Sustainability in private real estate: top trends to watch

Climate change risk and a covid-accelerated wellness agenda are key themes in this year’s deep dive on sustainability in private real estate.

1 – Climate change emergency

It is the proverbial monkey that humanity must urgently get off its back, as the world edges ever closer to climate catastrophe. Sticking Band-Aids on this problem will no longer cut it. Top-down leadership is required to push the agenda as well as a coordinated response across regions and business sectors. Everyone needs to be part of the journey. And that includes real estate owners and managers.

The sector is estimated to contribute over 30 percent of global emissions. And, in the words of Will Robson, MSCI’s global head of real estate solutions, “being a big part of the problem also means [being] a big part of the solution”.

2 – Stepping up to the ‘E’ challenge

So, it is heartening to hear that real estate’s key stakeholders – investors, managers, developers – are committing in greater numbers to reduce the sector’s energy use and carbon emissions. A more structured approach is being taken to solve the problem, including capturing more granular data on the environmental performance of physical assets and harnessing the latest technology to improve carbon footprints across whole portfolios, with the industry setting ever stricter improvement targets year after year.
“What is positive for real estate is that [we] can really see what the effects are and make measurable adjustments,” says Rudy Verstappen, ESG research manager at Altera Vastgoed.

3 – Net-zero carbon by 2050: Pipe dream or realistic goal?

It was the Paris Agreement that set this ambitious target, but many believe it mission impossible to reverse in such a short time frame a problem that has taken well over a century to create.

The measures asset owners are taking are still not efficient, warns Peter Bretveld, senior portfolio manager at Kempen. “We’re not making enough progress toward the 1.5 degree Celsius pathway… so the likelihood of negative impacts from climate change increases significantly.” Others are more optimistic. “With a concerted industry-wide focus, [I] believe it could be achievable,” says Lili Dunn, president of Bell Partners, a US-based apartment investment and management company.

4 – Shouldering the risk burden

Investors’ and managers’ efforts to confront the climate emergency are not entirely selfless. The assets they own are in the eye of the storm, concentrated in the cities most vulnerable to climate change. That puts capital at risk.

Ed Walter, global CEO of the Urban Land Institute, sums up the dilemma investors face in markets that have historically been their most lucrative: “Some investors are starting to either press pause on new investments or, in some case, pull back from some local property markets due to lack of climate resilience.” There is an urgent need for more reliable information on city-scale risk to gauge the capital at risk across global portfolios.

5 – Wellness movement gathers pace

The younger cohort of the millennial generation and the increasingly influential generation Z place far more weight on how the places they live, work and play in impact their health, wellbeing and overall productivity. For employers, this matters if they are to attract the best available talent in the market and keep their businesses competitive.

And it matters to property owners, too. “Health and wellness create value for real estate assets by helping retain tenants and lease up space faster,” says Jessica Long, Nuveen Real Estate’s head of sustainability for the America’s.

Covid-19 has only accelerated the agenda, as landlords must now look at new measures to keep building occupiers safe. As one commentator in this report highlights, in just nine months, health and wellbeing has become a risk factor; ignoring its importance could seriously undermine the value of assets now and post-pandemic, and erode their competitiveness. The stakes have been raised on this part of the ESG equation, which makes the EY statistic highlighted here all the more surprising.