Lucienne Mosquera, Managing Partner, at SustainCRE has published some interesting analysis on the growing evidence of a Brown discount in the global real estate market. According to their research "in their current form, around 97% of today’s commercial buildings will not support the transition to net zero. This poses a challenge as these buildings will become increasingly difficult to let or sell."
Using some simplifying assumptions she estimates that a Brown building (one that doesn't get refurbished to align with future decarbonisation targets etc) could be worth 2/3 of a conventional Green building, and only half of a Green building that has been fully optimised.
What is driving this? It's a mixture of occupier and investor demand.
Occupiers want an emphasis on energy, water, and waste efficiency. Plus, there is a growing interest in the S for Social factors, so buildings that comply with future health and wellness standards. Investors want buildings that will fit into Article 8 or Article 9 of the EU’s Sustainable Finance Disclosure Regulation (SFDR). And limited supply of these Green buildings means higher pricing. The good news is that the Brown discounts are strengthening the financial case for deep building upgrades.
This also has a useful read across for other transitions. The changes around green buildings have started to happen not because of one single action, but because a number of factors have come together. Yes, building regulations are important. But, in a way they only happened because of public pressure (in this case from tenants), and demand from investors (the finance industry). It's hard to be sure, but if you took one away, the rate of change would likely be slower.
We can see similar trends in other transitions. One example is Electric Vehicles or EVs. Regulation is starting to be tightened (although it's facing some pushback), end consumer demand is growing, and investor demand for investible opportunities is growing. Together they are helping to drive change.
The message to Sustainability Professionals, work on all three elements (consumer opinion, regulation and finance). The absence of just one leg of the stool could materially slow change.
We looked at how much a green building could be worth recently. But the story we want to highlight is to do with building regulations - the Cinderella lever.
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