There are numerous reasons for commercial real estate (CRE) owners, investors, and tenants to be concerned about the risks posed by climate change, but the one that should demand their attention is the impact on their bottom line. The severity of extreme weather events, which are causing unprecedented levels of property damage, clearly indicates that this is not a problem that will simply disappear. For instance, June 2024 was the hottest June on record. More telling, it was marked as the 13th consecutive month of record-high global temperatures, according to NASA's Goddard Institute for Space Studies, an unprecedented streak.
In 2023, the U.S. set a new record for weather and climate disasters (tornadoes, wildfires, major flood events, and hailstorms) costing at least $1 billion, with 28, at a staggering cost of $92.9 billion — and this was a year when no hurricanes hit a major metropolitan area. The figure is deceptively conservative because it doesn’t even include events resulting in under $1 billion in damages caused by wildfires, drought, tornadoes, and flooding. The 2023 figure represents a 21% rise in the number of such events since 2020 and a 35% increase over the last decade, according to the NOAA National Centers for Environmental Information (NCEI), and is a clear indicator of the escalating financial risks.
“There’s nothing that will be more consequential to the planet over time than climate change,” asserts Geoff Kasselman, SIOR, CEO of Evoke Partners and Op2mize Energy, whose platforms leverage expertise in energy, technology, and CRE. “It’s no longer a question of ‘if.’ No one can deny it's disrupting the insurance market, which in turn is disrupting the real estate market. And nobody can deny it's disrupting the commercial loan availability and the cost of debt, which, again, is impacting the real estate market.”
Deloitte’s 2024 Financial Services Industry Predictions report forecasts that the average monthly insurance cost for a commercial building in the U.S. could rise from $2,726 in 2023 to $4,890 in 2030 — an 8.7% annual growth rate. Current monthly costs could more than double for states facing the highest risks from extreme weather. “The links between climate change, extreme weather, and insurance costs will likely remain for the foreseeable future,” said the report.
It’s no longer a question of ‘if.’ No one can deny [climate change] is disrupting the insurance market, which in turn is disrupting the real estate market... The links between climate change, extreme weather, and insurance costs will likely remain for the foreseeable future.
THE FINANCIAL BENEFITS OF SUSTAINABILITY
Property loss and rising insurance costs are two of the more glaring reasons the industry should pursue sustainability measures more aggressively, but following a sustainable path also offers many benefits. Kasselman listed four primary reasons for companies to adopt sustainable practices with their real estate:
1. Access to Capital: Most large private companies are not self-funded and rely heavily on investors, many of whom now recognize the correlation between sustainability and financial performance. Kasselman explains that the pools of money with the best terms and the lowest cost are increasingly prepackaged with sustainability compliance stipulations or minimums. “Whether you want to comply or not, you need money to grow your business at scale, and that means you’ve got to be green. You’ve got to have an ESG policy,” he affirms. “So, some companies are doing it — begrudgingly — for that reason alone.”
2. Attracting and Retaining Millennial and Gen Z Talent: An organization’s response to climate concerns plays a vital role in attracting and retaining Gen Z and millennial workers, according to a 2023 Deloitte survey. More than half of Gen Z (55%) and millennial (54%) respondents say they research a brand’s environmental impact and policies before accepting a job offer. “They're coming to the workforce with an agenda, and more often than not, it includes a high priority for all things sustainable,” says Kasselman. “They seek out workforce opportunities where there's an aligned interest in sustainability with the employer, and while the employer may not really care, they know they need the workers, so they have to (make it a priority).”
3. Enhance Brand Reputation: Studies have shown that demonstrating environmental stewardship through sustainable real estate can enhance a company's brand reputation. Kasselman relates a first-hand anecdote about a manufacturing facility installing solar panels on just the office portion of their facility: “The minute they put a small-scale solar array on their office roof, they got more orders because they took on a green persona, and their industry rewarded them with more business.”
4. The Regulatory Environment: There has been a profound shift in reporting and compliance with sustainability measures both in the U.S. and worldwide. What once was voluntary is becoming increasingly mandatory. In March 2024, the SEC ruled that it now requires publicly traded companies to disclose ESG metrics and risks in their annual reports, proxy statements, and registration statements. The initiative provides investors who recognize the value of sustainability measures with consistent, reliable ESG data with which to make informed investment decisions.
