The last few years have been challenging for US commercial real estate operators. One of those challenges has been keeping up with a surge in net-zero carbon commitments from investors. In 2022, the effects of interest rate hikes, along with a growing politicization of ESG topics, has deprioritized sustainability initiatives for many operators.
While the interest rate-driven economic challenges are as clear as the politicization is frustrating, the resources required to execute on a net-zero commitment may not be as clear. Here in North America, and in the UK, Grosvenor made our World Green Building Council net-zero commitments back in 2019. We had already been pursuing sustainable development and operational activities for many years prior, so we were well aware that a net-zero commitment would be very challenging. Now that we are a few years in, the level of effort required from every aspect and everyone in the business has exceeded our original expectations.
However, as noted above, many institutional investors are clearly expressing their demand for net-zero progress. In addition, there is a growing belief that, at some point, some tenants will pay a premium for ‘low carbon’ space. 2022 also brought some of the first meaningful non-financial disclosure proposals for US regulators. Will these investor, regulatory and revenue factors overcome the economic and political challenges that 2022 brought to net-zero initiatives? There is one place that we can look for a glimpse of the future.
Differences between the US and Europe
In the UK and Europe, which seem to be two to three years ahead of the US, operators have meaningfully accelerated their carbon-reduction initiatives. Some of the most striking differences include: significant premiums being paid for carbon-neutral buildings; clear investor expectations, with pressure on operators to act; general awareness and significant adoption of commitments through various supply chains; meaningful regulatory and public reporting requirements; and general societal expectations, raising the reputational risk for operators.
Our own development team in London can point to clear and meaningful premiums being paid for ‘net-zero carbon’ development projects. This potential for rent premiums and the cost savings associated with efficient building systems create a strong profit motive that currently exists in Europe and the UK. Looking into this ‘future’, it is the financial incentives that interest me most in a US context.
US capitalism has proven to be highly effective when there is a profit motive. I’m confident that when US operators can see a path to these financial incentives, that the subsequent adoption will be swift and efficient. If Europe serves as a view to the future, then those operators willing to put in the effort to take a leading position today will drive higher rents and achieve lower exit cap rates while operating under lower legislative risk tomorrow. In other words, early adopters will outperform relative to those that remain on the sideline.