Why having low-carbon buildings also makes financial sense
Electrifying buildings will be key to achieving a low-carbon future. Image: Getty Images/iStockphoto
- Reducing emissions from across real estate is critical for a low-carbon economy and the time to act is now.
- As well as greening the grid, improving buildings' energy efficiency is key to both decarbonization and reducing operational costs.
- Businesses that prioritize on-site clean energy and energy efficiency are the ones that stand to benefit the most in years to come.
As we hit the mid-point of a decade in which reducing carbon emissions is critical, companies now fall into two increasingly separate camps on decarbonizing their real estate.
The first is waiting for the grid to go green to benefit from the surge in renewable energy – and leave buildings to get on with business as usual. It’s easy to see why some companies find this more low-effort approach appealing.
Many cities are making progress on the amount of renewable energy on local grids as forward-thinking municipal governments race to make good on their own net zero targets. Take Seattle, where the energy grid is powered by 80% clean energy or Paris, which relies on fossil fuels for just 8% of its electricity.
Make no mistake; a clean grid is both an essential part of a low-carbon future and an important way to improve energy security. But it does not address the waste caused by energy inefficiency. Building operations are a big part of the problem which, if addressed, can save business billions of dollars.
Electrifying buildings has also been gaining momentum in recent years. US cities like Washington, DC and Seattle have the highest number along with the likes of Sydney and Melbourne. This isn’t automatically good news for a low-carbon future.
Our research shows that the link between electrification and lower emissions in buildings isn’t always clear. Reducing energy demand is the quickest way to save money and decarbonize.
Furthermore, simply electrifying older buildings in cities where the grids are playing catch-up can cause grid capacity issues. As the supply increases, so does the need for energy resiliency as increased electricity demand, particularly from artificial intelligence (AI) data centres, laboratories and onshore manufacturing, takes grid pressure to new highs.
Prioritizing energy efficiency in buildings
Contrary to the wait-and-see approach, some building owners and occupiers are taking action to reduce operational emissions, in addition to electrifying their real estate. Effective energy efficiency strategies, implemented in a timely way, are a crucial part of cutting emissions in the long-term to meet corporate net zero targets.
Some of this drive is down to incoming local regulations. More than 40 US cities have committed to passing a Building Performance Standard (BPS) by 2026 or earlier.
Meanwhile the European Union agreed in December 2023 to reduce the emissions and energy use of buildings by developing minimum energy performance standards. This means 16% of the worst-performing buildings will need renovating by 2030 and 26% by 2033.
But in current market conditions, it’s the economic benefit that makes a stronger case for action for investors and corporate tenants both in the short and longer-term. The investments made on reducing emissions translate into lower operational costs because low-carbon buildings are simply cheaper to run.
Light to medium building retrofits, some of which can be carried out by tenants or at least in conjunction with landlords, can unlock between 10% and 40% in energy savings, depending on property type and retrofit level.
Our research based on 46,600 buildings across 14 markets covering 5.9 billion square feet of commercial space shows this would unlock $2.9bn to $11.4bn in annual energy savings. This would rise to $16.8bn if whole building retrofits were achieved.
Better energy efficiency can reduce volatility
Better energy efficiency can also mitigate challenges from energy price volatility and reduce the risk of overwhelming ageing grids, especially during peak times or adverse weather events stressing heating and cooling systems.
As heavy energy users, data centres, laboratories and healthcare could particularly benefit. Some of these sectors such as laboratories are already very sophisticated in their environmental, social and governance strategies.
While they are significantly more energy intensive than data centres, their emissions intensity is only marginally higher, indicating that they likely use clean energy across their operations. Yet mechanical, electrical and plumbing (MEP) retrofitting to improve energy efficiency could cut energy costs by $4.75 per square foot.
Energy efficient space is a big draw for today’s corporate tenants with their own carbon commitments to hit and an eye on lower operating costs. Our research shows there’s already shortage of space that’s only going to become more pronounced.
In 21 cities globally, 30% of projected demand for low-carbon office space will not be met by 2025, leading to a potential gap exceeding 70% by 2030, given the current quality of existing stock and the development pipeline.
This lack of supply extends beyond offices to all asset classes, with increasing demand pushing up the price of space in a counter-cyclical way. It’s creating a medium-term opportunity for investors who create low-carbon buildings now in terms of green premiums for rent and sale values.
At present these are largely judged on a building’s green certifications but as tenants and buyers increasingly zero in on their carbon targets, the focus on energy and emissions performance will grow.
Getting to low-carbon buildings
Many of today’s buildings need to become smarter and more efficient to contend in a low-carbon world – and reap the economic, environmental and reputational benefits that come with it.
Yet the biggest challenge to achieving this is unlocking the sustainable finance required. The cost of retrofitting the office stock alone across 17 major countries is conservatively estimated by JLL to exceed $3 trillion. More private and public sources of capital and debt are urgently needed, going beyond the green bonds, loans and funding programmes currently available.
What's the World Economic Forum doing about the transition to clean energy?
The US Inflation Reduction Act, one of the world’s most ambitious subsidy programmes, shows it’s possible to decarbonize in ways that make economic sense and drive tangible progress towards decarbonization goals.
We’re entering a new era of low-carbon buildings. Companies that take the initiative to prioritize energy efficiency and on-site clean energy now are the ones that stand to benefit the most in years to come from lower operating costs, secure energy supplies, resilience to incoming regulations and alignment with employee expectations on sustainability. In this case what’s good for the planet is equally good for their bottom line.
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