Reporting and compliance initiatives have also been implemented at the city and state levels. In California, the Climate Corporate Data Accountability Act requires businesses operating in the state to publicly report their greenhouse gas emissions, and the Climate-Related Financial Risk Act mandates that companies disclose the threats they face due to climate change. Multiple cities across the U.S. have adopted similar compliance measures. In New York City, local laws 95 and 97 require most buildings over 25,000 square feet to meet new energy efficiency and greenhouse gas emissions limits. Boston has adopted the Building Emissions Reduction and Disclosure Ordinance (BERDO), which sets requirements for large existing buildings to reduce greenhouse gas emissions.
SIOR Affiliate Member Eddie Adler, director of business development for the Cantera Development Group, says most major markets have some form of sustainability requirements in place. “In order to build in the city of Chicago proper, for instance, you have to meet sustainability goals,” he says. “Whether it's a green roof, EV (electric vehicle) stations, or how you're doing your detention structure, you have to garner a certain amount of points to achieve sustainability goals.”
Last year, the European Union (EU) enacted the Corporate Sustainability Reporting Directive (CSRD), which requires EU businesses — including qualifying EU subsidiaries of non-EU companies — to publish regular reports on the social and environmental risks they face and how their activities impact people and the environment. “Europe is so far ahead of the United States in all facets of sustainability, environmental consideration, and energy management that if you're going to do business there, they're going to require you to comply,” says Kasselman.
Sustainability initiatives are encouraged or mandated around the globe. In 2021, the International Sustainability Standards Board (ISSB) was established to develop standards that will result in a “high-quality, comprehensive global baseline of sustainability disclosures focused on the needs of investors and the financial markets.”
David Behar, SIOR, commercial manager with Newmark Central America in San Jose, Costa Rica, says that the majority of new buildings being constructed in Costa Rica are being built to LEED or EDGE6 (a green building certification system focused on making buildings more resource-efficient) certification standards, a practice that began over a dozen years ago. Behar states the change was driven by the influx of international companies (80% of which are U.S. and Canadian, but also from Europe, Latin America, and Asia). “We now have more than 280 multinational companies in Costa Rica, and most of them came here with the idea that they wanted to reduce their carbon footprint and have buildings that are sustainable.”
Studies have shown that demonstrating environmental stewardship through sustainable real estate can enhance a company's brand reputation.
Multinational companies like Hewlett-Packard, Bank of America, and Best Buy are frequently cited as firms at the forefront of sustainable building practices in new construction, renovations, and employing renewable energy sources.
“A lot of the clients I work with — including data centers and a large steel company — are now required, as part of their edict, to use renewable energy sources,” says Bryce Custer, SIOR, a broker/advisor with Canton, Ohio-based NAI Spring Commercial, who is seeing not only an increase in solar but in hydropower as well. The steel company, Nucor, which describes itself as “one of the first diversified steel makers in North America with net-zero, science-based greenhouse gas targets for 2050,” opened the world's first LEED v4 certified steel mill in Brandenburg, Kentucky, in 2023.
OTHER FINANCIAL BENEFITS
There are a multitude of other financial benefits associated with sustainability, including:
- Reducing Operating Costs: Implementing sustainability measures — such as energy efficiency upgrades, renewable energy sources, water conservation, and smart building systems — can significantly reduce operating costs, improving the bottom line for owners and occupiers.
- Increased Tenant Demand/Rents: Buildings with green certifications tend to command higher rents and attract tenants willing to pay a premium for sustainable workspaces. JLL reports that the average rental premium for green-certified, Class A office space in North America is 7.1% and 9.9% in Asia.
- Increase in Asset Value: Green, energy-efficient buildings tend to have higher valuations and lower risks of obsolescence compared to inefficient properties. Higher rents translate to higher property valuations.
Despite current economic uncertainty—, including elevated interest rates and a tightening of lending standards—, many companies may feel that now is not the time to incorporate green building and operational practices. However, inaction comes with its own set of costs, so the business case for sustainability has never been stronger.
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