More companies than ever before are putting climate change and decarbonisation strategies at the heart of the way they do business as they respond to the pressures of the pandemic, a report by PwC and the Urban Land Institute (ULI) shows.
The industry leaders canvassed for the annual Emerging Trends in Real Estate®: Global Outlook report are hopeful of a consumer-spending-led economic recovery feeding through into an uptick in activity in the second half of 2021. But much will depend on the rollout of the vaccine and an easing of lockdown restrictions.
Unprecedented levels of fiscal and monetary stimulus threaten market volatility, and the emergence of stock market bubbles and renewed inflationary pressure in the US and Europe are concerns for real estate leaders. Despite the risk of greater volatility, the loose monetary environment is keeping interest rates low for the time being and making the yield spread for real estate hugely compelling to investors compared to other asset classes.
Since the start of the second lockdowns in autumn, lenders have adopted a far more cautious approach to real estate compared with equity investors. While banks were generally supportive of business at the outset — invariably at the behest of governments and central banks —lending criteria have become tougher. There is a wide expectation that distressed debt will increase once the government support packages end although it is considered unlikely to match the levels of distress seen after the global financial crisis.
Given the pressure on occupier markets, the report speaks about ‘a bifurcation in pricing’ between in-favour sectors like logistics that have provided stable income during the pandemic and those sectors that have been hardest hit, such as hospitality and parts of retail. Residential is also in favour, with investors seeing favourable supply-demand dynamics, which make housing a prudent defensive play for the foreseeable future, but the outlook for the office sector is altogether more difficult to predict.
The report suggests that the impact of the pandemic on offices might be lower than widely assumed, and employees are expected to eventually want to return to the office albeit in more of a “hybrid” working model than in pre- Covid times.
The overriding theme from interviews conducted is that the industry is looking beyond occupancies and returns, and it is starting to address its wider responsibilities. A growing focus on decarbonisation in the real estate industry in the last 12-18 months has been driven primarily by providers of finance and the biggest tenants, but also by climate change becoming more tangible in the form of more frequent extreme weather events.
The main takeaways from the interviews point to a daunting amount of complexity in the development, ownership and management of real estate, which makes coming up with an effective strategy difficult even for the largest companies, let alone the execution. Currently there are no common definitions on what ‘net-zero’ means whether it only relates to the carbon emissions related to the operation of the building or also the ‘embodied carbon’, emitted during production and transport of materials and the construction of the building.
The profusion of certifications, standards, targets and terminology creates the potential for “greenwashing”, giving the appearance of decarbonising for reasons of brand and to attract capital, while actually focusing on only part of the story. To avoid “greenwashing” alignment of goals and unprecedented collaboration between all stakeholders, including developers, construction companies, investors, tenants and the public sector is key: ‘Any certification or net-zero standard that does not put embodied carbon front and centre of its thinking risks sending the real estate industry down the wrong path, stifling innovation in the areas where it is truly required, and diverting funding to initiatives that will not be that impactful in reducing carbon emissions,’ the report says.
ULI global CEO Ed Walter comments: “However acute the economic impact of the pandemic, the real estate industry recognises that the long-term impact of climate change will be greater. Few have fully got to grips with the challenge, but skills and innovations are spreading through the industry, and the Urban Land Institute is playing a key role in sharing of knowledge and best practices.”
Craig Hughes, global real estate leader, PwC, said: ‘While many eyes are focused on the economic recovery, we should not underestimate the structural impact of this crisis, following the dislocation across many industries and society. It is about more than recession and rebound, as we won’t go back to how it was before. ESG factors are in laser focus including an increased sense of urgency to decarbonise.’
‘There remains a daunting amount of complexity in the development, ownership and operation of real estate, which makes coming up with an effective strategy vital. Owners, occupiers and all other stakeholders in the real estate value chain will need to work together, if the industry is to play its part in reversing climate change and adapting to a post-pandemic world.’
The full 2021 Emerging Trends in Real Estate: Global Outlook report is available here
