Built environment sustainability
Sustainability is one of the key trends that will drive change in Real Estate over the next 20 years. The built environment contributes about 39% of global carbon emissions, meaning Real Estate has a key role in achieving a sustainable future. Generally speaking, there are two ways to categorise the greenhouse gas emissions associated with buildings: operational carbon, understood as the energy-related emissions produced during a building’s operation, and embodied carbon, the emissions associated with construction materials and processes over a building’s life cycle. It is important to consider both aspects to achieve the goal of net-zero CO2 emissions during the life of the building.
The real estate sector plays an essential role in reducing the carbon footprint
Source: Global Alliance for Buildings and Construction, 2021 Global Status Report
JLL’s commitment to climate action
Achieve net-zero carbon emissions by 2040. – Reduce emissions by 51% by 2030. – Offsetting no more than 5% of 2018 reference level.
The road to carbon neutral/zero carbon in real estate
Adoption of net zero carbon emissions or climate neutrality will double by 2025
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Why is sustainability important in the retail sector?
Retail is one of the real estate sectors facing the biggest challenges on carbon emissions as activity density linked to asset performance is high. Reduction efforts have, however, been high in this sector and results are beginning to become visible. Therefore, retail real estate has some of the greatest risks and opportunities, with some estimates showing emissions need to reduce by 95% from current levels.
When the pandemic hit in 2020, many thought this new crisis would divert attention away from climate matters. In fact, the opposite appears to have happened. This focus is particularly visible with investors and the reallocation of capital towards green investments accelerating.
In terms of social responsibility, retail landlords have publicised the benefits of their schemes for many years, rightfully claiming that the curated public spaces, employment opportunities and community facilities provided by retail schemes improve the local area. With an increasing focus on issues such as mental health and closing inequality gaps there is now a greater focus on the impact of property investment beyond its impact on physical space.
The growing awareness and importance of ESG amongst all stakeholders means that all assets – no matter where it is or what type – will be impacted by long term sustainability challenges.
Action Plan for Net-Zero Carbon Emissions Buildings
Source: Green Building Principles: The Action Plan for Net-Zero Carbon Buildings, World Economic Forum in collaboration with JLL, October 2021.
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The global report Decarbonising the Real Estate Environment, produced by JLL, which analysed the responses of 647 senior managers (tenants and investors) reveals the following:
Two-thirds (68%) of tenants say reducing carbon emissions is currently part of their corporate sustainability strategy.
56% of tenants state that reducing carbon emissions is being specifically addressed as part of their corporate real estate strategy. Another 29% expect it to be addressed by 2025.
Investors with sustainability strategies will be better-placed to address their tenants’ future goals.
According to our global study*, 83% of tenants and 78% of investors interviewed agree that climate risk poses a financial risk.
From raising capital to buy/sell decisions, deeds, and financing, among others, climate change will affect every stage of an asset’s life cycle. It is the subject of increasingly common debate among investors.
* Responsible Real Estate: Decarbonizing the Built Environment, JLL, June 2021.
Commercial Real Estate: expected effects of greater exposure to climate risk on the performance of real estate assets
Source: JLL Research
The challenge for Retail
Occupiers
As retailers typically trade in physical product, there can be a great deal of emissions embodied in upstream and downstream activities such as manufacturing, transport and distribution, waste generated in operations and end of life treatment of sold products. For a retailer, it can be more efficient to focus on these areas as a greater proportion of their carbon footprint can come from these activities as opposed to their physical retailing unit.
For example, fashion retailer H&M has estimated its upstream and downstream emissions make up 99.5% of its environmental impact, with their physical stores accounting for just 0.5%.
This can result in a perceived level of apathy from occupiers towards landlords when it comes to paying a premium for sustainable space. Despite this focus on improving the most wasteful elements of their business, of the 1,422 companies who have publicly signed up to meet science-based sustainability targets, only 83 (5.84%) of these are classified as retailers*. * Targets, S. B. (2021, May 13). Science Bases Targets. Retrieved from Science Bases Targets: https://sciencebasedtargets.org/companies-takingaction#table
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Buildings
In terms of the physical space and operational efficiency, the European Union’s Carbon Risk Real Estate Monitor (CRREM) has published data on typical historic energy usage on a kilowatt hour per square meter (kWh/ m²) basis. It shows that in 2012 the typical kWh/m2 of a retail park unit was 80-150 with shopping centres being significantly higher at 350-450, which is the second highest of any asset type, behind hospitals. CRREM suggests that in order to achieve net-zero carbon retail parks and shopping centres will need to achieve average reductions of approximately 78% and 95% respectively.
