Location, Location, Low-Carbon: How Climate is Changing the Holy Trinity of Real Estate
Before I started working on the energy transition in the United States, I was a young newspaper reporter in my home country of Australia. It was the late 1990s and one of the first places I worked was the paper’s real estate section.
Back then, the cardinal rule for any real estate transaction was simple (and easy to remember): location, location, location.
Call it the Holy Trinity of real estate. But in recent years, things have changed.
Location remains critically important, but for a growing number of real estate firms, so is climate change and speeding up the world’s transition to a zero-carbon energy system.
In fact, by the middle of this decade, I’m confident there’ll be a new trinity that drives value in the real estate sector: location, location, low-carbon.
That’s my prediction after working for a cleantech firm in the real estate sector and talking with some of the world’s top experts in buildings and sustainability.
“I think the world has woken up to the fact that real estate – buildings – represent 40% of carbon emissions,” said Sara Neff, Head of Sustainability for Lendlease Americas, in an interview we conducted over Zoom.
“There needs to be a major focus on decarbonizing the built environment … if any country, state [or] city is going to achieve its carbon targets.”
Lendlease manages a global portfolio of construction projects and real estate assets and has worked on iconic buildings such as the Sydney Opera House and the September 11th Memorial & Museum in New York.
By 2025, the firm has pledged to reach “net zero carbon” by cutting direct and indirect fossil fuel consumption from its buildings “as far as possible” and then using carbon offsets to account for emissions that are harder to reduce in the short term.
By 2040, however, Lendlease plans to reach “absolute zero carbon,” meaning “no greenhouse gas emissions from our business activities.” Or to put it more bluntly: “No offsets.”
But Lendlease is far from alone.
According to Nareit, a professional association representing America’s $3.5 trillion real estate investment sector, “more organizations than ever are making commitments to net zero emissions.” Not only that, real estate investment trusts, or REITs, are starting to “roll up the sleeves to turn commitments into practical plans and impactful actions,” Nareit says.
The motivation isn’t just environmental — it’s financial.
Not “green enough”
In the wake of the COVID-19 and the rise of remote work, tenants in commercial office buildings have more leverage over building owners, who need to find ways to keep their properties fully leased.
Increasingly, those tenants and their employees want to work in modern, energy-efficient, low-carbon buildings. At the same time, there’s rising pressure on local officials to toughen building codes and impose penalties on office buildings that don’t voluntarily make the necessary upgrades.
“Properties that are not ‘green enough’ face the potential risk of steep fines and longer term value erosion,” Nareit has warned.
This finding is backed by research from global real estate juggernaut Jones Lang Lasalle, or JLL, showing tenants and investors will pay a “green premium” for lower-carbon buildings.
Buildings with “green certifications” attract 6% higher rents and 7.6% higher prices when they are sold, according to JLL, which manages 4.6 billion square feet of real estate in more than 80 countries.
On the other hand, “buildings that don’t evolve to meet sustainability standards will suffer financially,” a phenomenon JLL calls the “brown discount.”
“Our buildings failed us”
Competition for tenants is driving this trend, according to Mahesh Ramanujam, a veteran of the low-carbon building movement and former CEO of the U.S. Green Building Council, or USGBC.
“It is huge. Unprecedented I would say,” Ramanujam said in an interview.
The pandemic forced people to look at office buildings and other workspaces much more critically, says Ramanujam, who spent more than a decade at USGBC, the entity that oversees the most widely used green building rating system in the world: LEED.
“Our buildings failed us. Our spaces failed us,” he said.
As occupancy limits and work-from-home requirements forced millions of workers out of office buildings, the U.S. was also struck by a recording-breaking series of major weather and climate disaster in 2020 and 2021, according to the National Oceanic and Atmospheric Administration, and international climate officials issued increasingly dire warnings.
This forced a major shift in U.S. public opinion. “Americans are becoming more worried about global warming, more engaged with the issue, and more supportive of climate solutions,” public opinion researchers at Yale University and George Mason University recently concluded, supporting the findings of other respected polling organizations.
As a result, for many businesses and their workers, their initial concern over health and wellness quickly widened into other problems with building design, including energy use and carbon emissions.
“I really think it got to a boiling point with COVID,” Ramanujam said.
So what does the work of reducing carbon emissions from the building sector actually look like?
