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The real estate industry has been wrestling with its carbon footprint and how to reduce it for some time. However, until recently, the focus has been exclusively on emissions from building operations, such as lighting, heating and cooling.

But operational carbon emissions are only half the story. The construction of any building generates carbon. Making steel, glass and concrete results in carbon emissions. The transport of materials to and from a construction site and the work involved in erecting a building all involve emissions. It is estimated that 11% of total global carbon emissions come from building construction and materials.

Now the industry is beginning to look at the whole life cycle of a building to assess its emissions and it is driving changes in behaviour. Peter Epping, global head of ESG at Hines, says: “We need to be careful about which buildings we are knocking down and whether the benefit in terms of reducing operational carbon over time or other benefits are worth the embodied carbon of building new. No matter how green a building is touted to be, you still spend at least 30 years of operational carbon in its development.”

As building operations becomemore efficient, the embodied carbon in a building becomes more important. The longer a building can be preserved, the more the carbon involved in its creation can be ‘amortised’.

Billy Grayson, executive vice president, centres and initiatives, at the Urban Land Institute, says: “According to most estimates, embodied carbon accounts for as much as half of a buildings’ total carbon emissions over its lifetime. If we can develop strategies to use lower-carbon building materials and construction strategies, we can make significant progress in reducing overall emissions from the real estate sector.”

Projects that attempt to minimise embodied carbon can benefit from green building certification. Many of the major certification systems, including LEED, BREEAM and EDGE, consider embodied carbon.

Earlier this year, a pioneering low-carbon certification programme for real estate was launched in Europe, garnering support from real estate investors such as Ivanhoé Cambridge and Generali Real Estate, as well as the French BBCA association.

Like most exercises in making real estate more sustainable, measuring and assessing a building’s total carbon emissions over its projected life can help developers and investors judge its impact. A whole building life cycle analysis (WBLCA) attempts to account for all carbon sources present throughout a building’s life. Such analysis – while obviously requiring a certain amount of speculation – can give a more balanced picture of a project’s impact and might even sway decisions on whether to embark upon it.

To reduce embodied carbon, the real estate industry needs to embrace the four ‘Rs’: reduce, reuse, replace and recycle, says Grayson. Reducing the raw materials and energy used in the construction process will reduce embodied carbon. This might involve using modular construction to reduce waste and transport emissions, or producing materials on site. Of course, simply creating fewer buildings and instead refurbishing existing stock naturally reduces the use of materials.

Reuse could involve using the materials from the construction of one building for another, or they could be recycled. “Recycling all construction waste and using recycled materials for construction can also have a positive impact on reducing embodied carbon,” says Grayson. Developers are beginning to replace carbon-intensive building materials with lower- carbon or renewable materials, such as timber, lower-carbon concrete and recycled steel.

Such considerations are increasingly tipping real estate investors into refurbishing and improving existing buildings rather than demolishing them and building afresh. Grayson says: “Usually, refurbishment or repurposing of obsolete properties is better than redevelopment, from an embodied carbon perspective.”

However, refurbishment is not always the best option: it might be impossible for a building to be brought to the required specification, for example. As construction becomes lower- carbon, the balance may also swing back in favour of new buildings, especially if the building they replace can be recycled.

Using the four Rs to reduce embodied carbon should also not come at a cost; using less energy and materials in a project tends to mean lower costs. Furthermore, lower-carbon materials are often similar in cost to their standard equivalents, the ULI’s Embodied Carbon in Building Materials for Real Estate report argues. New technology is emerging to help the real estate industry reduce embodied carbon. 

Epping says: “It is very encouraging to see considerable innovation in the field of low-carbon construction, whether that is low-carbon cement, low-carbon steel or other materials.”

For example, advances in structural timber are making it a practical solution for large scale commercial buildings, even lofty skyscrapers, while solutions are emerging for concrete which are not just lower-carbon but carbon negative, as the making of the concrete involves storing carbon dioxide.

Throughout a building, the choice of materials will affect its final embodied carbon footprint. “Everything down to the choice of carpets can make a difference. And that’s why we were pushing really to getting environmental product declarations (EPDs) for everything we use in a building, so we can have a ‘carbon P&L’,” says Epping. Environmental product declarations will allow purchasers to weigh up the environmental impact of a product.

Embodied carbon could be further reduced by employing circular economy techniques. The circular economy refers to the constant reuse and recycling of materials to reduce waste, carbon emissions and pollution. This might involve reuse of buildings or the recycling of existing materials into new buildings.

