CIM Group: New routes to decarbonization

This article is sponsored by CIM Group

Fully decarbonizing the real estate sector will require dramatic technological and behavioral change. In 2020, just 5 percent of all new buildings were net-zero-ready, and yet two-thirds of the global building floor area that exists today will likely still be in use by 2040, according to the International Energy Agency.

Throw into the mix booming demand for both energy and real estate floor space and the number of regions with building performance standards for operators to meet, and it is clear that totally transforming the asset class will involve monumental change. Retrofitting existing buildings will therefore be essential, and a greater focus on energy efficiency, electrification, emissions reporting and integration with electricity systems will become more and more important for newbuilds.

That is according to Robert Dupree, principal and co-head of investments at community-focused real estate and infrastructure owner CIM Group. He explains that many different factors are now shaping the sustainability agenda, as well as some very real challenges.

Real estate is a huge contributor to greenhouse gas emissions. How do you view the progress that has been made so far to decarbonize the sector?

It has certainly been challenging over the past couple of years, especially given the downturn in real estate. The sector has been put under the microscope, and there has been more focus on making the numbers add up.

Today, buildings in the US account for approximately 75 percent of total electricity use, according to the US Department of Energy. Globally, the World Green Building Council estimates that buildings account for roughly 40 percent of emissions. There is going to be a cost associated with changing that, but there are clear benefits too.

We are seeing that the reductions in the operating costs associated with adopting sustainable technologies are now becoming much more meaningful – particularly as electricity prices and demand charges rise – so payback periods are shortening. There has been continued progress and focus on improving operational efficiencies by installing things like LED lights, upgrading HVAC systems for higher efficiency and upgrading windows for better insulation.

There is also growing demand on the tenant side for improving building efficiencies and overall sustainability. The same is true among our investor base. There has been more focus on participation in benchmarking programs such as GRESB, and sustainability scores are receiving more and more attention.

In Europe, the Sustainable Finance Disclosure Regulation (SFDR) has also become a meaningful component of how funds are communicating their commitment to environmental and social targets and marketing themselves to investors.

Which particular decarbonization technologies stand out?

If you look at the biggest contributors to building emissions, heating, ventilation, cooling and lighting really stand out, and are typically responsible for the majority of a commercial building’s energy use.

We have seen a number of technologies focus on improving HVAC, such as heat pumps. While that is not exactly a new technology in itself, there are groups that are looking to reduce the upfront cost of installing these types of systems through new technologies and business models.

There is also the potential to switch to electric heat pumps for water and space heating systems. By powering these with renewable electricity, we can shift away from systems that rely on fossil fuels. After all, heating is one of the biggest drivers of emissions in real estate.

Emissions from operating the building are about half of the building’s total emissions over its lifetime, according to the World Business Council for Sustainable Development. The other half of emissions arises from the production of building materials such as concrete and steel.

Alternative, lower-carbon materials are starting to become more cost-competitive, and switching up your building materials and improving the quality of things like insulation are also important levers for reducing emissions. Those factors can play a big role in the overall sustainability of a building.

Buildings are already grid-connected and have spaces that could potentially be repurposed in value-additive ways. Is there an opportunity here with regard to distributed energy sources?

We believe the grid is a large part of the overall picture, and we are now starting to see managers look to integrate low-carbon energy technologies such as solar and battery storage into buildings. We are also starting to see certain components become true amenities, such as electric vehicle charging points.

That has become a growing focus among tenants on the multifamily and commercial side. Integrating advanced controls on building systems to reduce peak demand, and using on-site energy storage to power equipment when energy is most expensive, can help to improve the economics for owners and operators. These are themes that developers are having to think more carefully about when planning their buildings.

There has also been a huge increase in demand for electricity, which is being driven by several macro factors. For instance, in the US, there is simply more onshoring and more domestic manufacturing taking place. Then there is a big trend around data centers and their growing thirst for power. The utility companies, which do not have the required capacity, are becoming a bottleneck in certain areas.

How might the supply of power affect the sustainability agenda in real estate?

Based on our observations, new sources of power, whether renewable or otherwise, are coming through all the time, but what is becoming a major bottleneck is the transmission side. You can generate more power, but if you do not have new transmission lines to get that power to users, it is all going to go to waste. That is becoming a big focus for the utilities, and it is something real estate investors will need to think carefully about in their decision-making.

We have also seen some new technologies and solutions coming through that promise to create more efficient transmission lines. That extends to connecting lines that have capacity to those operating at overcapacity, effectively trying to reroute through shorter transmission lines.

Is it worth taking a vertical approach to decarbonizing real estate?

Being vertically integrated has major benefits. At CIM Group, for instance, we have an in-house development team that constructs all our projects, whether small-scale or ground-up developments. We also have a property management team, with employees based in our buildings on a day-to-day basis.

That means we come at it not just from an investment perspective, where we have our investment teams doing the underwriting and assessing the revenue structure of a particular company, but also bringing in other departments that will be the end user of products, to really assess whether they are viable. They can advise on where best to focus and how to get to a point where you are no longer asking someone to subsidize the cost structure of a development.

Does it help to draw on experience in infrastructure?

Being involved in the real estate side as well as the infrastructure side really allows us to understand multiple components of the life cycle of a project, including everything from the overall design of buildings and what tenants demand, as well as the various ways that you can source and store electricity efficiently.

One of the things we are starting to see, especially in the data center world, is what are called behind-the-meter solutions. That refers to energy-related activities on the consumer’s side. It is not always easy to go directly to a utility and ask for a specific amount of power. Sometimes, you need to find another source.

Having deep knowledge of both types of assets, infrastructure and real estate, is a big advantage for understanding how new technologies and solutions will ultimately work together.

What are the key challenges that need to be overcome to better decarbonize the real estate sector?

I think the biggest challenge is that the math ultimately needs to work. Operators and developers need to understand that the solutions can work for them too, and that it is not just about extra cost without added benefits. There needs to be more awareness of how much this can boost efficiencies, reduce operating costs, and attract and retain high-quality tenants in a competitive market.

We also need to listen more to tenants about the minimum standards they expect. As new technologies come online, and costs continue to fall, we expect to see more of that. Then the next phase will be more openness on the materials side and experimenting with alternatives.

Accessing and employing data will be a huge component too. You need to be able to demonstrate impact with clear case studies and data. Then you can talk directly to owners about the real effect on operations.

You can also explain that if you go down a certain path, it will incur a specific cost, and also a return on the investment. That then feeds directly back into talking with investors and demonstrating the decarbonization impact.

How significant might shifting to low-carbon building materials ultimately prove?

It is definitely an area where we are seeing a lot of new products and technologies, ranging from commercial 3D printing to alternative cements, concrete embedded with captured carbon and plywood alternatives that are effectively made from grass. However, this is still an emerging sector and generally remains small-scale for now.

The key question is whether these technologies can scale enough so that they work across everything from a single-family residential building to a 100,000-square-foot commercial building. These are complex supply chains, so owners and developers have a real role to play in championing these solutions.

From investors’ perspective, there is a clear understanding of the impact that building materials have on emissions globally and their importance in achieving carbon reductions. In the US, you are also seeing some government support through grants or tax credits, including via the Inflation Reduction Act, which are helping to drive investment in the space. Even discounting that though, we believe there is growing demand from operators, developers and tenants to create more efficient buildings.