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The CRREM 2050 target of 21 kWh/m² to achieve Net Zero Carbon is near to impossible for Shopping Centres even with investment in state of the art retrofitting, and would require extensive behaviour change by tenants to even approach this level. A considered strategy of both specification change and managing tenant and consumer behaviours will be necessary to make meaningful progress. Many assets may have to target Carbon Neutrality instead, with the use of carbon offsets. The cost of offsetting is projected to increase over time with the current cost of approximately £20 per tonne predicted to at least quadruple to £80 per tonne by 2050.
When viewed in the broader context of the structural changes ongoing within the retail sector, it can be seen how vital it is to incorporate impactful sustainability initiatives into the management of retail assets to ensure a product is provided which is compatible with the future landscape of retail and the broader values of its stakeholders.
Online Retailing
The increase in popularity of online retailing is an area for review when it comes to reducing the carbon footprint of many retailers. Whilst it is an area which still requires more research, an argument can be made that physical stores can provide a more efficient way to sell retail products over online alternatives. Data from third-party returns processing firm B-Stock shows that the percentages of returns from online sales is approximately 30% compared with 10% of in-store sales whilst a US study by retail logistics company Optoro found that ca. 2.25 million tonnes of retail returns end up in landfill every year.
Even with returns removed from the picture, physical stores provide an efficient single location for the bulk transport of goods. Research by the Sequoia Partnership shows that up to 11 times more fuel is required to deliver a single product to a customer’s house from a distribution centre by traditional delivery van, including missed deliveries, compared with a delivery to a store. Whilst a consumer may visit the physical store in a car, this impact is minimised through the ability to return and purchase multiple goods in a single trip. The impact could be minimised further if the retail centre provided facilities for the recycling or donating of products, bags, hangers and packaging.
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Partnerships are essential to accelerate the race to zero emissions
Aligned goals
Collaborative and coordinated
Regulation, incentives, coercion and advocacy
Technology and innovation
Transparency and measurements in real time
Data-sharing
Multiple business cycles
National and local
Large and small actors
81% of occupants and investors agree that a strong partnership between cities, tenants and investors will be critical to driving the net-zero carbon agenda.
Source: Responsible Real Estate: Decarbonizing the Built Environment, JLL, June 2021.
A cyclical and iterative approach to collaboration
Value creation
Current and future market regulations and investor and tenant ESG requirements
are affecting asset values. Hence, more sustainable assets acquire greater value based
on the following factors:
Value erosion
Minimum sustainability requirements will continue to rise, putting pressure on
governments to meet the UN's 2030 Sustainable Agenda and the Paris Agreement
commitments. Properties that do not adapt in advance to applicable regulations
will experience decreased investor interest in the coming years, with a negative
impact on asset values.
Demand
Properties that adapt better to ESG criteria will attract higher demand than
those that do not meet the requirements.
Return – Investment
Although it remains difficult to quantify, we are already observing a "green
premium" for properties that meet the most demanding sustainability and ESG
criteria, as well as discounts for those that do not. The trend is clear and seems
likely to accelerate in the coming years.
Finance
Companies that own assets with implemented ESG objectives/strategies have
been shown to find better financing terms and have managed to issue corporate
debt with strong market interest.
How sustainability will impact value in Retail
By Silvia Damiano, Head of Valuations Spain
Retail assets typically have greater margin than other asset classes to improve their sustainability. The ESG commitment aspects of an asset’s operation will be increasingly important to how investors and creditors perceive the risk associated with them. One influencing factor is climate risk, which is becoming more and more synonymous with investment risk.
As minimum sustainability requirements increase and market players set ambitious, time-bound targets to achieve carbon neutrality, retail assets must find innovative, high-impact ways to incorporate sustainability if they are to retain their appeal to investors. These changes are unlikely to immediately raise an asset’s value, but will help protect against value erosion and obsolescence.
A key consideration is how long an asset can retain its investment appeal without significant investment or operational change. Some investors have already announced that they will move their capital to other funds or asset classes if a current fund does not have a GRESB 4 or 5 or Net-Zero Carbon by 2030 certification.
No study of the impact on value would be complete without considering the role of e-commerce and its influence on increased carbon consumption. The rise of online sales is an area that is fundamental to many retailers’ attempts to reduce their carbon footprints. The drive to zero carbon emissions could favour the physical store becoming part of the solution, as the price of convenience becomes too high and the click-and-collect model becomes the norm.
The retail sector has an important role to play in a low-carbon economy. There is a great deal of work to do in terms of both environmental and social factors, and much room for improvement. The main players in the market are already showing interest and seeing the long-term benefits of acting and investing today. For the time being, the financial benefits are to a large extent protection measures against value erosion. But we believe that in the future the premium generated by retail assets’ environmental and social responsibility will grow and become substantial.
