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Green recovery: How London’s Office Market Can Capitalise on the Real Estate Sustainability Trend

We are all too aware of the havoc that COVID-19 has wreaked on public health, society and the economy. However, experts are describing the pandemic, devastating as it is, as a dress rehearsal for the impact that global warming will have on the planet if we do not successfully manage the transition to net-zero carbon.

Achieving real estate sustainability is a global challenge. Since the global real estate sector is estimated by the United Nations to consume 40% of energy globally, and account for over 20% of the world’s total carbon emissions, achieving sustainability in the huge London office market is more pressing than ever. Issues like energy-efficiency, low carbon dioxide emissions and the use of sustainable materials are coming increasingly to the fore for the city’s developers and landlords, driven by tenant demand.

The pandemic has hit the London real estate market hard, with construction work largely grinding to a halt during lockdown and a sharp fall in the number of new real estate investment opportunities coming to market. Concern about tenant demand, confidence in the economy and willingness to invest in new projects are now also seen as major challenges to development in the short-term.

Our latest London Office Crane Survey, covering the six months up to March this year, had shown that the underlying trend had been very strong. In the six months to March, there was five million sq ft of new construction across central London, an all-time record, and 42% higher than during the same period a year earlier. That equates to 45 separate new projects, almost double the long-term average. While existing construction paused temporarily, and construction work is currently operating at lower capacity due to social distancing, none of the schemes has been abandoned.

The trend towards home and remote working may change the nature of office space but, as the nation starts to get back to work, corporates increasingly believe that to attract and retain employee talent, particularly among younger generations, they have to provide sustainable office accommodation that aligns with environmental, social and governance (ESG) principles.

If London aims to retain its status as one of the top global real estate development markets, then it must expand its supply of green office space. As noted in our London Office Crane Survey; the debate on embodied carbon in buildings is likely to intensify. A key question is whether existing buildings should be demolished to make way for newer models, and, in doing so, waste the embodied carbon. We expect that there will be a stronger focus on remodelling and refurbishment, where buildings can be recycled and adapted to suit demand, without having to be demolished and rebuilt.

While carbon emissions have fallen substantially during the period of lockdown, due to a sharp fall in commuting, the latest report from the International Renewable Energy Agency (IRENA) forecasts that this year’s annual global carbon emissions will be down by just 6-8%, this reduction does look set to continue.

Even if that were repeated every year, it would still not be enough to meet the target of keeping global warming to just 1.5C above pre-industrial levels by 2050.

That may sound like a grim prognosis, but there is cause for optimism. The real estate sector, as a major contributor to carbon emissions, is paying increasing attention to ESG factors. Having sustainable workspace will be a major component of any green recovery strategy, and we could see a gradual shift to the circular economy - reusing the materials that go into office construction.

Rather than being a distraction from the trend towards sustainable and ‘healthy’ offices, COVID-19 has focused attention on it. Workplace health and employee wellbeing have risen to the top of the agenda. Air quality will be one of the most important factors for building and tenant health, with an emphasis on fresh air, ventilation and air filtration. Tenants will no doubt also be asking questions about the ‘healthiness’ of their building, and the measures in place to prevent and mitigate the spread of infectious diseases. In addition to strict hygiene practices, we will see more smart building solutions – such as predictive maintenance, air quality monitoring sensors, and ultra violet cleaning may even become very important within building design in the future.

ESG was already a concern for major tenants but that awareness is now seeping through to mid-size and smaller tenants. Any programme to kickstart the economic recovery will not undermine that focus.

Indeed, landlords and developers who do not follow the ESG agenda will expose themselves to related risks that may lead to accelerated obsolescence and falling property values. In late 2019, 23 of the largest property firms signed up to the Better Buildings Partnership, pledging to tackle the growing risk of climate change by delivering net-zero carbon portfolios by 2050. This applies to both new and existing office schemes, and covers operational and embodied carbon for the whole building, including the energy consumed by their tenants.

But the sense of urgency around sustainability is growing. Sever major real estate developers have committed to reducing embodied carbon levels in their developments to net-zero sooner, with some targeting 2030. Given that embodied carbon accounts for around half of the company’s annual carbon footprint, this highlights the impact of an ESG focus.

Another key strand of real estate sustainability is the application of circular economy principles, prioritising remodelling, retrofitting and refurbishment over new builds. Recycling and adapting existing buildings to suit demand, without having to demolish and rebuild them, will become more prevalent as this greatly cuts back on wasting embodied carbon.

This trend is evident in current developments. The largest new construction project in the West End is the major refurbishment of Henrietta House, a 143,000 sq ft office building, in Marylebone, scheduled to complete in Q4 2020.

Elsewhere, the 1.2 million sq ft redevelopment of Elizabeth House beside Waterloo Station has recently been given planning consent, while the recent decision to refurbish rather than demolish the 81 Newgate Street was met with applause. The scheme is BT’s headquarters and contains 810,000 sq ft office space.

In the light of current economic downturn, green shoots of new initiatives were at risk of getting trampled on as businesses focus on sustaining their own businesses. However, given new regulation, tenant requirements, especially if they want to attract employee talent, and the risk of accelerated obsolescence and falling property values, developers will need to stay committed to reducing carbon emissions. When the post-COVID-19 green recovery gets underway, London’s real estate market has a compelling opportunity to harness sustainability to future-proof its office space. Businesses will need to find the most optimal route to get there given the economic downturn.

Increasing the energy efficiency of developments, minimising carbon emissions and enhancing liveability for occupants will protect property values and lead to sustainable real estate development What’s good for the planet is also good for London.

CTA: To learn more about these issues please visit:

https://www2.deloitte.com/uk/en/pages/real-estate/articles/crane-survey.html

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