Real Estate's Four Great Challenges - Part 1
John Martin The Great Day of His Wrath 1851–3 - Tate Britain, London
This is part 1 in a series of 5 posts looking at the four great challenges facing the real estate industry on the road to 2030.
I am available to present the entire series in person: So far I'll be doing so in London, Copenhagen, New York, Washington DC, Miami and Vienna. Contact me if you'd like to book an event.
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Many people talk about challenging times, speed of change, and ‘how not to get left behind’.
Mostly though the substance of their arguments are relatively trivial and could have been written at any time over the last 40 years. Much change is actually rather slow, disruption is limited and the same old same old companies carry on as they always have.
But occasionally certain industries are hit with tumultuous change. Tech being the obvious example. In a few generations we’ve gone from mainframes, to PCs, to smartphones. And from client-server, to local networked applications to everything being in the Cloud.
And the undisputed, impregnable industry leaders, those whose power was ‘too great’, suddenly found themselves as also rans. IBM got trashed by Microsoft, who got trashed by Apple. And everyone perhaps is now going to get trashed by Generative AI, and new superstar companies like OpenAI.
When platforms change, leaders change. Every dog has its day.
But ….. it takes something big, really big, to fundamentally redesign winners and losers in an industry. Incumbents can handle most threats, but tsunamis are tsunamis. Sometimes resistance is futile. You can’t buck the market.
In evolutionary biology they call these moments punctuated equilibriums, where a species splits into two distinct species, rather than one species gradually transforming into another.
I’m wondering if the real estate industry is at just such a moment, especially the commercial sector.
Four massive challenges need to be faced, between now and 2030, now less than seven years away.
Do you remember 2016?
North Korea was conducting ballistic missile tests, Donald Trump was elected US President, David Bowie, Prince, and George Michael died, the Olympics took place in Rio, Game of Thrones was released, …… and of course a quite mad Britain voted for Brexit.
And none of this feels very long ago does it?
But this is just the time we have left before 2030.
There are projects being discussed today that might not open until 2030.
It’s not even the average duration of the UK peak-to-peak and trough-to-trough real estate cycle, which is around eight years.
So, 2030 looms large.
And so it should.
Because you need to think of it not so much as just another year but as a brick wall, an immovable object, that you are hurtling towards. If you hit it, you are in big trouble.
You really mustn’t hit it.
To avoid the carnage you need to address the four challenges.
Which are:
Decarbonising the built environment
Adapting to the impact of the move to hybrid, distributed and remote working
Repositioning and repurposing a flood of obsolete buildings
Saving our cities from the revenue crash and other consequences of the above.
2030 is the deadline because legislators have already decreed it is, and because it’s a pivotal point on the journey to a carbon neutral planet by 2050. We have to get to point X to get to point Y. And 2030 is point X.
Challenge Number 1
So let’s look at decarbonising the built environment. Or to put it more personally 'our assets'!
First off, what’s the urgency?
In March 2023, the IPCC published the ‘AR6 Synthesis Report: Climate Change 2023’ and it can be summed up as follows:
‘The viability of humanity living within planetary boundaries rests on the actions we take in the next seven years. There’s no time to lose to keep to the target of limiting the global average temperature to below 1.5°C.’
They state “There is a rapidly closing window of opportunity to secure a liveable and sustainable future for all.”
And here are some of the main findings:
Human-caused climate change is already affecting many weather and climate extremes in every region across the globe – with widespread loss and damage to both nature and people.
GHG emissions will lead to increasing global warming in the near term, and it’s likely this will reach 1.5°C between 2030 and 2035.
We are currently at around 1.1°C of warming and current climate policies are projected to increase global warming by 3.2°C by 2100.
To keep within the 1.5°C limit, emissions need to be reduced by at least 43% by 2030 compared to 2019 levels, and at least 60% by 2035. This is the decisive decade to make that happen.
The IPCC has “very high confidence” that the risks and adverse impacts from climate change will escalate with increasing global warming.
Implications of global warming:
There are many well known implications of this:
Extreme weather events such as Hurricane Harvey in the US in 2017. This Category 4 hurricane made landfall in Texas and caused unprecedented flooding in the Houston metropolitan area. 50 inches of rain in some areas led to widespread flooding that affected millions of people.
68 direct deaths resulted, and between $85 billion and $125 billion in economic damage. There were also numerous oil spills, chemical plant explosions, and the release of toxic pollutants into the air and water.
Climate scientists believe climate change made floods from Hurricane Harvey up to 50 per cent worse.
Rising sea levels would seem to be an inevitability and many cities are particularly vulnerable, such as Venice, Rotterdam, Copenhagen, London, Hamburg, Miami, New Orleans, New York.
