The property industry can’t afford not to adapt to climate change

Extinction Rebellion in London. Image: Getty.

From the school strikes for climate, to Extinction Rebellion protests and calls for a Green New Deal, citizens around the world are putting pressure on their governments to prevent global warming more than 2°C above pre-industrial levels.

In the UK, these efforts have met with some success – the government has declared a “climate emergency” and promised to reduce greenhouse gas emissions to net zero by 2050. Even so, scepticism persists in some quarters: former chancellor of the exchequer, Philip Hammond, has argued that the UK government’s goal may be unaffordable, based on estimates that the transition to a zero-carbon economy could cost up to £1trn.

Of course, there is likely to be significant public money spent on renewable energy transition and carbon offsetting. The costs of assets made obsolete by climate change policy – such as unexploited fossil fuel reserves – is also potentially huge.

But the problem with perspectives like Hammond’s is that they don’t balance the cost of acting now against the cost of doing nothing. In the UK and around the world, people live and work in buildings that are typically powered, heated and cooled using energy from fossil fuels. If these buildings are not retrofitted with energy efficiency measures, there is a real risk they will be rendered obsolete by policies aimed at reducing greenhouse emissions.

A valuable asset

Research at Northumbria University has examined this situation in relation to international real estate. The global value of real estate is estimated at $217trn – that’s roughly 2.7 times the GDP of the entire world. Of this, $162trn worth is residential, $29trn worth is commercial and $26ttrn worth is agricultural land.

A conservative estimate is that global real estate consumes 40 per cent of global energy annually and accounts for more than 20 per cent of international carbon emissions. So it’s hardly surprising that international agencies have identified real estate and the built environment as key contributors toward global warming and a major target of international efforts to reduce greenhouse gas emissions.

One of the most comprehensive approaches to reducing building energy use can be seen in the European Union (EU). A 2010 directive on energy performance made it mandatory for all European properties to hold an energy performance certificate and monitor energy use from heating and air conditioning. The government of England and Wales has used these energy performance certificates to enforce minimum standards of energy efficiency for privately rented family homes and commercial properties.

Since April 2018, any commercial property with an energy performance rating below E (that is, those properties with F and G ratings) has been deemed illegal to let (although there are some exemptions related to maximum cost of improvements). By 2020, the plan is for these same rules to apply to residential property – which includes shared homes, nursing and care homes and blocks of flats.


A less daunting prospect

In England and Wales, it is estimated that 10 per cent of residential property stock (worth £570bn) and 18 per cent of commercial stock (worth £157bn) does not meet these minimum standards. If these properties are not retrofitted to become more energy efficient, they will become obsolete and lose value, since the owners will no longer be allowed to let them.

Put this way, the cost of achieving an energy transition is less daunting, because the cost of not acting is equally (if not more) expensive. It’s even reasonable to expect benefits to the economy from the growing building retrofit industry.

If all international governments adopted similar minimum energy efficiency standards as the UK – and assuming the same proportions of property stock are potentially obsolete – the risk value for residential real estate property assets can be estimated at $16trn and $5trn for global commercial assets (based on their global vale, mentioned earlier).

A timely riposte

The potential cost of not acting in the real estate sector should provide a catalyst for the transition to more energy efficient buildings. It should also provide a riposte to those who worry about the cost of transitioning to net zero emissions. Indeed, there’s a clear need for investors and property owners to move beyond green-washing and reduce the carbon emissions of real estate before costly regulation and enforcement sets in.

Ignoring climate change exposes real estate assets to the risk of permanent disruption – especially now that the potential impacts of global warming are being widely acknowledged. Clean technology is becoming more affordable and consumers are adopting principles of environmental sustainability. Indeed, it’s already becoming more common for investment managers and financiers to demand that companies disclose business model exposure to climate change, while investors are starting to take advantage of exposed assets.

It makes sense for property owners to plan for the introduction of powerful new climate-related policies in the coming years. Adapting existing buildings and constructing new developments that are not reliant on fossil fuels – though perhaps costlier in the short term – can create a more resilient, and therefore valuable, asset in the longer term.

Kevin Muldoon-Smith, Lecturer in Real Estate Economics and Property Development, Northumbria University, Newcastle and Paul Michael Greenhalgh, Professor of Real Estate and Regeneration, Northumbria University, Newcastle.

This article is republished from The Conversation under a Creative Commons license. Read the original article.

 
 
 
 

A new wave of remote workers could bring lasting change to pricey rental markets

There’s a wide world of speculation about the long-lasting changes to real estate caused by the coronavirus. (Valery Hache/AFP via Getty Images)

When the coronavirus spread around the world this spring, government-issued stay-at-home orders essentially forced a global social experiment on remote work.

Perhaps not surprisingly, people who are able to work from home generally like doing so. A recent survey from iOmetrics and Global Workplace Analytics on the work-from-home experience found that 68% of the 2,865 responses said they were “very successful working from home”, 76% want to continue working from home at least one day a week, and 16% don’t want to return to the office at all.

It’s not just employees who’ve gained this appreciation for remote work – several companies are acknowledging benefits from it as well. On 11 June, the workplace chat company Slack joined the growing number of companies that will allow employees to work from home even after the pandemic. “Most employees will have the option to work remotely on a permanent basis if they choose,” Slack said in a public statement, “and we will begin to increasingly hire employees who are permanently remote.”