To be sure, nobody has got the problem fully worked out, but the broad outlines of the solution are coming together:
1. Cleaner energy supply.
Roughly 75% of carbon emissions from the building sector come from day-to-day energy use, so where that energy comes from matters. Rather than passively wait for big utility companies to fully transition to zero-carbon sources of electricity, some building owners are directly procuring their own clean energy to displace what they would otherwise need from the power grid. To date, those building owners have focused “technologies that really help you maximize on-site renewables,” according to Lendlease’s Sara Neff.
Rooftop solar panels are the most obvious example, but vertical solar panels for the sides of buildings and geothermal systems built below ground are also being explored, Neff says. Meanwhile, a company called Ubiquitous Energy is developing windows that double as solar panels — and has demonstrated the technology in commercial buildings in Colorado, California, Michigan and Ohio. Building owners are also investing in off-site clean energy projects, following in the footsteps of large tech companies like Salesforce and Microsoft which need large-scale electricity sources to feed their power hungry data centers and corporate offices.
2. Smarter energy demand.
Energy efficiency is a core strategy for building owners looking to reduce their carbon emissions. For example: Between 2012 and 2018, the share of commercial buildings using highly efficient LED lighting surged from 9% to 44%, according to data released last year by the U.S. Energy Information Administration, or EIA. After lighting upgrades, tuning up or replacing heating and cooling systems usually comes next, often with the help of smart thermostats.
But smarter temperature controls are just the beginning, according to JLL’s Global Head of Sustainable Operations Christian Whitaker. Building management systems that control lighting, temperature, ventilation and other systems are moving beyond static programming into artificial intelligence and machine learning, Whitaker said in an interview over Zoom.
Virtual engineering platforms like Hank, which was recently acquired by JLL, can plug into a building’s management systems and carry out “real-time learning about what's functioning and what isn't and how to optimize those systems,” Whitaker said. This kind of property technology, or proptech, could be “the biggest thing in building operations from an efficiency improvement standpoint” since the introduction of digital controls, he said. “I’m really excited about the application of machine learning.”
3. Stronger thermal barriers.
Even the smartest, most efficient heating and cooling technologies will work too hard and waste too much energy if the thermal envelope of a building — the walls, floors, doors, roof and windows — isn’t strong enough. A weak thermal envelope allows too much heat transfer inside during summer and too much heat transfer outside in winter, driving up energy use and utility bills.
Some technology providers, such as SolCold and Huntsman Building Solutions, are focused on exterior and interior coatings that block heat transfer through walls and roofs much more effectively than traditional insulation. But there’s also a renewed focus on the so-called weakest link in the thermal envelope — windows.
Advanced window technologies include low-emissivity, or low-e, coatings that reflect heat energy back outside in summer and back inside in winter, along with dynamic or “smart” window products that automatically tint or darken with the help of small electrical currents. There’s also a push to increase the use of triple-paned windows, which are commonplace in Europe, here in the U.S.
Much of this work is being coordinated through a public-private initiative, the Partnership for Advanced Window Solutions. “Our goal is to aggregate market demand, reduce product cost, quantify benefits, and accelerate the adoption of advanced windows and window attachments,” said Robert Hart, Principal Scientific Engineering Associate at Lawrence Berkeley National Laboratory, one of the founding members of the advanced window partnership.
Beyond the energy and climate implications, window energy waste also costs building owners and tenants real money. According to data from Berkeley Lab and the EIA, the annual cost has climbed from $40 billion to more than $45 billion over the past four years. Importantly, this estimate of energy waste doesn’t account for recent inflation or the market shocks triggered by Russian President Vladimir Putin’s invasion of Ukraine.
4. Green materials for new buildings, deep retrofits for old ones.
About 25% of carbon emissions from the building sector come from construction materials themselves. The majority of this “embodied carbon” is attributed to the manufacturing of just two products: Concrete and steel.
The primary ingredient of concrete is cement, which generates direct carbon emissions when it’s being made. Like many other industrial products, the manufacturing process for cement also relies heavily on energy from fossil fuels.
This has prompted the development of new concrete products that don’t use cement. For example: Late last year, construction firm Wagners announced the global expansion of its Earth Friendly Concrete, or EFC, product line into the United Kingdom and European Union after years of use in residential, commercial and infrastructure projects in Australia.
