Global focus has shifted significantly towards climate change and the actions that governments, businesses and individuals are taking to mitigate its impacts. The term “Net Zero” specifically, has generated tangible traction. For the real estate industry, a driving force to transition towards Net Zero has been the World Green Building Council (WGBC) and their Advancing Net Zero (ANZ) project which first launched in June 2016.
Since its inception, the project has released a series of reports, most recently the 2019 Status Report, which accompanied the “Net Zero Carbon Buildings Commitment”. This commitment and national commitments such as the Better Buildings Partnership (BBP) Climate Change Commitment, are tying signatories to achieving Net Zero portfolios by 2050. With 82 signatories on the WGBC commitment and 23 on the BBP, Net Zero is representing one of the most significant market trends for real estate and also holds the greatest potential for genuine transformation.
In practical terms, Net Zero commitments will be translated into credible Net Zero pathways through national-level frameworks and directives like the UK Green Building Council (UKGBC) Advancing Net Zero (ANZ) framework and also the London Energy Transformation Initiative’s (LETI) Climate Emergency Design Guide. These will pose difficult and likely uncomfortable questions of landlords at all stages of a building life cycle, impacting development, operation and end-of-life activities. With an acknowledgment by large swathes of the industry that this is the only direction we can take, what will real estate look like in 2035 as companies hit the height of transition towards 2050 Net Zero goals?
First of all, all Net Zero pathways for landlords that complete development, refurbishment and fit-out projects will require comprehensive considerations of embodied and development-associated carbon and the ways in which this can be limited. In a lot of cases, this carbon will need to be offset which will likely present developers with a considerable cost. For London, the Greater London Authority (GLA) and the Mayor of London Office have already introduced carbon offsetting on large development projects. Any works that fail to reduce their associated carbon by 35% against current regulations, will need to pay for offsets. With the price per tonne of carbon already at £95, the costs can very quickly escalate and this price is only likely to increase. Cheaper offsets are always available but offset schemes such as this one presented by the GLA are seen as realistic and credible prices.
With this in mind, a movement away from new construction is likely and a deep retrofit of current building stock may become a more cost-effective option. How deep retrofits will need to go is dependent on legislation as well as intensity targets set within Net Zero frameworks. In the UK by 2035, leased commercial properties will likely be required to have a minimum of a B rating and energy intensities for commercial offices will be expected to hit 89 kWh/m2, meaning that a large proportion of current stock will need considerable energy efficiency improvements. Where the most extensive works are required to building fabrics, embodied carbon will again become an issue and the cost of offsets is likely to be an inhibitor. In extreme cases, where it’s a choice between deep retrofit and complete redevelopment, the market could start to see stranded assets, where neither option is viable for landlords.
From an operational perspective, one of the biggest market transformations in 2035 associated with Net Zero will be the way in which buildings are heated. In the UK, including domestic sources, heating accounts for 37% of all greenhouse gas emissions and decarbonization of this is essential. Green gas is one potential solution but the current level of green gas is low and the typical percentage of green gas in tariffs is very rarely 100%. It’s unlikely that green gas supply will ever be sufficient to service widespread societal decarbonization. The transformation will, therefore, come from a movement to heating that does not require direct burning of fuels. Depending on size, buildings will need to use a range of different technologies including air-source heat pumps, district heating and cooling, and solar thermal panels, but understanding of how these technologies can work together is currently lacking. The costs and life-cycles of these solutions are also unfavorable to landlords at present.
These represent just some of the market transformations associated with Net Zero. At present, these transformations come with significant challenges but with the backing of the real estate market through commitments such as those set by the WGBC and BBP, they will be overcome. The largest challenge and perhaps also, the biggest opportunity associated with Net Zero, will be whether 2050 is too late and how real estate can realize Net Zero quicker. Investors will increasingly look at Net Zero strategies, with those companies that can demonstrate they’re winning in the race to Net Zero representing the most attractive long-term investments.
If you want to understand how GRESB can provide investors with an objective understanding of your net zero ambition register for our webinar on Tuesday 24th March via this link.