Grayson says: “Circularity teaches us [that] any industry’s waste products should be a feedstock for other industries’ processes, and that we should figure out ways to reduce lifecycle environmental impacts by efficiently integrating different industries in the efficient use, reuse, and recycling of materials.

“If buildings were built from rapidly renewable materials and designed for adaptive reuse and disassembly, it would significantly reduce their life cycle greenhouse gas impact and contribute to the circular use of materials as feedstocks for future buildings and other beneficial manufacturing processes.”

Part of the challenge of reducing embodied carbon is in persuading people to consider it, how to measure it and how to reduce it. “We have seen that introducing this topic into the conversations with architects, designers and contractors means people get up to speed quite fast and act smarter. If you had mentioned this topic two years ago to anyone, they would probably just have shrugged their shoulders and looked for someone else to work with,” says Epping.

Hines has contributed to the debate by publishing an Embodied Carbon Reduction guide, which explains the topic and gives some detail on how it might be addressed by the real estate industry.

And it must be addressed, not least due to the existing and future legislation which is expected for the sector. For example, the Netherlands’ commitment to economic circularity by 2050 involves a requirement that the building sector reduce its raw materials use by 50% by 2030. Since 2013, all new buildings have been required to conduct a whole building life cycle analysis.

As noted in Sustain’s May issue, a number of new-build projects in cities across the world have been rejected, due, in part or whole, to the carbon emissions associated with their construction.

The major push factor for the real estate industry, however, is likely to be the wider implementation and higher cost of carbon taxes. Some 40 countries and more than 20 cities, states and provinces already use carbon pricing mechanisms, with more planning to implement them in the future, in order to shift the burden of climate change onto those who are responsible for it.

For example, in April, Singapore announced it would be revising its carbon tax and raising it incrementally to change behaviour. From 2024, large emitters in Singapore will have to pay S$25 (US$18) for each tonne of carbon dioxide equivalent emitted, increasing to S$45 in 2026 and 2027, and eventually to between S$50 and S$80 by 2030.

Once carbon taxation expands to more countries, developers will have a strong financial incentive to take action and reduce embodied carbon.

Hong Kong office landlords need to embrace ESG to compete, claims Colliers. 

In a new report, the property adviser said Hong Kong Grade A office rents have fallen 20.6% since early 2019, with the market battered by political protests and the effects of covid restrictions. 

Hong Kong is one of only a few locations still insisting on quarantine, which is putting off business and leisure visitors. “For multinational corporations, Hong Kong becomes less favourable for the location of regional headquarters,” the report says.

To add to the city’s woes, Colliers forecasts 15m sq ft of office space hitting the market between 2022 and 2026. With so much new space underway, existing assets without strong ESG characteristics risk being stranded. Adopting ESG best practice reduces the transition risks related to future government policy.

More sustainable offices are also preferred by tenants. Colliers research shows that sustainability-certified buildings outperformed in terms of rents and vacancy from March 2019 to date. 

Colliers suggest that office landlords use green financing to help them retrofit existing buildings to make them energy efficient and that they use green certification such as LEED or BEAM Plus, Hong Kong’s local certification regime.

For owners of existing buildings, Colliers recommends:

When you think of green buildings you might be inclined to think of an electrified modern office tower, rather than a multi-let industrial (MLI) estate, however a whole life cycle approach to this sector shows it can be made as sustainable as any. 

The real estate industry is just beginning to take account of embodied carbon, that is the emissions which come from construction and renovation work, as opposed to building operations. Embodied carbon can amount for up to half an asset’s lifetime emissions, depending on how much maintenance is required.

Whilst all real estate requires almost constant maintenance through its lifecycle to remedy wear and tear from use and environmental degradation, MLI property requires relatively little, compared to say an office or shopping centre. 

Most of an industrial building is made of long lasting and hardy materials, such as the concrete slab which makes up the floor or yard (50 years lifespan) and steel exterior cladding (typically 30 years lifespan and can be easily replaced).  With no lifts, air conditioning or soft furnishings, this makes them cost effective to maintain with little additional embodied carbon during their lifespan.

There is much that can be done to make an existing industrial asset more sustainable. The common methods we use to improve energy efficiency in our portfolio are new LED lighting (cutting lighting related emissions by circa 80%), rooftop solar panels, removing gas heaters, installing air-source heat pumps in the offices and adding more insulation.