This is perhaps truer for retail than for other real estate sectors, as the greater challenges retail faces mean not all assets will be able to improve to the required levels. This will reshape and define what we call ‘prime retail’. Of course, logically, if all retail were able to achieve the same certification and compliance levels, this would become the new norm, making any premium disappear.
At JLL we believe sustainability is a cornerstone of current valuations and we work with our clients to understand their goals and provide leading, personalised advice to ensure they achieve their ambitions.
By actively promoting the use of DCF methodology in the valuation of all retail assets worldwide, JLL can start modelling the upward potential of many of these initiatives.
How will technology impact the sector?
Impact of technology on the built environment
The need to reduce carbon emissions and create more resilient cities that support the health and well-being of citizens and the workforce, as well as other variables like demographic change and consumer preferences, demand the ability to handle these changes at both building and city levels. The future of technology in the real estate sector will be conditioned by all of these key factors, which are already influencing the current environment and will shape the future.
The COVID-19 pandemic has accelerated
several of these trends, including security, telecommuting, the digitalisation and automation of processes, and sustainability. In response, businesses are being prompted to explore new solutions. Taking advantage of developments in IoT connectivity and artificial intelligence over recent years, the best placed technologies will be those that enable automation and address the real needs of companies and governments, making clear improvements that can be integrated with existing systems or replace them with comprehensive solutions.
Several of these issues will continue to evolve and shape the future of how technology interacts with the built environment:
Data, analytics and automation
Technology platforms are underpinned by data, but at present much data remains unstructured and unusable, raising the importance of focussing on business architecture and end-to-end integration. Data and their analysis encourage automation and will drive improvements in the real estate sector, from administrative paperwork and financial structure to portfolio strategy and even construction techniques. The massive increase in data collection facilitated by new technologies will at the same time demand cybersecurity, privacy and transparency from companies and governments.
Sustainability and well-being
The focus on how the real estate sector should help reduce carbon emissions and create more resilient cities will remain key over the coming decades. New regulations have come into force and are increasingly common for both new construction―for example, the EU Directive on the Energy Performance of Buildings, which requires all new buildings to consume almost zero energy―and existing stock, such as New York’s Climate Mobilization
Act, which imposes carbon footprint reduction targets for all buildings over 2,300 sqm.
These goals will require significant change in the adoption of technology, which will cover the whole spectrum of the industry, from urban planning to building design, new construction techniques and advanced energy efficiency management. The pandemic has also highlighted the real estate sector’s impact on health and welfare. From ensuring that buildings are clean and have adequate filtering to the potential impact of design on subjective well-being and productivity, and providing access to inclusive spaces and services.
This means rethinking how design and functionality can support tenants’ health and increased understanding and communication between designers, building owners and users, as well as greater capacity to monitor health metrics and provide tailored experiences.
Engagement, personalisation and experience
As institutional Real Estate increasingly shifts to an user experience-oriented model, technologies support tenant and consumer attraction and retention, along with personalisation: from office personalisation applications to consumer participation in 3D experiences and services for residential tenants. All of this will be crucial to meet expectations and maintain performance.
Infrastructure and design
Advanced design techniques like BIM (Building Information Modelling) remain at a nascent stage of development, but have the potential to radically improve the functionality and longevity of buildings as they mature and common standards are developed. Combining advanced design techniques with urban planning and smart city infrastructure, as the technology for digitally connecting buildings to the urban fabric evolves, it also holds the promise of improving the way cities are planned and managed, especially when it comes to climate impacts and resilience.
In-store technology advances
Adopting in-store technology will drive sales and increase individual margins. A better understanding of consumers’ in-store buying habits will benefit retailers' long-term commitments to individual stores.
Examples of in-store technology
Smart changing rooms
The pandemic is accelerating their adoption
They offer shoppers a comfortable, secure fitting experience
They increase conversion rates, allowing more products to be displayed and improving staff productivity
Click & Collect machines
Shoppers prefer to have choice.
60% of buyers use the Click & Collect service;
35% of those go on to make additional compulsive purchases.
Click & Collect machines are 80% more efficient than employees
Self-service checkout
49% of shoppers say they only use self-service checkouts.
41% of shoppers say long waiting times would deter them from making a purchase.
Self-service checkouts free up space and employees
Share of automated retail (% of total stores worldwide)
***LINK NEEDED **** Please click here to see the article on our JLL insights homepage. This article is based on the ‘Spain Retail Annual Report 2021 and outlook 2022’ and the ‘Valuing retail in its global journey to Net Zero Carbon’ report. ***LINK NEEDED ****
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