The Paris Agreement sets out a global goal to keep the rise in mean global temperature to well below 2C, and ideally 1.5C, above pre-industrial levels. In order for this to happen, CO2 emissions need to halve by 2030 and the world needs to achieve net-zero carbon by 2050.

The pressure on economies to decarbonize was reinforced by an October UN environment report that stated there was “no credible pathway to 1.5C in place.” The report claims the world is on track for a temperature rise of between 2.4C and 2.6C by the end of the century – a warning echoed at the most recent COP summit in Egypt. The transformation towards net-zero greenhouse gas emissions in electricity supply, industry, transportation and buildings needs to move “much faster,” the UN report concluded.

The built environment is responsible for 39 percent of carbon emissions, per the World Green Building Council, which has called for the sector to decarbonize in line with the Paris Agreement.

So, the task ahead of the real estate industry is straightforward then: total decarbonization by 2050?

Sadly not – the race to net zero is complicated by a variety of factors, including confusing definitions, a multiplicity of net-zero pathways, arguments about offsetting, the need to engage occupiers and a general lack of global consistency. Different real estate sectors present different challenges, too.

Richard Manley, head of sustainable investing at Canadian national pension scheme CPP Investments, says: “Achieving net zero by 2050 will require a step change in engagement and concerted efforts by investors, operators, developers and customers.”

Perhaps not surprisingly, the real estate industry is a long way behind that target, with a relatively small number of asset owners committed to a net-zero pathway. GRESB data suggests only 10 percent of firms have a net-zero pathway in place and a further quarter have no decarbonization plans at all.

Duncan Owen, chief executive of ESG-focused investment manager Immobel Capital Partners, says: “In the major European cities that we are targeting, for example, only about 10 percent to 15 percent of the office stock at present complies with the various national sustainability measures set to become enforceable between 2027 and 2030. Those standards, unhelpfully, are all slightly different but it shows how far away we are at the moment.”

A guide to the scale of the challenge might be to look at the total assets under management submitted to the GRESB assessment, as companies that want to be part of the assessment might reasonably be supposed to be committed to the task of decarbonization. In 2022, this hit nearly $7 trillion.

“Real estate needs to get a grip on what its emissions actually are”

Chris Cummings
Savills Earth

However, Savills has estimated that the total value of global real estate is $326.5 trillion. Much of that property is owner-occupied and thus out of the real estate industry’s hands, but it demonstrates the scale of the task.

GRESB has plotted its universe’s performance in reducing energy intensity against the Carbon Risk Real Estate Monitor’s net-zero pathways. The findings demonstrate that the present trajectory of the assets in the GRESB universe is a long way from the path they need to tread.

A long, hard road

Real estate owners are not helped by the definition of net zero itself being subject to debate. Terms such as net-zero carbon, zero carbon, carbon neutral and others tend to be used interchangeably – this is misleading.

From a practical point of view, the World Green Building Council Net Zero Carbon Buildings Commitment defines net zero as no whole-life carbon emissions by 2050. Whole-life carbon means asset owners must include both operational carbon from building use and embodied carbon emissions caused by construction or refurbishment work.

The process for reaching net zero takes three-stages:

    1. Minimize emissions from the asset;
    2. Source as much renewable energy as possible;
    3. Use offsets to cover any remaining emissions.

Different pathways have slightly differing requirements; for example, the UK Green Building Council requires that renewable energy must be “additional”: ie, from a new source that adds to the total supply, rather than landlords simply buying a share of a finite supply. Many pathways also insist that no more than 10 percent of emissions can be offset.

Prior to minimizing emissions, they need to be measured. “A net-zero pathway must be data driven. Real estate needs to get a grip on what its emissions actually are, where they are, what is a sensible timeframe to decarbonize them,” says Chris Cummings, director, sustainable design at Savills Earth.

The main problem real estate has with measuring emissions is that most are caused by tenants, who are not always keen to share data. This may be a consequence of an inherent discrepancy: tenant energy use will be the major factor in a building’s emissions; but those emissions may only be a small part of the tenant’s emissions and therefore a lower priority for reduction.

Furthermore, typical lease arrangements are not conducive to co-operation, which can be a barrier to energy use reduction and the deployment of onsite renewables. Manley says: “We need to see a transformation in market convention to deliver emission reduction targets, including how we structure tenancy agreements, management contracts and lending covenants.”

However, the real estate industry is moving to a more service-based model, which will make it easier to factor in added value options such as rooftop solar. Green leases can also lock in data sharing and a joint commitment to minimizing energy use.

The Paris Agreement envisages the bulk of decarbonization to come from national energy grids.

John Macdonald-Brown, chief executive of ESG consultant Syzygy, says: “We are working on a logistics project where we are consulting on a solar farm and wind turbine to build alongside it and to supply the occupiers. When that sort of initiative is combined with battery storage, there is potential to reduce the reliance on the grid and for the development to be supplied with large quantities of cheap power, which is a big incentive.”

Assuming a landlord has reduced energy and sourced enough renewable energy to leave only 10 percent of emissions remaining, the next stage is offsetting, which is itself fraught the uncertainty. There are many questions about whether offsetting schemes really compensate for emissions.

Macdonald-Brown suggests national and global collaboration is needed to create offsetting projects that can be properly assessed and which make a genuine contribution to absorbing CO2.

