AgentCOVID-19Newsletter

The COVID-19 pandemic: an “accelerator of existing trends”

The real estate industry is tackling the challenge of a cyclical downturn juxtaposed with the long-term consequences from the disruption caused by COVID-19, and how the environmental, social and governance (ESG) agenda is becoming increasingly important.

A report by PricewaterhouseCoopers (PwC) and the Urban Land Institute (ULI) highlights a clear global narrative of COVID-19 as an “accelerator of existing trends”—such as digitalization and online shopping—while at the same time hugely reinforcing the real estate industry’s environmental, social, and governance (ESG) agenda. More companies than ever before are putting climate change and decarbonization strategies at the heart of the way they do business as they respond to the pressures of the pandemic.

The industry leaders canvassed for the annual Emerging Trends in Real Estate: Global Outlook report are hopeful of a consumer-spending-led economic recovery feeding through into an uptick in activity in the second half of 2021. But much will depend on the rollout of the vaccine and an easing of lockdown restrictions.

Unprecedented levels of fiscal and monetary stimulus threaten market volatility, and the emergence of stock market bubbles and renewed inflationary pressure in the U.S. and Europe are concerns for real estate leaders. Despite the risk of greater volatility, the loose monetary environment is keeping interest rates low for the time being and making the yield spread for real estate hugely compelling to investors compared to other asset classes.

Since the start of the second lockdowns in autumn, lenders have adopted a far more cautious approach to real estate compared with equity investors. While banks were generally supportive of business at the outset—invariably at the behest of governments and central banks—lending criteria have become tougher. There is a wide expectation that distressed debt will increase once the government support packages end, although it is considered unlikely to match the levels of distress seen after the global financial crisis.

Given the pressure on occupier markets, the report speaks about “a bifurcation in pricing” between in-favor sectors
like logistics that have provided stable income during the pandemic and those sectors that have been hardest hit, such as hospitality and parts of retail. Residential is also in favor, with investors seeing favorable supply-demand dynamics, which make housing a prudent defensive play for the foreseeable future, but the outlook for the office sector is altogether more difficult to predict. The report suggests that the impact of the pandemic on offices might be lower than widely assumed, and employees are expected to eventually want to return to the office albeit in more of a “hybrid” working model than in pre-COVID times. Also, in Asia, not much long-lasting impact is expected given corporate culture and relatively small living spaces in Asia’s major cities, which are expected to lead to a more consistent return to office working.

The overriding theme from interviews conducted for the study is that the industry is looking beyond occupancies and returns, and it is starting to address its wider responsibilities. A growing focus on decarbonization in the real estate industry in the last 12 to 18 months has been driven primarily by providers of finance and the biggest tenants, but also by climate change becoming more tangible in the form of more frequent extreme weather events.

The main takeaways from the interviews point to a daunting amount of complexity in the development, ownership and management of real estate, which makes coming up with an effective strategy difficult even for the largest companies, let alone the execution. Currently there are no common definitions on what “net-zero” means, and whether it only relates to the carbon emissions related to the operation of the building, or also the “embodied carbon” that’s emitted during production and transport of materials and building construction.

The profusion of certifications, standards, targets and terminology creates the potential for “green-washing,” which
is defined as giving the appearance of decarbonizing for reasons of brand and to attract capital, while actually focusing on only part of the story. To avoid greenwashing, the alignment of goals and unprecedented collaboration between all stakeholders, including developers, construction companies, investors, tenants and the public sector, is key: “Any certification or net-zero standard that does not put embodied carbon front and center of its thinking risks sending the real estate industry down the wrong path, stifling innovation in the areas where it is truly required, and diverting funding to initiatives that will not be that impactful in reducing carbon emissions,” the report states.

ULI global CEO Ed Walter comments: “However acute the economic impact of the pandemic, the real estate industry recognizes that the long-term impact of climate change will be greater. Few have fully got to grips with the challenge, but skills and innovations are spreading through the industry, and the Urban Land Institute is playing a key role in sharing of knowledge and best practices.”

The interviews reveal an industry that is alive to the fact that stimulus will need to be repaid, the increasing importance of health and wellbeing and ESG regulations will be tightened. But this comes at considerable cost, and lead-times are significant for innovation to occur and changes to be implemented into supply lines. The vaccine alone will not take
away the pain of impending reforms.

Craig Hughes, global real estate leader, PwC, said: “While many eyes are focused on the economic recovery, we should not underestimate the structural impact of this crisis, following the dislocation across many industries and society. It is about more than recession and rebound, as we won’t go back to how it was before. ESG factors are in laser focus including an increased sense of urgency to decarbonise.

“There remains a daunting amount of complexity in the development, ownership and operation of real estate,
which makes coming up with an effective strategy vital. Owners, occupiers and all other stakeholders in the real estate value chain will need to work together, if the industry is to play its part in reversing climate change and adapting to a post-pandemic world.”

In a chapter focusing on decarbonization, the report advises a range of responses:

  • Assuming around 80% of the buildings standing in 2050 have already been built, making them energy efficient rather than developing new buildings would have a huge impact on meeting net-zero carbon goals.
  • Complexity in ownership and management of real estate requires developers, owners, suppliers, advisers, customers, local and national governments and international bodies to collaborate on common goals and strategies.
  • A change in valuation methodology to take account of retrofitting costs would force change, and would include modification to industry best practice. Doing so could require changes from the regulatory bodies that govern how valuations and appraisals work in different countries.
  • Net zero is fast becoming the most important standard for buildings in terms of climate change and decarbonization.
  • Tenant behavior changes to include embodied carbon when assessing net-zero targets will massively reduce the real estate industry’s incentive to develop new buildings.
  • Green leases can be used to incentivize tenants to switch to renewable energy sources and reduce their own energy consumption.

While about 28% of the world’s emissions come from building operations and about 11% from construction,
74% of the carbon emitted during a building’s life cycle comes from its construction and demolition, according to the UN and US Energy Information Administration. Given the proportion of carbon emissions coming from the built environment, regulation of real estate by city, regional and national governments is expected to accelerate. The report cites New York’s Local Law 97, Los Angeles’ Green New Deal, the UK’s energy efficiency standards and Germany’s carbon tax on commercial buildings.

In France, new legislation is proposed to make landlords and tenants equally responsible for the energy consumption of a building. In the Asia Pacific region, tougher regulation of real estate in China and Singapore is also expected to follow a recent announcement of net-zero targets. Investors are increasingly conscious of the risk of “stranded assets” that cannot be brought into line with regulations, and for which there will be no buyers or occupiers. This is already starting to show an impact, with the general view that greener buildings are increasingly being seen as more saleable.

Most Popular Articles

Real estate tech profile: Growing a business with Scout 

Becoming the mayor of your geo-farming neighborhood has, for a long time, been conducted in very much the same way — with door-knocking, direct mail and luck. Technology has started making inroads to opening conversations, but there was still a gap filled mostly with just-listed and just-sold postcards. Truly being able to reach the consumer […]

Nov 26, 2024 By

Latest Articles

Trading money for time is the key to hitting your annual sales goals 

Troy Palmquist offers strategies to help you leverage your resources and create more time for the things that matter most right now Like many agents, you may have spent last year retrenching, scaling back, working on systems and processes, and diving deeper into your database. Now, the action plan starts to take place to hit […]

Dec 06, 2024 By