Our own research suggests the most impactful way of improving energy efficiency is by moving to LED lights, followed closely by installing solar panels.  We recently analysed the Energy Performance Certificate (EPC) scores of 136 MLI units, which showed that LED lights improved the average EPC score by -50 points, whilst solar panels improved it by -40 points, either enough to take a typical Grade D rated unit to a Grade B. 

We also found that every unit we assessed was capable of being economically upgraded to meet all future and proposed legislation. The average investment required was £6 per sq ft across the sample, which equates to around 7% of current net asset value (NAV).  Excluding the cost related to the installation of solar panels (which can be a profitable investment in its own right), the remaining cost to comply with all current and proposed environmental regulations until 2030 averaged £2.70 per sq ft, reflecting an investment of just 3.5% of average NAV (or around five months’ rent). 

This means that it is both economically viable and feasible to upgrade MLI buildings to meet more stringent environmental standards, whilst further extending their lifespan and improving their lifetime carbon emissions in the process.

The most sustainable buildings are the ones which never go out of fashion.  MLI is one of these sectors, as the average occupier has always and will always be looking for the same thing – clear, dry, secure space with good access and a good local labour market.  

Taking a whole life cycle approach to MLI shows how sustainable it can be and also demonstrates what can be done to make older real estate assets greener for longer.

Julian Carey is managing director at Industrials REIT.

Palace Capital has announced a change of direction to focus on adding value to office assets through ESG measures.

The UK-listed real estate investment trust will sell its industrial assets as part of the plan. 

Palace intends to focus on UK provincial markets where it can improve the Energy Performance Certificate score of office assets. UK EPC ratings range from G (worst) to A (best).

From 2030, landlords will need an EPC rating of B or better to be able to lease office assets, however Savills research found 85% of UK office stock is Grade C or below. 

In a statement to the stock market, Palace said: “This strategy seeks to generate increased rental and capital values, reduce the risk of obsolescence from the existing portfolio, enhance the Group’s ESG credentials and further establish it as a specialist regional office player.”

The REIT owns office properties in regional cities such as Leeds, York and Liverpool (pictured above).

UK real estate investment trust SEGRO has launched a refurbishment of an industrial and warehousing asset in Slough, UK, aimed at boosting energy efficiency, air quality and biodiversity. 

Measures to be undertaken at the 20,120 sq ft building include: rooftop solar, external and internal green walls, LED lighting, air source heat pump, photocatalytic CO2-asorbing paint, green roofs, planting and nesting boxes for birds and bats.

James Craddock, managing director at Thames Valley, SEGRO, said: “The refurbishment of older buildings is an important part of our journey to be net-zero carbon by 2030. This scheme at Bestobell Road is a great example of how existing buildings, where appropriate, can be transformed into more modern, efficient, greener spaces that enable low-carbon growth now and into the future.”

Aegon Asset Management and Taurus Investment Holdings have bought the first asset for their $600 million joint venture.

The venture bought Canopy Villa Apartments (pictured above), a 296-unit apartment complex located in Orlando, Florida, built in 1981 for an undisclosed sum.

Aegon and Taurus launched the “ESG-centric” joint venture in March. It will acquire US multifamily assets and retrofit them to improve environmental performance.

Taurus’s RENU Communities subsidiary will carry out the retrofitting works required to make the asset a low-carbon, energy efficient building.

“Given Canopy's 1981 vintage, there is a significant opportunity for RENU to enhance the property through our tailored retrofit program," said Chris Gray, chief technology officer of RENU Communities. "We will aim to reduce its carbon footprint by more than 50%, greatly improving property operations and the quality of life for residents."

The current default position is that refurbishment rules. Indeed, 86% of new construction schemes on London offices launched in the past six months were refurbishment projects, according to Deloitte’s latest London Office Crane survey.

This is in line with updated planning guidance from Mayor of London, Sadiq Kahn, which says significant projects in the capital will be required to meet embodied carbon benchmarks and prioritise retaining existing buildings over demolition. 

However, this is not always the best route to long-term carbon reduction. Take the Marks & Spencer's flagship store on Oxford Street, a 100-year-old building set to be torn down and replaced with 10 storeys of office space plus gym and a smattering of retail.

When critics argued the project would waste the embodied carbon of the existing building and generate an extra 39,500 tonnes of emissions, Khan halted the demolition plan. He later u-turned following a preliminary carbon report by engineering firm Arup which found that over its whole lifecycle, the new build would result in a lower carbon footprint than a refurbishment due to superior operational performance.

Although the demolition plan has now been "paused" until the scheme can be reviewed by government, this case demonstrates there is no one-size-fits all approach.