Uncertain future

Perhaps the biggest collective challenge is the problem of the best and the rest. GRESB participants and companies embarking on a net-zero pathway are not the problem. The issue is that in developed markets, many commercial real estate owners are not focused on decarbonization and see it as an expense to be avoided.

“Perversely, the conflict in Ukraine has been positive for net zero because it has highlighted some of the risks in relying on fossil fuels and the advantages of renewables”

Duncan Owen
Immobel Capital Partners

Manley is optimistic, however: “There will be positive spill-over effects to the wider real estate industry beyond just institutionally owned assets with the increased focus on different emission abatement solutions. This should encourage more in the industry to be involved.”

Real estate owners of all stripes will furthermore be subject to regulations on energy use that could damage their business and their asset values. A number of markets have legislation to prevent the leasing of energy-inefficient buildings. From 2027, the UK will require any landlord to have achieved an energy performance rating of ‘C’ or better to be able to lease a property.

Macdonald-Brown says: “You might envisage a less scrupulous landlord refusing to make net-zero commitments but that landlord will suffer, not just from having buildings that are less attractive to tenants and investors, but by holding on to more expensive sources of power.”

Immobel’s Owen adds: “Rather perversely, the conflict in Ukraine has been positive for net zero because it has highlighted some of the risks in relying on fossil fuels and the advantages of renewables in providing energy security, as well as a pathway to net zero.”

The scale of the task is daunting. This suggests there is a risk of ‘climate fatigue’ or that pathways to net zero might be abandoned in a downturn. For example, it is widely considered that the global financial crisis set ESG considerations back several years.

However, Owen says: “There is a long way to go before 2050, and what will drive the move to net zero will be a generation in the early stages of their careers, for whom this is embedded in their psyche. My children are zealots about sustainability – it is their generation that will take this forward.”

Sector analysis


Upgrading work needs to be done

Duncan Owen, CEO of ESG-focused real estate investment manager Immobel Capital Partners, says only 10 to 15 percent of offices in major European cities are compliant with the energy performance certificate requirements that will be enforced by law in a few years’ time.

Savills estimates 85 percent of UK office stock is rated Grade C or below, which means it will need to be upgraded by 2030, when office space will need to be Grade B or better in order to be legally leased. The property adviser estimates the cost of upgrading at £63 billion ($72.7 billion; €73.2 billion).

However, on the positive side for the office sector, its tenants also have net-zero commitments and workforces who increasingly prefer more sustainable workplaces.


Failing to make the grade

Savills has analyzed the EPC ratings of UK real estate stock and found that 185 million square feet of assets are at risk of failing to meet the Grade B energy performance certificate requirement by 2030, and 80 percent of these are small units in non-institutional ownership.

Meanwhile, retailer behavior can be unhelpful; they prefer to have their doors open for business, while sending chilled air from the store into the street.

Fragmented ownership makes collective action harder. Owners of retail malls have more control over their portfolios and larger landlords can co-operate with tenants across assets. In October, developer Hang Lung Properties signed a sustainability co-operation agreement with luxury giant LVMH, covering 90 units across seven Chinese cities and 290,625 square feet of retail space.

Industrial and logistics

No single solution

The industrial and logistics sector is in a slightly contradictory position. One the one hand, as Chris Cummings, director, sustainable design at Savills Earth, says: “A landlord can get enough solar PV on a logistics center to offset its energy use reasonably straightforwardly, whereas if the owners of a CBD office building do the same, they might only cover 2 percent of usage.”

This is certainly the case for modern logistics properties. However, due to the low capital value of many older industrial buildings, capital expenditure can be tough to justify. Some uses, such as cold storage, have tremendous energy requirements even when they are run at maximum efficiency. This a particular problem in markets with little access to renewables.


Collaborate with your customers

Decarbonization is “a bigger challenge when more stakeholders are involved,” says Cummings. The hospitality sector has millions of customer stakeholders using a lot of energy in a short period of time. Landlords and hotel management companies might be well aligned. However, customers are harder to co-opt.

Hotels have been seeking to reduce energy use and costs for some years, lowering the frequency of laundry, for example. A new era of collaboration with end users will likely be needed to minimize energy use. The growth of ‘eco-tourism,’ however, suggests a sizable market for less energy-intense customers.


Incentive for efficiency

There is a huge gulf in performance between the institutionally owned multifamily residential sector and owner-occupied properties. A single owner and manager for multiple apartments allows for economies of scale, efficient management and capital to keep the building up to date.

This bodes well for the growing stock of new build multifamily and co-living spaces. Indeed, a report published by services firm JLL and the Urban Land Institute suggests co-living could be a more sustainable solution for city living.

Owner-occupiers, on the other hand, have little incentive to improve their asset’s performance except the need to stave off rising energy bills.

Data centers

Power-hungry, but important

The data center sector is in a rather curious position. On the one hand, it is by far the most energy-intensive real estate sector, with facilities rated by their energy requirements rather than square footage. Modern data centers are more efficient than ever before, but still power-hungry.

Even when powered by renewables, which is by no means possible in every market, data centers need back-up, which tends to come from diesel generators. However, data centers are essential infrastructure for the digital economy and power millions of virtual meetings, which replace the need for travel.