This type of declaration has been echoing through workspaces since Twitter made its announcement on 12 May, particularly in the tech sector. Since then, companies including Coinbase, Square, Shopify, and Upwork have taken the same steps.


Remote work is much more accessible to white and higher-wage workers in tech, finance, and business services sectors, according to the Economic Policy Institute, and the concentration of these jobs in some major cities has contributed to ballooning housing costs in those markets. Much of the workforce that can work remotely is also more able to afford moving than those on lower incomes working in the hospitality or retail sectors. If they choose not to report back to HQ in San Francisco or New York City, for example, that could potentially have an effect on the white-hot rental and real estate markets in those and other cities.

Data from Zumper, an online apartment rental platform, suggests that some of the priciest rental markets in the US have already started to soften. In June, rent prices for San Francisco’s one- and two-bedroom apartments dropped more than 9% compared to one year before, according to the company’s monthly rent report. The figures were similar in nearby Silicon Valley hotspots of San Jose, Mountain View, Palo Alto.

Six of the 10 highest-rent cities in the US posted year-over-year declines, including New York City, Los Angeles, and Seattle. At the same time, rents increased in some cheaper cities that aren’t far from expensive ones: “In our top markets, while Boston and San Francisco rents were on the decline, Providence and Sacramento prices were both up around 5% last month,” Zumper reports.

In San Francisco, some property owners have begun offering a month or more of free rent to attract new tenants, KQED reports, and an April survey from the San Francisco Apartment Association showed 16% of rental housing providers had residents break a lease or unexpectedly give a 30-day notice to vacate.

It’s still too early to say how much of this movement can be attributed to remote work, layoffs or pay cuts, but some who see this time as an opportunity to move are taking it.

Jay Streets, who owns a two-unit house in San Francisco, says he recently had tenants give notice and move to Kentucky this spring.

“He worked for Google, she worked for another tech company,” Streets says. “When Covid happened, they were on vacation in Palm Springs and they didn’t come back.”

The couple kept the lease on their $4,500 two-bedroom apartment until Google announced its employees would be working from home for the rest of the year, at which point they officially moved out. “They couldn’t justify paying rent on an apartment they didn’t need,” Streets says.

When he re-listed the apartment in May for the same price, the requests poured in. “Overwhelmingly, everyone that came to look at it were all in the situation where they were now working from home,” he says. “They were all in one-bedrooms and they all wanted an extra bedroom because they were all working from home.”

In early June, Yessika Patapoff and her husband moved from San Francisco’s Lower Haight neighbourhood to Tiburon, a charming town north of the city. Patapoff is an attorney who’s been unemployed since before Covid-19 hit, and her husband is working from home. She says her husband’s employer has been flexible about working from home, but it is not currently a permanent situation. While they’re paying a similar price for housing, they now have more space, and no plans to move back.

“My husband and I were already growing tired of the city before Covid,” Patapoff says.

Similar stories emerged in the UK, where real estate markets almost completely stopped for 50 days during lockdown, causing a rush of demand when it reopened. “Enquiry activity has been extraordinary,” Damian Gray, head of Knight Frank’s Oxford office told World Property Journal. “I've never been contacted by so many people that want to live outside London."

Several estate agencies in London have reported a rush for properties since the market opened back up, particularly for more spacious properties with outdoor space. However, Mansion Global noted this is likely due to pent up demand from 50 days of almost complete real estate shutdown, so it’s hard to tell whether that trend will continue.

There’s a wide world of speculation about the long-lasting changes to real estate caused by the coronavirus, but many industry experts say there will indeed be change.

In May, The New York Times reported that three of New York City’s largest commercial tenants — Barclays, JP Morgan Chase and Morgan Stanley — have hinted that many of their employees likely won’t be returning to the office at the level they were pre-Covid.

Until workers are able to safely return to offices, it’s impossible to tell exactly how much office space will stay vacant post-pandemic. On one hand, businesses could require more space to account for physical distancing; on the other hand, they could embrace remote working permanently, or find some middle ground that brings fewer people into the office on a daily basis.

“It’s tough to say anything to the office market because most people are not back working in their office yet,” says Robert Knakal, chairman of JLL Capital Markets. “There will be changes in the office market and there will likely be changes in the residential market as well in terms of how buildings are maintained, constructed, [and] designed.”

Those who do return to the office may find a reversal of recent design trends that favoured open, airy layouts with desks clustered tightly together. “The space per employee likely to go up would counterbalance the folks who are no longer coming into the office,” Knakal says.

There has been some discussion of using newly vacant office space for residential needs, and while that’s appealing to housing advocates in cities that sorely need more housing, Bill Rudin, CEO of Rudin Management Company, recently told Spectrum News that the conversion process may be too difficult to be practical.

"I don’t know the amount of buildings out there that could be adapted," he said. "It’s very complicated and expensive.

While there’s been tumult in San Francisco’s rental scene, housing developers appear to still be moving forward with their plans, says Dan Sider, director of executive programs at the SF Planning Department.

“Despite the doom and gloom that we all read about daily, our office continues to see interest from the development community – particularly larger, more established developers – in both moving ahead with existing applications and in submitting new applications for large projects,” he says.

How demand for those projects might change and what it might do to improve affordable housing is still unknown, though “demand will recover,” Sider predicts.

Johanna Flashman is a freelance writer based in Oakland, California.