, a lot of this sustainability work happened behind the scenes,” Rushin said. “I think [potential] fines certainly got people’s attention.”

The built environment is responsible for a significant proportion of the world’s carbon emissions.

Buildings currently contribute roughly 21% of all global carbon emissions, according to the IPCC, with additional emissions stemming from other facets of the built environment.

Efforts to reduce those emissions have been slow: Since 1990, global emissions from buildings have increased by 50%, according to the IPCC.

Of buildings’ total emissions, 24% comes directly from building systems like water, heating and cooling. Because those systems are relatively straightforward to address within the bounds of an existing property, it is where building operators have focused much of their early efforts, investing in systems that can track weather, indoor temperature and occupancy on a granular level, and adjust down a building’s energy usage accordingly.

But those technologies are just now becoming scalable, said Jackie Duke, senior vice president of operations and sustainability for Brookfield Properties’ D.C. office portfolio.

“This technology is new. We’ve found no companies that can do what we are specifically looking for,” Duke said. “We’re really asking for something that they’re just creating.”

Reddy said the climate technology sector has moved past infancy, but it is still enduring some growing pains on the way to cheap, widespread, easily implementable solutions. 

“I think we're teenagers. We think we're adults, but we're still children and we'll make bad decisions,” Reddy said. “There’s more growth to go.”

That growth is well underway. In 2021, total U.S. climate tech venture funding reached nearly $30B, more than double what it was in 2019, according to market intelligence firm Holon IQ.

But not all of that funding has gone to solve issues with the built environment. Global investment in energy storage solutions, a key part of reducing buildings' emissions related to daily energy use, reached $12.8B last year. Investment in solutions for the built environment, including commercial property technology, construction, and heating and cooling, reached a comparatively paltry $326M.

Rushin, of Jamestown, said that kind of technology has been key in reaching short-term emissions reduction targets.

The owner-operator is moving forward with technologies like Prescriptive Data’s Nantum OS to better track and reduce emissions, a system that JPMorgan Chase also recently announced it would deploy across 30M SF of its commercial properties. 

The tech is part of Jamestown’s strategy to reduce its emissions by or before IPCC deadlines. In its most recent sustainability report released last year, the global real estate company reported emissions across its portfolio have fallen 20% from 2014 levels, and that the company was ahead of schedule in meeting its emissions targets.

That progress has also occurred in part thanks to opportunistic changes to buildings as they age. Rushin said that Jamestown began a $2M renovation for the America’s Square office building in Downtown D.C. late last year, and took the needed refresh as an opportunity to invest in a sustainability-focused retrofit of the building to comply with D.C.’s Building Energy Performance Standards ahead of schedule.

That’s the best way to go about sustainable retrofitting, ULI's Grayson said.

Grayson said renovating the current building stock, which will be responsible for the vast majority of the commercial real estate world’s emissions over the next few decades, is easiest when a building is in the process of turnover. He said if building owners invest in improvements when they are recapitalizing, when there is tenant turnover, or when they buy a building, they can lower disruption and more easily integrate those short-term capital expenditures into their debt.

“Figuring out a way when your cost of capital is low and refinancing your debt is the way to go,” Grayson said.

Those improvements aren’t just to make developers’ ESG credentials look good; they will likely be necessary in a rapidly shifting regulatory environment. The SEC’s proposed green disclosure rules will require large building owners to report emissions created indirectly from their properties as well as their physical climate risk by 2024.

Those regulations will be crucial in pricing the cost of emissions and climate impacts into the market, Grayson said. 

“SEC disclosure does not solve this problem on its own, but it is a very good step, because it’s federal,” Grayson said. “It provides a level of transparency and data quality that real estate investors can use to meet their climate commitments and climate goals by engaging with data.”

Grayson said cities across the country also need to provide a mixture of incentives and mandates for their own building stock to keep investment in sustainability flowing, especially for emissions sources like the embodied carbon created through building materials.

That will likely be the last emissions source commercial real estate will tackle, Grayson said.

While investments in electrification and reducing building energy usage will go a long way in addressing Scope 1 and 2 emissions, which deal with a building’s direct emissions and indirect emissions from operations, respectively, the SEC and global authorities also expect the industry to start tackling its Scope 3 emissions, those dealing with the carbon expended by subcontractors, suppliers and employees, as well.

Ryan Dings, chief operating officer and general counsel of Boston-based Greentown Labs, said the incubator was looking to invest in startups that can tackle the embodied carbon and emissions produced from building materials like concrete and steel.

But he said there just isn’t enough innovation and steady supply of capital to support a broad base of solutions. While Dings said he wished he could be investing in half a dozen companies focusing on the issue, so far he has found just two.

“We should have more companies working on decarbonizing steel and reimagining wood and all the products that go into buildings, because the fact of the matter is not all of these technologies are going to work at scale,” Dings said. “In order to truly ensure we reach carbon neutrality, we need to make sure we reach as many shots on goal as we can get.”