Commercial real estate companies in the U.S. and Canada are increasingly joining the race to net-zero carbon emissions amid mounting pressure from various stakeholders in the aftermath of the COVID-19 pandemic, industry insiders say.

Net-zero is defined as the state in which a balance is achieved between the amount of greenhouse gases produced and the amount removed from the atmosphere.

About 40% of carbon emissions globally are attributed to the built environment, and a significant portion of these come from electricity, heating, cooling and maintenance, which are necessary to operate commercial buildings, Christian Beaudoin, Jones Lang LaSalle Inc.'s director of research and strategy for the central U.S., said in an interview with S&P Global Market Intelligence.

Drivers for the transition to net-zero include increasing pressure from institutional investors to have a climate action plan and employees of real estate companies pushing management to address ESG issues, he added.

Additionally, tenants are increasingly choosing buildings that have sustainability features as well as modern amenities in a "flight to quality," Hameer Vaid and Hunt Holsomback of Alvarez & Marsal Holdings LLC said in a separate interview. Many lenders are also providing more favorable interest rates to sustainability-compliant real estate projects.

The communities in which real estate companies operate likewise have a goal to achieve net-zero by 2050 and many industry players are aligning their sustainability strategies to this objective, Boston Properties Inc. Vice President of Sustainability Ben Myers said during a session at the recent 2021 Urban Land Institute fall meeting.

Road to net-zero

More than a dozen real estate companies have committed or set net-zero goals since the start of 2021, as shown in the chart below.

Several other REITs made net-zero pledges in recent years, including Boston Properties, Kilroy Realty Corp., AvalonBay Communities Inc., Hersha Hospitality Trust, Prologis Inc., Digital Realty Trust Inc., Simon Property Group Inc., Host Hotels & Resorts Inc. and Healthpeak Properties Inc. Real estate brokers CBRE Group Inc. and JLL set net-zero goals in 2020.

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Despite a growing consensus on the need to decarbonize portfolios, the pace of company adoption differs. "Some are moving faster and are more progressive with their environmental strategies, while others are waiting to see if this really plays out," Beaudoin said.

Strategies and hurdles

To operationalize net-zero, companies need to measure their greenhouse gas emissions, which are classified into three scopes, Myers said at the ULI fall meeting.

Scope 1 emissions are direct emissions from sources owned or controlled by a company, including on-site combustion of fossil fuels, while Scope 2 emissions are indirect emissions produced off-site as a result of purchased energy such as electricity, heat and steam. Scope 3 emissions occur across the company's value chain, including suppliers, customers and end-users.

Strategies for achieving net-zero may include increasing systems efficiency, managing energy demand and sourcing energy from renewable sources, JLL's Beaudoin noted.

Real estate companies are likely to face near- to medium-term challenges on the path to net-zero, including the ongoing need to evolve operating models, Vaid and Holsomback said. Cost and time also pose barriers, especially as they relate to older real estate assets that need to be retrofitted. Capital requirements, cost recovery and permits for large projects also need to be considered.

Despite the initial upfront capital and amount of work needed to retrofit buildings, sustainable properties have the potential for a slight green premium in terms of rental values and tenant demand, although other factors come into play, Beaudoin said.

The bottom line is "an efficiency mindset is the right approach for commercial buildings," and real estate is a long-term investment that pays off over time, Beaudoin stressed.