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The best way to think of a climate strategy in the commercial real estate industry is that it is part of a business strategy. It concerns many stakeholders, including executive leadership, investors, and users/tenants, and will account for physical and compliance risks that have an impact on the industry’s assets and valuations.
In this way, a climate strategy is not a nice to have, but rather a necessary part of doing business that more companies are implementing.
In this second article of our two-part series on the evolving regulatory response to climate change in the commercial real estate industry, we examine how owners and managers can consider and benefit from the climate-related risks that are driving the segment to action, including:
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Taking action to protect against weather-related property damage, which is becoming increasingly common.
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Staying attuned to the evolving landscape of Building Performance Standards being imposed by a growing number of jurisdictions.
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Considering the technology that can be implemented at the time of capital renewal.
Managing the risks of climate extremes
Increasingly unpredictable weather extremes are impacting the built environment, which was largely constructed to tolerate a range of conditions that are no longer the norm. That’s why making buildings more resilient to changing weather patterns is a smart investment.
Weather-related insured damages surpassed CA$3 billion annually in Canada in both 2022 and 2023,1 and US$93 billion in the U.S. in 2023,2 most of which was associated with damage to buildings.
By 2050, projections show that up to US$160 billion in U.S. real estate assets could be impacted by rising sea levels, climbing to between US$238 billion and US$507 billion by 2100.3 In Canada, projected damages from rising sea levels could reach CA$1.2 billion annually by the end of the century.4
A changing climate can also disrupt supply chains for property owners and tenants, reduce labor productivity, erode property value and increase energy costs, all of which can exacerbate cash flow volatility for real estate businesses and tenants.
Proactive investment in climate adaptation has been shown to deliver a return of investment of 2x to 10x when taking the cost of avoided future damages into consideration. Even taking simple actions for flood resilience can lead to favorable insurance premiums for climate-resilient buildings, higher occupancy rates, reduced cash flow volatility for property owners and tenants, and reduced energy costs.5
Business implications:
Commercial property owners can benefit from conducting risk assessments that consider the exposure of the properties in your portfolios to climate hazards, including floods, wildfires, extreme heat, storms and water access.
From there, you can gain insights into how these factors are expected to evolve over the lifetime of your buildings, as well as the associated impact on property values and cash flow. Industry participants can gain deeper insights from extending this analysis to the risks posed to corporate supply chains and tenants’ value chains and partnering to reduce risk.
Navigating an evolving regulatory roadmap
Local governments across North America are introducing regulations that will have a significant impact on commercial building owners and operators. Cities in Canada and the U.S., as well as globally, are setting net-zero targets aligned with, or more ambitious than, federal targets, and they’re implementing building performance standards (BPS) to drive compliance.
The American Council for an Energy-Efficient Economy finds that “the number of jurisdictions implementing BPS has doubled since 2020,” with three states and 11 U.S. cities implementing some type of BPS.6 Major Canadian real estate markets, including Vancouver, Toronto and Montreal, are doing so as well. These standards typically require increased measurement and reporting of emissions for commercial buildings along with emission reduction targets that become increasingly strict over time.
Business implications:
Building owners can benefit from establishing a view of BPS policies across their real estate portfolio, identifying where emissions are within their value chains, and developing an implementation plan aligned with capital renewal cycles.
Based on the BPS policies that apply, property owners can set targets for several key indicators, including:
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Energy efficiency and emission reductions
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Embodied carbon
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Renewable energy procurement
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Carbon offsets
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Climate resilience measures
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Workforce upskilling
In addition, when municipalities implement BPS targets, they typically provide guidance and tools to help property owners achieve compliance. These jurisdictions are also more likely to provide financing solutions to support property owners in their decarbonization journeys. Additional resources to help in measurement and benchmarking include the GHG Protocol's Corporate Accounting and Reporting Standard and Energy Star’s benchmarking tool.
Turning intention into action
Implementing a climate strategy is frankly complex and it will take time. Fortunately, the key technologies required to cut emissions from the building sector exist today and adoption can be accelerated with suitable financing structures, market demand, and supply of clean power. The primary strategies and associated technologies are:
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Reducing overall energy demand through enhancement to the building envelope, optimizing internal energy-consuming systems (e.g., lighting, equipment), and integration of smart systems to control energy use.
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Decarbonizing the energy consumed in buildings through the electrification of space and water heating. This is primarily achieved with heat pumps, installation of onsite renewable energy systems, and incorporation of non-emitting gases (hydrogen, renewable natural gas) into existing infrastructure where electrification is not feasible.
In addition to using the right tools, understanding the rapidly evolving regulatory landscape will require owners and developers to find the right partners who can help them access the resources and information they need to minimize their compliance risk.
Whether it is the consequences of rising sea levels or navigating an ever-evolving regulatory environment, managing the emerging risks to your operations, customers and supply chains is an important step toward ensuring business strategies are positioned for continued success.
1 Severe weather in 2023 caused over $3.1 billion in insured damage. (n.d.-b).
2 2023: A historic year of U.S. billion-dollar weather and climate disasters. (2024b, January 8). NOAA Climate.gov.
3 Becketti, Sean. (2021). The Impact of Climate Change on Housing and Housing Finance. Research Institute for Housing America.
4 Institut climatique du Canada. (2022, July 27). Under water - Canadian Climate Institute. Canadian Climate Institute.
5 Report outlines measures to protect commercial real estate owners. (2021, January 13). Waterloo News.
6 Nadel, S., Hinge, A. (2023). Mandatory Building Performance Standards: A Key Policy for Achieving Climate Goals. ACEEE.
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