We’ll see a loss of bio diversity and ecosystems, and already are. The dramatic decline in bee populations is an example of the impact of biodiversity loss on human life. The loss of these essential pollinators could lead to reduced crop yields and higher food prices, affecting global food security.
Climate change reduces food and water security. The ongoing Syrian civil war, which began in 2011, has been partially attributed to food and water insecurity caused by a severe drought between 2006 and 2011. The drought led to crop failures and the death of livestock, forcing many rural families to migrate to urban areas in search of work and resources. This influx of people, combined with existing social and political tensions, contributed to the outbreak of civil unrest that ultimately escalated into a full-scale conflict.
These consequences are well now and much discussed, but there are second and third order consequences that we tend to miss, or don’t consider.
For example, climate change impacts can lead to disruptions in global supply chains, reduced agricultural productivity, and increased costs associated with natural disasters. These disruptions can exacerbate existing economic inequalities and have significant implications for global trade, investment, and economic growth.
Resource scarcity and the impacts of climate change on food, water, and energy security can lead to increased competition for resources and potential conflicts between nations.
The psychological toll of climate change can lead to increased rates of anxiety, depression, and post-traumatic stress disorder, particularly amongst those most affected by climate change.
Cultural and historical sites can be lost due to sea-level rise, extreme weather events, and other environmental changes. These impact on peoples cultural identity and communal heritage.
We could reach a time of feedback loops and tipping points that amplify warming and cause potentially irreversible damage. For example, melting permafrost can release large amounts of methane, which is a potent greenhouse gas. One action acts as a flywheel for the other.
And then there is societal unrest and inequality: The uneven distribution of climate change impacts can exacerbate existing social inequalities, leading to increased poverty, social unrest, and political instability. Disadvantaged communities and countries are often more vulnerable to climate change and have fewer resources to adapt, deepening the divide between the "haves" and “have-nots”.
All of this can come back to bite us.
But there is more. At the City level the real estate industry itself could be impacted by another set of potential consequences. Such as an increase in flooding and storm surges causing significant property damage, increased insurance premiums, and decreased property values in flood-prone areas.
Urban heat islands can develop that tend to have higher temperatures than surrounding rural areas due to the concentration of built surfaces and human activity. These can lead to higher energy demand for cooling, increased air pollution, and potential health risks for residents.
Recent examples include the Western North America heat dome of 2021, Tokyo in 2020, Melbourne in 2019, and Karachi in 2018. All experienced extreme and persistent temperatures and hundreds of fatalities.
We’ve already mentioned water scarcity but droughts and reduced freshwater availability due to climate change can strain water resources in cities, leading to increased water costs and potential restrictions on usage.
This can impact the development and management of real estate properties, particularly in water-intensive sectors like landscaping, agriculture, and industry.
Intense heat can also highlight infrastructure vulnerabilities such as ageing transportation networks, water and sewage systems, and energy grids.
That simply cannot cope.
Increasingly real estate developers and investors may need to factor in the costs of upgrading or adapting infrastructure to cope with this.
Another second order impact can be changing demographics as people migrate to less vulnerable areas or seek to escape the negative effects of climate change.
Think about at risk coastal areas, or agricultural land in ‘overheating’ regions.
Or areas lacking in resilient and adaptive infrastructure.
Over time, people, in potentially huge numbers, could be on the move from all such places.
Anyone with long time horizons needs to think hard about what real estate you buy or sell. There’s very much winners and losers here. There are areas that’ll benefit greatly from climate change. Or at least relatively so.
Cities are bound to react with regulatory changes and incentives. They may implement more stringent building codes, zoning regulations, and incentive programs to encourage energy efficiency, resilience, and sustainability in the built environment.
Real estate developers and property owners will have to adapt accordingly, but there are certainly going to be many opportunities for sustainable development and retrofitting.
Maybe harder to deal with will be issues around reputation and social responsibility: As public awareness of climate change and its impacts grows, companies and investors may face increasing pressure to demonstrate their commitment to sustainability and climate resilience. This of course can be a bug or a feature - all depends on your assets doesn’t it?
Which segways neatly on to the role of the built environment in global greenhouse gas emissions.
And here is where our problems start:
According to the United Nations Environment Programme (UNEP), the built environment, including building construction and operations, accounts for approximately 38% of total global energy-related CO2 emissions.
Buildings consume around 36% of global energy, primarily for heating, cooling, lighting, and powering appliances and equipment.
According to the IEA (the International Energy Agency):
‘To align with the Net Zero Scenario, carbon emissions from buildings operations need to more than halve by 2030’.
It’s that year again. 2030.
And so far we are doing really badly:
‘Following the easing of Covid-19 restrictions, in 2021 energy demand in buildings increased by nearly 4% compared with 2020 (or 3% compared with 2019), the largest annual increase in the last decade.’
But the sticks have been primed. If we don’t do it naturally then we’ll need to be forced to.
