The United Nations Climate Change Summit (COP26) just concluded, and there was a lot of discussion about cities' roles in the impact of climate change. Given that cities consume more than two-thirds of the world's energy and generate an approximately equal amount of global carbon dioxide emissions, cities are an obvious place to focus decarbonization efforts.
Climate change initiatives are being rolled out across the board -- from major Fortune 500 companies and city planners to real estate operators, real estate investment trusts (REITs), and even Federal policies. While surely positive for the environment, these initiatives could have some negative outcomes in not only the cost of developing and operating real estate moving forward but also in its value. Here's why.
How climate initiatives will impact city investors
Cities house half the world's population and a good majority of its investment opportunities. Any major changes to regulations and incentives within these urban domains can profoundly impact the cost of doing business. Depending on the location and scope of business, initiatives could range from new building codes to insurance premiums rising.
UN Secretary Guterres called for cities to align "procurement, infrastructure development, zoning, urban planning, building codes, transport systems, waste disposal and investments with the Paris Agreement, the New Urban Agenda, and the Sustainable Development Goals." While not every city will adopt every measure, reform is likely on its way. A few items you might see include:
- Minimum heating/cooling standards or alternative energy solutions.
- Increased requirements for water runoff and catchment on commercial properties.
- Rezoning residential to multi-use or commercial to create more walkable cities.
Cities are signing on to climate initiatives
From presidents of countries down to mayors of cities have shown interest in supporting climate change initiatives. The Paris agreement has been signed by 192 parties and holds those parties responsible for lowering global greenhouse gas emissions. Interest, though, for investors can mean talk, or it can mean business.
Financing will be a critical component for putting many of the initiatives discussed in place. At COP26, 450 major banks signed an agreement to decarbonize their portfolios and invest billions to fund green initiatives. The money faucet is clearly flowing, but is the financial commitment substantiated?
Initiative impacts on real estate values
Green buildings are already selling, and the desirability will only go up from here. Consumer demand reports from the National Association of Realtors (NAR) found that 59% of residential consumers are very interested or somewhat interested in sustainability.
A market comparison the NAR conducted in Boston looked at the potential for a higher sales premium in carbon-neutral homes. They compared new-construction homes earning LEED (Leadership in Energy and Environmental Design) Platinum and Home Energy Efficiency Rating System (HERS) certifications to similar new-construction homes on the market at the same time and right down the street. The carbon-neutral homes sold faster and for a 22.7% price per square foot premium over comparable units that did not have these standards.
Commercial buildings follow suit as well. In addition to the well-established cost savings in operations, which average 69%, you will also see increased rents and occupancy and higher sales value if you're holding the property. Dodge Data & Analytics World Green Buildings Trends Report found that the average premium for rental rates is 17% globally, and the occupancy rate is 16% higher. And if selling, you will likely get a premium for the sale, with the United States averaging a 20% higher sales value.
Solid consumer demand alongside public and private entities backing climate initiatives make this an easy adjustment. Remodeling new investments with this in mind, slowly modifying existing real estate as repairs arise, and basing new construction around this theme are likely sound ideas. They will not only reduce environmental impacts but also likely boost your real estate values too.