Assess and compare the outcomes

Evaluation of the merits of refurbishment versus redevelopment must start with a rigorous Whole Life Carbon Assessment for each property in question. With the industry moving towards the RICS methodology, this is the standard by which to assess, and compare, the outcomes of refurbishment against redevelopment.

Building consultants need to assess what's best in each individual case: the answer may not always be refurbishment. Older buildings may have limitations around the floor-to-ceiling heights, or the structural loading, or plant space. Consequently, the amount of carbon needed to go into a refurbishment may not stack up long term.

Without first assembling all the facts, building owners could unwittingly invest in a refurbishment that creates a property which is not as lettable, useful, flexible, or as efficient as a replacement could be. Redevelopment with a completely clean sheet may present a better long-term option, particularly when operational carbon over the life of the asset is factored in with a more efficient thermal fabric and services strategy. 

Guidance does not go far enough

If carbon was assessed for all building projects, regardless of size, a centralised dataset could be built. Over time, this would lead to a repository of data for the establishment of carbon rules and allowances for both refurbishments and redevelopments, which would allow for effective benchmarking. 

What’s more, the new guidance itself does not seem bold when compared to ambitious industry goals set by the London Energy Transformation Initiative (LETI). Baseline standards, coupled with aspirational targets, may help propel the market to reach further beyond regulatory compliance.

The danger is that embodied carbon is increasingly perceived as the only issue, when we still need to work towards reducing operational carbon. In this sense, the conversation around how refurbishment stacks up against redevelopment is far too limiting. 

We need high quality sustainable design standards, driven by both regulatory guidance and market forces, to deliver buildings people want to spend time in, which will also generate the least amount of carbon emissions throughout the whole life cycle.

Hedley Jones is head of ESG, refurbishment and redevelopment at Workman

Sustainable real estate has matured from a niche alternative to mainstream investment strategy in little more than a decade. But in that process the complexities of developing a credible net zero carbon asset have multiplied.

One of those complexities is whether the more sustainable approach – both financially and environmentally – is to refurbish and retrofit rather than building from scratch. With so many elements to consider, particularly with measuring outcomes, it is difficult to arrive at a definitive answer.

One of the basics that remains unclear is how to achieve net zero carbon. It was only in 2019, around 10 years after investors first began contemplating sustainable property, that the UK Green Building Council (UKGBC) published Net Zero Carbon Buildings: A Framework Definition, what it termed the “first step” framework for achieving net-zero carbon in construction and operations.

Adding to the complexity is the fact that policy and regulation is increasingly taking a tougher line on new state-of-the-art sustainable property. Embodied carbon, for example, is coming under increased regulatory scrutiny as embodied emissions from construction can, according to the RICS, account for up to half of the carbon impacts associated with a building over its lifecycle.

Hundreds of countries have made buildings critical pathways to reducing greenhouse gas emissions (GHG) and their transformation into net zero economies: next year they are set to return to Paris to review those commitments under the Paris Agreement’s Global Stocktake pledge. Perhaps, therefore, Brazilian investor Safra Group’s recent failure to obtain approval for a new 305m tower in the City of London is a sign of the pressure new developments will be under.

Safra’s plans were rejected due to what the UK government’s planning inspectorate termed the “highly unsustainable concept” of using vast quantities of reinforced concrete for the foundations and lift shaft.

In New York, meanwhile, the city’s 2020 Energy Conservation Code has already raised the standards for new construction, with a long list of new efficiency requirements (on a property’s thermal envelope, lift shafts and heating and cooling) before building permits are issued.

“Regulation will make retrofitting and refurbishment the primary route to net zero anyway,” says James Ennis, director of project management at Grosvenor, which is refurbishing 7 Holbein Gardens in London (pictured above). “It is becoming harder to knock down buildings and develop new unless there is a clear carbon case to do so. Legislation is already here to ensure that existing buildings have a different future.”

Savills Earth, which advises real estate companies on achieving their sustainability targets, is categorical on the advantages of refurbishment – defined as keeping the substructure and superstructure as a minimum. “This has a clear embodied carbon benefit over demolishing and redeveloping in all building types,” says Georgios Askounis, associate director at Savills Earth.

Investment manager Orchard Street recently launched its net zero carbon pathway with a strategy that prioritises he continuous improvement of standing assets through refurbishment, despite it sometimes being harder to communicate the value of those investments to stakeholders in the form of a set framework.

Head of responsibility and ESG Lora Brill says that while embodied carbon assessments for new buildings help in measuring impact they are still quite rough, since a true measure of embodied carbon necessitates reliable data on every individual material, which is not easy to obtain from all suppliers.