And all across the world there are increasingly big sticks being designed to force significant change.
For example, in New York City there is Local Law 97 which requires large buildings (over 25,000 square feet) to meet certain carbon emissions limits starting from 2024. Buildings that fail to comply will face financial penalties. The law aims to reduce the city's building-related emissions by 40% by 2030 and 80% by 2050.
In the EU, amongst other regulations there are those encompassed in the ‘European Green Deal’ such as increasing the greenhouse gas emissions reduction target to at least 55% by 2030, compared to 1990 levels, and the "Renovation Wave" strategy, which aims to at least double the annual energy renovation rate of residential and non-residential buildings by 2030.
In the UK there is the Climate Change Act 2008 which sets a legally binding target to achieve net-zero greenhouse gas emissions by 2050, with an interim target of reducing emissions by 68% by 2030 compared to 1990 levels.
Also, there is the Minimum Energy Efficiency Standard (or MEES) which sets a certain energy performance standard that increases over time. In April 2023 one level was introduced but this will increase in 2027, and then again in 2030.
Currently around 85% of buildings do not meet the 2030 standard.
Getting there will necessitate upgrading 15 million square feet (1.4 million square metres) of space per annum. Yes per annum. Every single year. And that’s just London offices.
And penalties for failure are going to be high. In the EU they are set by each member country, but in New York they involve meaningful financial penalties, and in the UK you’ll simply not be able to legally rent out your property.
So 2030 really is looking like a brick wall that will be very painful to hit.
If we hit it it’ll bad for the planet, for our society, for our cities, for our businesses, and for our finances.
However, even if these arguments aren’t a good enough reason, there are others, because there is an increasingly powerful causal relationship between building energy efficiency, operating costs, and asset value.
Energy-efficient buildings obviously use less energy which equates to reduced operating costs for heating, cooling, lighting, and other building systems. Which equates to higher net operating income, which equates to higher value.
Avoiding regulatory penalties and obsolescence isn’t a bad move.
Being more in demand likewise. The market already wants, and will pay for, buildings that meet the highest sustainability standards. Aligning with their environmental values and goals is already a priority for the best companies. By 2030 not doing so will make you a pariah.
And of course financing is the strongest argument of all. Investors will not fund, and will not buy, unsustainable buildings. Public institutions are already pretty much unable to do so, but by 2030 will there be any financing available for unsustainable assets, that is not accompanied by massive write downs in value?
Today there are clear green premiums for the most sustainable buildings, but by 2030 these may ease. To be replaced by ever growing brown discounts.
All of which is a massive boon for the PropTech industry. A massive market, a huge problem, and a brick wall of a deadline.
Which goes to explain why, in the US, there will be 20 X the public investment in the green economy this decade than there was in 1990-1999.
Yes, 20X!
And investment across Europe, and the rest of the world is, or will be, growing equally dramatically.
For the simple reason that we cannot fix this problem without technology. Yes we probably need to change our behaviours somewhat but frankly that is unlikely to happen at a really fundamental level. Human nature would get in the way. But we most certainly will adopt new technologies in place of old ones.
Carrots and sticks, and new technology, will save us. Or nothing will.
So we will be seeing huge potential for a wide range of new technologies. Such as:
Passive design strategies. So building orientation, shading devices, natural ventilation, and natural lighting.
Building envelopes: high-performance insulation, windows, and air sealing can minimise heat loss and gain, reducing the need for mechanical heating and cooling.
Adaptive reuse and retrofitting: ‘the most sustainable building is the one already built’. 80% of 2050’s building stock already exists. And it all need decarbonising.
Sustainable materials: timber, recycled steel, and low-carbon concrete
High thermal mass materials: Such as stone or concrete, can help store and release heat, stabilising indoor temperatures and reducing energy consumption
Advanced insulation materials, such as aerogel, vacuum insulated panels, and phase change materials, can provide better thermal performance and reduce heat loss or gain.
Energy-efficient HVAC, lighting, and appliances
Building automation and controls: energy management systems, and smart controls can optimise building performance, monitor energy consumption, and identify opportunities for further efficiencies.
On-site renewable energy generation: Integrating renewable energy sources, such as solar photovoltaics, wind turbines, or geothermal systems, can help reduce a building's reliance on grid electricity and lower its carbon footprint.
Energy storage: Incorporating energy storage solutions, such as batteries or thermal storage, can help manage energy demand, store excess renewable energy generation, and provide backup power during grid outages.
Electrification: Fully electrified buildings lead to reduced GHG emissions, energy efficiency and improved air quality.
The year 2030 is a real crunch point regarding sustainability and real estate. It is, in reality, a wicked problem. It is also probably the single largest opportunity space in technology. Decarbonising the largest asset class in the world, against a timetable that will bite us back hard unless we meet it, is our challenge number 1.