Matthew Brooker, National Head of Commercial, RLB UK
I recently celebrated 34 years at RLB. This anniversary coincided roughly with the BCO conference, held in Dublin earlier this year where many key stakeholders in the commercial sector gathered to talk about the challenges, and opportunities ahead for landlords, occupiers, investors, and all those in the commercial ecosystem. As I reflected on both my time at RLB to date and the key themes at BCO, there was one dominant takeout for me – how the evaluation of commercial buildings is changing at pace, with Environmental, Social and Governance elements (ESG) drivers behind this change.
Physical risk
We should all be firmly aware that the climate crisis is not just looming but is and has been happening with comment by Professor Robert Watson, of the Tyndall Centre for Climate Change that he was ‘pessimistic’ about being able to limit the global average temperature to 2°C. It is difficult to dismiss a connection between this and the fires we have witnessed this summer burning across Greece and Southern Europe as well as most recently extreme weather events in the Arizona desert that I feel support his pessimism. But even if we successfully hit net zero and limit warming to 1.5C, avoiding the worst impacts of climate change, even with that low level of warming we will still be on track for up to $54 trillion in physical damage from climate change by the year 2100 from storms, fires, flooding, drought, subsidence and other hazards. The consequences of this impact on our commercial estates are huge and we need to be not just thinking, but acting now to incorporate elements such as ventilation, flood, heat, and fire protection into our estates.
Risks need to be addressed through built environment solutions and strategic plans put into place to ensure our built environment is future fit in this new world where climate impacts will be the norm. The Chartered Institution of Building Services Engineers (CIBSE) has provided an overheating criteria guidance and an adaptive thermal model to define thermal comfort and design overheating criteria (TM52). Likewise the UK Green Building Council has created a framework for measuring and reporting climate-related physical risks to build assets and the World Green Building has outlined principles for resilience in the built environment.
Transitional risks
However, with the increased physical risk comes a financial, economic, and regulatory risk from climate change or the ‘transition’ risks. We are already seeing the introduction of environmentally positioned governance with for example, the MEES Regulations that came into effect from 1 April this year in the UK that stipulated that all commercial properties need a minimum Grade E EPC rating to make them lettable. According to some estimates this would mean that 10% or 20million sq.ft of London’s office space is already potentially unusable once current tenancy agreements expire. A recent Deloitte survey suggested that up to 80% of London’s offices now need upgrading to meet these new energy efficiency regulations which will look to tighten further in 2030 to a minimum EPC requirement of B by 2030 and an interim milestone of EPC C by 2027, with BNP Paribas estimating that 50% of inner London commercial stock will be unlettable by 2027 if no improvements are made. Action is needed today, not tomorrow. It gives me cause for concern about how, without institutional change, an already pressured material and labour supply chain will be able to meet this increased regulatory need.
Financialisation
Of course, how buildings will weather the elements in the future and whether they adhere to governance is having a huge effect on their values as an asset within an investment portfolio. Another key driver is the momentum for ESG (Environmental, Social, Governance) performance, whether regulatory, such as EU CSRD (Corporate Sustainability Reporting Directive) requirements in Europe, or voluntary like the GRESB (Global Real Estate Sustainability Benchmark) ESG Real Estate framework or new ISSB (International Sustainability Standards Board) ESG standard. For real estate and the built environment, ESG focus is also driven by financialisation, from private equity to institutional investors and beyond, as portfolios of real estate are increasingly subject to aggregation and creation of investment vehicles. Even when solely owned or traditionally let—the influence of sector financialisaton has been spurring a move on sustainability shifting from Corporate Social Responsibility and a focus on reputation and voluntary action—to ESG—formal sustainability reporting linked to formal commitments in company governance.
Greenspace and transport mode shift
As well as governance and environmental changes, social and occupancy preferences are also influencing the desirability and therefore value of our commercial estates. One such example is the demand from tenants to access parks and greenspaces and convenient commercial ecosystem of shops, public transport links and services alongside their workspace. With less focus on car access and car usage, amenities that promote wellbeing and a work-health balance are being prioritised as well as green amenities that protect against heat and flood risk. An interesting presentation at the BCO by Indy Johar of Dark Matter Labs presented the idea of value created by an environment that as a previously unconsidered and yet tangible factor that should be part of an estates value.
Net zero – crucial role of buildings
And then of course there is the net zero action for both retrofit and new builds, a number one priority for addressing the climate emergency. We know that presently 25%1 of UK emissions are linked to the built environment and 39%2 worldwide with embodied carbon material elements making a large impact (for example, cement production accounting for 8% of global emissions). As we are seeing through the projects we are involved with, many new developments and those being adapted are now looking to green certifications such as LEED, BREEAM, WELL to improve on building performance and deliver reportable ESG credentials. Those buildings that are achieving these certifications are linked to value uplifts, with recent research by Knight Frank estimating that green-rated buildings compared to those without BREEAM or NABERS rating were found to hold an 8-18% sales price premium.
There is no doubt the future of commercial estates is evolving rapidly, and the criteria that we currently apply to value those estates will be influenced or changed by new working patterns, demands and governance. With the value benchmarks becoming more ESG-led, collaborating with fully informed specialists that understand the impact and can initiate solutions that will future proof your estates will be the way commercial estate managers continue to maintain and add value to estates in the decades ahead.
RLB’s Sustainability team provides a full range of sustainability solutions to clients including sustainability, carbon, ESG, social value and accreditation assessment and strategy. For further information, please visit (Smarter Greener Better – RLB | Europe) or contact Heather Evans within the sustainability team.
1 UK Parliament, Building to net zero: costing carbon in construction
2 World Green Building Council, Bringing embodied carbon upfront
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