Climate tech comes to real estate’s rescue

The global crisis we are facing today due to the coronavirus pandemic has much to teach us about another immediate threat: climate change. With one of the highest carbon footprints, buildings and their construction together account for 36 percent of the world’s energy consumption and 39 percent of all carbon emissions annually, according to United Nations estimates.

That means the real estate industry has a crucial part to play in decarbonizing the global economy, with climate technology a key protagonist. And while the task ahead is a huge challenge, it is not an impossible one.

“We see decarbonization as a game changer in the real estate industry and trust that the adoption of climate tech solutions will facilitate the interaction between different stakeholders: property managers, facility managers, asset managers and investors,” says Alexander Gebauer, chief executive for West Europe at Allianz Real Estate, the in-house real estate and asset manager of Allianz Group. The German insurer has made a public commitment to transitioning investment portfolios to net-zero greenhouse gas emissions by 2050.

Pressure from public pension funds and other institutions that invest in private equity property firms is often mentioned as a driver to swiftly decarbonize real estate assets. In January 2020, Larry Fink, the chairman and chief executive of BlackRock, the world’s largest asset manager, noted in a letter to CEOs that investors are increasingly recognizing that “climate risk is investment risk” and predicted changes in capital allocation “more quickly than we see changes to the climate itself.”

Along with investors, tenants’ demand for decarbonization is also pushing real estate players to incorporate climate technology into their buildings.

“We have seen changes in tenant behavior over the last 12 to 24 months, where more and more large corporate organizations are making commitments to net zero with specified time periods,” says David Goatman, head of energy and natural resources EMEA at property agent Knight Frank. “For most office-based organizations, the real estate that they occupy is at least 50 percent of their total CO2 emissions, so property has a very important role in hindering or helping those net-zero pathways.”

Regulation, on the other hand, is underpinning much of the activity around decarbonizing buildings. “In some countries, [regulators] have become the main drivers to push the entire real estate value chain to adopt climate-tech solutions,” Allianz’s Gebauer notes.

The UK is a clear example of how regulation has brought into sharp focus the energy efficiency of the existing building stock – and the need to adopt climate tech. Since April 2018, landlords are not allowed to grant a lease on a commercial or residential property with an energy performance certificate (EPC) rating below E, albeit with some exceptions. Recently, the government has consulted on raising the minimum EPC rating to B or C by April 2030. “To get to that rating as a minimum, you are talking about having to make changes to 40 to 50 percent of commercial real estate in the UK, which would involve substantial investments in climate tech,” Knight Frank’s Goatman argues.

Strategic tech use

Pushed by requirements from institutional investors, tenants and regulators, a growing number of real estate players have been making strategic use of climate-tech solutions to achieve portfolio decarbonization and manage climate risk.

Logistics firms, for instance, are well-positioned for onsite renewable energy production, as they can use the large flat roofs of their assets to deploy solar panels. In some instances, operational carbon neutrality has been achieved through clean energy sources.

That is the case with a logistics facility that Prologis, the world’s largest warehouse REIT, developed for cosmetics manufacturer L’Oréal, in Muggensturm, Germany. The facility’s 7,400 solar panels have a maximum capacity of 2 megawatts, enough to power more than 510 average homes for a year.

Beyond clean energy production – such as solar and wind power – the industry focus lies on solutions linked to data and energy monitoring, to better understand building performance. There is also a big emphasis on efficiency and energy management, with initiatives such as optimizing heating and cooling systems through artificial intelligence.

“Not all assets are the same, but by using technology to estimate and optimize building performance, we can achieve significant cost savings,” says Justin Travlos, global head of sustainability at AXA IM – Real Assets. “When you take the low-hanging fruit of efficiency, you might see a 15-25 percent reduction in energy consumption. And what we are testing with tech, combined with machine learning and Internet of Things is the ability to push that boundary further, without a huge additional cost.”

The AXA Group’s global multi-asset investor has completed several energy optimization projects. They include the installation of LED lighting on a shopping center in Switzerland and the fitting of smart internal heat sensors across Finnish residential assets, projects that have achieved energy reductions of 33 and 11 percent, respectively.

One ongoing project is the regeneration of an office campus in Berlin, which involves the installation of a combined heat and power system – integrated with a photovoltaic system – to supplement heating and power supply. The project is expected to deliver a 35 percent reduction in CO2 emissions compared to the existing system.

Another player using climate tech is UK shopping center REIT Hammerson. Last year, it partnered with start-up Grid Edge to introduce AI technology across its two Birmingham venues, Bullring and Grand Central. The project delivered gas savings of 25 percent in 2019, as the firm plans to extend this tech to other destinations within its portfolio in 2021.

“After an extensive period of data gathering and monitoring (machine-learning), the Grid Edge platform has sufficient understanding to provide us with a prediction, on a day-ahead basis, as to how the building is expected to perform the following day,” explains Louise Ellison, group head of sustainability at Hammerson. “This allows us to actively manage our heating, cooling and ventilation strategy to optimize building performance. This may involve shutting systems down in areas we know will get low footfall and boosting it in areas that are going to be really popular.”

Meanwhile, French real estate group Gecina is collecting data on building usage with a view to improving carbon performance management and actions through an IoT strategy, says Sabine Desnault, executive director R&D, innovation and corporate social responsibility. The firm has already achieved a 6.4 percent reduction in CO2 emissions between 2018 and 2019 and is reviewing its carbon targets to reach neutrality “well before” 2050, she adds.

Desnault also highlights the role of digital technology in helping to design and build structures with a low environmental footprint. “For example, the use of generative architecture software is interesting because these algorithms automatically generate design proposals that meet functional and environmental constraints,” she says.

Overcoming difficulties

One of the challenges highlighted by industry sources is the integration of multiple technological solutions and innovations into one asset, particularly in a retrofit scenario as opposed to a new build. Another hurdle in a traditionally conservative industry like real estate is to get landlords comfortable with trying out new technologies. That is especially true when it comes to untested climate-tech solutions in a capital-constrained environment.

Despite those challenges, the immediacy of climate change – and the added benefit of cutting operating costs while reducing carbon emissions – should make the industry fully engaged to adopt climate technology. “Real estate people have got a lot better at getting climate data on their portfolios, but interventions are still necessary at the asset level,” Knight Frank’s Goatman argues. “Progress is quite slow, but the drivers around legislation, sources of capital and the occupier market will push property companies and funds to focus on actually getting stuff done at the building level.”

Why private equity real estate should finance climate tech

Fifth Wall’s co-founder argues industry needs to pick up the slack from VC and PE

Making the real estate industry carbon neutral requires more than deploying technology and buying carbon offsets to compensate for the CO2 emissions that are still generated by buildings, argues Brendan Wallace, co-founder of LA-based venture capital firm Fifth Wall, which is currently raising a $200 million carbon impact fund.

“This is a science problem, and how do you solve science problems? You invest in science,” Wallace noted during CREtech’s September 22 Building a Better Future webinar.

The real estate industry has traditionally relied on venture capital or private equity to finance climate tech, but this capital “is not flowing in” today. Meanwhile, the property industry has invested less than $100 million in technology to reduce carbon emissions, Wallace said. “That is shocking. That is less than 1 percent of Jeff Bezos’s personal commitment.”

Years of underinvestment mean climate tech has not yet accelerated fast enough to be developed cost effectively and enable true zero carbon emissions. For Wallace, it is the real estate owners that embrace investing in climate tech – as opposed to burying their head in the sand – that will “survive and thrive in the future.”