The COVID-19 pandemic reset the business of commercial real estate, with repercussions still coming into focus. Tens of millions of U.S. professionals stopped commuting to work in spring of 2020, laboring from home for months or longer. And in this moment of the Great Wait and the Great Resignation, many companies are dialing back their office reopening plans while others, including tech leaders from Adobe to Zoom, are extending remote and hybrid work options indefinitely.
About one-third of workers are back in brick-and-mortar workplaces, but the market remains rugged for many commercial real estate owners, operators and developers. This summer, about one-fifth of office space remained vacant in New York City, Chicago and San Francisco — and even in Texas, with the lowest vacancies, offices are only about half full.
With sustainability and ESG factors being increasingly important for competitive features, net-zero carbon commitments are emerging as the next big "must-have" for large owners and operators seeking to access finance, reduce risk and attract top-notch employees, tenants and clients.
More than 100 businesses and organizations have signed on to the World Green Building Council's Net Zero Carbon Buildings Commitment, which seeks to decarbonize the buildings sector by 2050 and get halfway there by 2030. That would diminish the nearly 40 percent of global CO2 emissions currently contributed by buildings.
More than 200 businesses have signed on to the Climate Pledge, launched in 2019 by Amazon and Global Optimism, agreeing to decarbonize by 2040 a decade ahead of the goals of the Paris Agreement. In September, the world's largest real estate investment and management firm CBRE Group joined them.
The net-zero carbon unicorn?
However, net-zero carbon buildings are in their embryonic stage; the World Resources Institute says they account for only 1 percent of buildings in the world. Eliminating fossil fuels is their primary ingredient.
The International Living Future Institute's Zero Carbon Certification, born in 2018, applies to energy-efficient projects that demonstrate onsite renewable energy or offsets that eliminate carbon in operations over a year, and that disclose and offset embodied carbon in building materials. Its first Zero Carbon designation went to Google's office at 6 Pancras Square in London last year.
The U.S. Green Building Council's new LEED Zero Carbon certification, which must be renewed annually, named its first two projects in 2020, including the Hanergy Renewable Energy Center in Beijing, which demonstrated zero CO2 emissions in energy for a 12-month period. The Colgate-Palmolive building in Burlington, New Jersey, did the same and also zeroed out emissions from occupant transportation. Engineering firm Petinelli in 2021 received LEED Zero Carbon certification for its headquarters in Curitiba, Brazil.
In October, Diamond Developers billed its upcoming SEE Institute center for sustainability in Dubai as the world's first net-zero carbon building, with offsets reducing embodied emissions. In England, Associated Architects declared in July that its Curzon Wharf tower for Birmingham will be the world's first net-zero emissions highrise, covering operations yet not embodied carbon.
Net-zero energy vs. net-zero carbon
It's important to distinguish between net-zero energy and the more challenging net-zero carbon. Net-zero energy buildings produce all the energy they can use, using a mix of onsite renewable energy, electrification and deep efficiency measures to reduce carbon emissions.
The number of net-zero energy buildings could be counted on two or three fingers a decade ago. Now there are about 700 in the U.S. and Canada, a growth of 42 percent between 2018 and 2020, especially in states with strong climate action goals, according to the New Buildings Institute, which maintains the Getting to Zero database of low- and zero-energy commercial and multifamily buildings. Square footage rose by 38 percent in that same time period to 62 million.
Net-zero carbon buildings go further, although definitions vary, but they may reach net-zero energy as well. A progressive definition of net-zero carbon, also called zero carbon or whole life carbon, describes a building that balances out the emissions originating from the embodied carbon in its materials as well as from its operations. When this extends to a portfolio of buildings, reducing emissions across Scopes 1, 2 and 3 covers a wide range of activities, including employees' commutes and the content of office supplies.
Offsets tend to be viewed as a necessary last resort for reducing the hardest slivers of emissions. None of the aforementioned leadership buildings meets the ideal of offset-free, net zero carbon for both operations and embodied carbon throughout their lifecycle.
Although the net-zero backlash is already underway, net-zero carbon is a foundational framework upon which many companies in the real estate realm are building long-term futures. Why? What is the business case for adopting a net-zero carbon goal?
Here are perspectives from three sustainability leaders at commercial real estate companies of various sizes.
The net-zero goal of the Dallas-based mammoth covers all the properties it handles.
"So many of our clients, especially the ones that are publicly traded, are hearing from their shareholders, just like we are, wanting to know what climate risk and opportunity means to their organization, and what are they planning to do about their carbon footprint?" said CBRE Vice President of Corporate Responsibility Jennifer Leitsch of the industry's uptick in interest in net-zero carbon. An embrace of net-zero carbon can be one piece of the puzzle in luring employees back to an office, she added.
"Having a company that has a purpose, that is looking to do things that advance environmental and social initiatives, in addition to increasing the value of the organization, are the types of things that employees get excited about," Leitsch said. "I really do think that companies who embrace environmental initiatives with things like net zero will see engagement from employees who really care about those things."
I have clients right now who are saying, 'We cannot move into a building if they are not meeting certain sustainability metrics.'
Many of CBRE's clients have already committed to their own net-zero targets or at least to science-based targets, said Leitsch, who sees CBRE's net-zero commitment as a natural extension of its commitment to the Science Based Targets initiative last December.
The 7 billion global square feet managed by CBRE in more than 100 countries make up 97 percent of its greenhouse gas emissions inventory. The company's net zero goal encompasses emissions from operations and purchased goods and services. However, it omits embodied carbon from construction materials, which are not included in the popular GHG Protocol, which CBRE uses to calculate emissions.