Regulation will make retrofitting and refurbishment the primary route to net zero

James Ennis, Grosvenor

Whole life-cycle assessments could, in theory, help show the carbon impact of a refurbishment project versus a new development on the same spot, but the UKGBC advises that net-zero whole-life carbon analysis is not proposed as an approach at present due to limitations around the reporting of carbon from the maintenance, repair, refurbishment and end-of- life stages of a building’s life cycle.

While the office sector is leading the move towards refurbishment and retrofitting, investors are only just beginning to explore how to create net- zero carbon retail assets, with investors exploring partial refurbishment opportunities where some of the retail element is developed as a green office asset, says Savills director Mark Garmon-Jones.

In some respects, retail and industrial assets do not share the barriers to refurbishment and he asset is multi-let, for instance, it will affect how much change can be implemented at any one time.

As Brill explains: “In industrial, and this is also true of retail parks, that kind of constraint isn’t as big because you can do one building at a time. Multi-let office buildings have many plants, while industrial buildings can have boiler upgrades, heat pumps installed and solar panels put on the unit more easily.”

Chad Phillips, global head of offices at Nuveen Real Estate, says the firm does not take a one- size-fits all approach as it aims to achieve net-zero carbon in its real estate portfolio by 2040. “We spend a lot of time assessing the carbon cost of each project when we consider investing. It is a very granular mission, and it is very dependent on asset, location, or what materials and mechanics are needed,” he says.

“There are large variables that impact cost and return and it is currently too hard to throw blanket generalisations around about how NZC commitments will impact real estate valuations. Lafayette is achieving close to NZC performance as defined by the Carbon Risk Real Estate Monitor and we undertook the first use of ‘Design for Performance’ principles for the first office outside of the UK.”

Nuveen is making headway in what Phillips describes as the “uneven and at times, disorderly” industry-wide transition to decarbonisation. “Some governments will act, but it won’t be in a consistent fashion, and others will not act at all.”

Such results are increasingly achievable as expertise, tools and technology becomes more sophisticated and effective. Mat Lown, partner and head of sustainability at property sustainability consultant TFT, which partnered with Grosvenor at Holbein Gardens (see case study), says improvements in the quality of cross-laminated timber, for instance, mean it could be used instead of steel or concrete, while a better understanding of how to maintain and manage green walls supported the viability of this feature in the lobby.

Specialist contractors in the reclamation of materials are also allowing Grosvenor to take materials from the demolition of one project and use them on another knowing that, on balance, it has a lower carbon impact than using in new materials.

Similar advances are allowing Allianz Real Estate to refurbish the 1960s-built Corso Italia 23, in Milan, into one of the first zero- emissions buildings in Italy. In the creation of a new Milan HQ for Deloitte across 49,000 sq m, the building’s original frame has been preserved but during the reconfiguration, materials are being extracted and used in a different part of the project.

Donato Saponara, head of investments & strategic development, west Europe, at Allianz Real Estate, says: “You need to adapt to a single project, it might not always be possible to change the windows (if the building is historic) but you could replace the glass, for instance, to still be able to maintain sustainability and people’s wellbeing as a priority.”

But whichever approach proves to be the right one over time, investors believe that if green initiatives – large or small – support and enhance the tenant’s experience of a building then they will be future-proofing a property.

“Energy efficiency is something that will differentiate your asset and preserve value.”

The full version of this article can be found in Sustain’s May issue. 

Aviva Investors plans a sustainability-led refurbishment of an office building in London’s Soho.

In partnership with Canada’s Public Sector Pension Investment Board (PSP Investments), the UK investment manager will refurbish 30 Golden Square to create 40,000 sq ft of office space with a BREEAM ‘Excellent’ rating.

As part of the refurbishment, new mechanical, electrical and plumbing services will be installed throughout, allowing for the creation of a two-storey roof extension and three communal roof terrace spaces, complete with over 40 different wildflower and four grass species.

James Stevens, head of investment, global real estate, at Aviva Investors, said: “It is vitally important that existing buildings are refurbished and renovated in order to reduce their carbon reliance and intensity, with these assets forming a significant portion of total emissions in the UK. 

“The work we are undertaking at 30 Golden Square will rejuvenate the asset, whilst also making it more in keeping with the transition towards a low-carbon future. We see this as a win-win situation, with occupiers benefitting from better energy efficiencies and therefore lower costs, whilst our investors gain from a reduction in the carbon footprint of their real estate portfolio.”