Instead of using cement to bind the concrete together, EFC uses an alternative made from recycled industrial waste products, cutting the product’s embodied carbon by more than 70%.
Meanwhile, other innovators in the concrete sector want to keep cement but capture and store the carbon emissions produced during the manufacturing process. Arguably the highest profile firm in this space is CarbonCure, a startup supported by tech billionaires Bill Gates and Jeff Bezos. The firm’s technology captures carbon from the cement-making process and injects it back into wet concrete, where it remains stored after the concrete cures.
As for steel, a similar dynamic is playing out: Using alternatives when they are feasible while at the same time finding ways to make the manufacturing process less carbon intensive.
Some developers are turning to engineered wood products that are layered, compressed and laminated to dramatically increase their strength. These “mass timber” products have already been used as steel substitutes in projects like the 8-story Carbon12 building in Portland, Oregon, and the 25-story Ascent building in Milwaukee, Wisconsin.
When it comes to steel’s embodied carbon, a vast array of potential innovations are being explored.
For example: Researchers at the Payne Institute for Public Policy at the Colorado School of Mines (where I’m a contributing editor) just completed a systematic review of the steel and iron sector. The experts at Mines, in partnership with researchers from the UK, Denmark, South Korea and the United Arab Emirates, identified more than 80 “potentially transformative technologies” that could deliver “energy and carbon savings, financial savings, and other environmental and public health benefits.”
There is also a growing awareness in the real estate sector that low-carbon innovations developed for new buildings can be used in upgrades to existing buildings. In fact, these “deep retrofits” may do more to reduce emissions in the long run than the construction of new green buildings.
“Net zero by design is not limited to new construction, as 80% of all buildings that will exist in 2050 already exist today,” the World Economic Forum concluded in a January 2022 report on accelerating carbon reductions from the built environment. “Retrofit and refurbishment projects are critical in the movement to decarbonize.”
5. Measure and show your work.
Reducing energy bills and cutting emissions have clear economic and environmental benefits. But how do you quantify those benefits in order to determine which initiatives work better than others and offer the best return on investment?
Not only that: Companies with large real estate holdings face growing pressure from investors to set and achieve environmental, social and governance, or ESG, benchmarks. And don’t forget: Tenants are more interested than ever in the energy and environmental profiles of the office spaces they rent and local governments may be contemplating or already enforcing new building performance mandates.
That’s where firms like The Footprint Company, Enertiv and Persefoni enter the picture. They offer building owners and real estate investors a suite of digital tools to measure progress towards carbon-reduction targets and other environmental goals.
Blockchain technology, best known for its cryptocurrency applications, is also being used by developers like Rubix and STRATO to increase accuracy and trust in climate-related data from building owners and many other businesses.
Shaping the future
So much has happened in real estate sustainability in a relatively short period of time and building owners, investors, tenants and other stakeholders are trying many different approaches. There’s no single agreed upon formula for reducing carbon emissions from the real estate sector — although it’s hard to imagine a “one-size-fits-all” solution being effective or desirable for such a diverse sector of our economy.
Some may see uncertainty as a reason to wait a little longer before taking action. But some of the biggest players in the real estate sector see an opportunity to lead and actively shape the fundamentals of their industry for decades to come.
Nobody is going to hand the real estate sector a “perfect” fix or “one technological solution that's going to deliver the panacea of net-zero carbon,” JLL’s Christian Whitaker advises towards the end of our interview. Instead, it’s “a patchwork quilt of strategies, technologies, systems, design thinking [and] space optimization” that real estate owners, investors and tenants can put into motion today.
“The technologies, the strategies, the optimization tools to reach our net-zero targets: They’re here, right, they exist today,” Whitaker says. “So there's really no reason — no good reason — to be on the sidelines waiting.”
Simon Lomax is an independent consultant based in the Denver Tech Center and an editor-at-large with the Payne Institute for Public Policy at the Colorado School of Mines. He is a former climate reporter for Bloomberg News with more than 20 years of experience in journalism, public policy and cleantech in the United States and Australia.
The Institute for Science & Policy is committed to publishing diverse perspectives in order to advance civil discourse and productive dialogue. Views expressed by contributors do not necessarily reflect those of the Institute, the Denver Museum of Nature & Science, or its affiliates.