CBRE's 100,000 employees includes 400 sustainability professionals to assist clients in their net-zero journeys, including with setting emissions reductions and other science-based targets. The company is a service partner with the Renewable Energy Buyers Alliance (REBA), which helps it to support clients who are adopting renewables. CBRE is also making strategic investments to support clients on a net-zero path, including in clean energy startup Altus Power in July.
Cushman & Wakefield
Chicago-based Cushman & Wakefield manages about 4 billion square feet worldwide, with 50,000 employees in 60 countries. The real estate services firm's vice president of sustainability and wellness services, Melissa Gutierrez-Sullivan, says her corporate clients in technology, finance and insurance are especially interested in zero-carbon goals but more small and midsize firms are jumping in, too. Whereas in years past clients used to ask about the cost of ESG or sustainability initiatives, she is getting clients to focus on risk by asking them, "What is the cost if you don't do it?"
"The REITs (real estate investment trusts) of the world are hiring global heads of ESG investing left and right now," she said. "They're investing in it because they know they need to make that change, especially for those developers who are in that class A type space. They know that they have to achieve certain goals, because our clients are demanding it."
"Now employees and consumers want that and need that, and they're going to go somewhere else if they don't believe in that company's values — never mind your investors are driving it too," said Gutierrez-Sullivan, who also serves as board chair of the U.S. Green Building Council's Los Angeles chapter.
Gutierrez-Sullivan described this demand as having pre-pandemic roots in BlackRock CEO Larry Fink’s January 2020 letter, followed by the Business Roundtable’s statement shortly thereafter. During the spread of COVID-19, she witnessed a shift in sentiment among clients away from a once-dominant concern about sustainability and toward wellness. "It’s been about carbon ever since," she said.
Companies who embrace environmental initiatives with things like net zero will see engagement from employees who really care about those things.
Registrations with GRESB, the Global Real Estate Sustainability Benchmark, rose by 22 percent in 2021. The GRESB assessments, which grew to 2,227 real estate and infrastructure organizations, offer data about portfolios that is used by 140 institutional and financial investors.
There's also growing industry interest in programs such as Green Lease Leaders recognition, which was born in 2014 out of the U.S. Department of Energy and the Institute for Market Transformation. Cushman & Wakefield created an internal ranked system that allows large clients to evaluate how green their leases are.
"The No. 1 thing my clients are talking to me about is green leases, every one of my clients," Gutierrez-Sullivan said, noting that tenants want to know how leases are affecting their own Scope 3 emissions and carbon footprints. "I have clients right now who are saying, 'We cannot move into a building if they are not meeting certain sustainability metrics.' Historically they would have said, 'No, we're not upgrading because it's going to cost us X, Y and Z.' Now they're making these net-zero goals, these very difficult goals to achieve. How are you going to achieve those goals if you don't have the data?"
Gutierrez-Sullivan said she is interested in following the level of cooperation between building owners and tenants over the coming years, when it’s time to renew leases with new sustainability requirements. She advises building owners to enlist somebody internally who works specifically on ESG and can manage the data when lease renewals come up later on.
With headquarters in Houston, Transwestern has 33 U.S. offices and about 1,900 employees, specializing in providing services to commercial real estate owners. Its sustainability director, Josh Richards, views net-zero carbon goals as a logical next step in an evolution that is partly driven by progressive green building and energy codes in places including California and New York.
"In many ways, the expectation is by 2030 net zero will be basically the new building code, even in many of the largest cities here in the United States," he said, describing the trend as the next wave in differentiation in sustainability in commercial buildings in the next decade, the same way LEED certification was in previous decades. Sustainability-focused millennials and Generation Z members will help to drive net zero as a requirement in future decades as they mature in the workforce, Richards added.
Some of Transwestern's larger funds and clients are already designing or working towards net zero, while others are holding back to watch how others test the waters.
It is the next big branding opportunity for sure when it comes to sustainability.
"For our owners, net zero is something that is in some ways really motivating, because it is the next big branding opportunity for sure when it comes to sustainability. But it's also something that really helps them address some of the concerns that their investors are looking towards" as they consider climate risks, including the costs of insurance and repairs, related to increasingly frequent natural disasters, he said.
In addition, smaller tenants that don't occupy entire buildings tend to pepper owners with informational requests about options for renewable energy and other carbon-reduction options. The more they ask, the more it will drive the property owners, the asset managers, more heavily towards net zero as an operation style, Richards said.
The pandemic didn't directly drive a huge increase in net-zero adoption, according to Richards. However, reduced occupancy demonstrated how much energy buildings waste even while empty, and many owners took the opportunity to plug gaps in energy efficiency and create other sustainability upgrades, including to landscaping. That coincided with a deeper interest by tenants in health and wellness, especially in indoor air quality.
"Anybody who's really looking at net zero is not just looking at it from an environmental side; they're not just looking at the greenhouse gas impacts," he said of the rise in concern around the health and wellness impacts of operating buildings, including the air pollution caused by coal-fired and natural gas-fired electricity.
"Our tenants and our clients have a really good understanding of how net zero can achieve more than one specific goal. Those conversations are kind of intrinsically linked. And often, it comes in this under this umbrella of environmental social governance or ESG, where we like to think about the communities we operate in kind of the upstream and downstream impacts of the actions that we take. And net zero is just kind of one of those vehicles that really helps us capture a lot of those things."