PropTech in a Low-Carbon Economy

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Anyone working in the property industry must be aware by now of the magnitude of the built environment’s contribution to climate change. Nearly a third of all global anthropogenic greenhouse gas emissions can be attributed to the construction and operation of buildings. Reducing that impact is a huge challenge that we all have a duty to address if we want to think of ourselves as responsible citizens (and parents and grandparents).

Over the last decade, most leaders in the real estate industry have taken some form of action to address their properties’ environmental impacts. In many cases, their actions have made business sense: lower energy consumption reduces operating costs, and improved indoor environmental quality contributes to productivity. There is a measurable ROI attached to adopting carbon reduction technologies—up to a point. In other cases, publication of investments in sustainability measures can be an important indicator of a real estate firm’s commitment to values that are resonate with tenants/customers, shareholders, and employees (i.e. environmental, social and governance accountability, or ESG). As a result of either motivation—ROI or ESG—important actions have been taken, and a large and growing number of buildings can be said to be performing better than ever in this respect.

Despite our progress, when you look at the overall magnitude of the challenge in front of us, we should acknowledge that our efforts don’t really amount to much more than tinkering at the margins of the problem. According to estimates from the Architecture 2030 Challenge, between now and 2060, the world will add 230 million square metres of new floor area. That’s roughly the equivalent of the entire floor area of Manhattan every month for 40 years! Meanwhile, two thirds of the buildings standing today will still be around in 2030, and we are currently only upgrading about 1% of them on an annual basis (see Global Alliance for Building and Construction). That rate needs to triple or quadruple quickly for the built environment to achieve carbon neutrality by 2060. Another way to frame how far behind we are: out of the tens of millions of grid-connected buildings in the world, today there are approximately only one thousand that are net zero energy. We’ve made progress lately, but we have a long way to go in a short time. We need to step up our game and get more aggressive about how we construct, manage, and upgrade our properties.

There are ways to get there. Governmental regulation—requiring that all property owners and builders address their carbon footprint—has the most potential to level the playing field. But command-and-control is also the most likely to provoke a backlash from the industry in North America and dev­eloping countries, where change is really needed. Nonetheless, certain progressive North American and European jurisdictions are promulgating ambitious carbon and energy reduction mandates, while also acknowledging the capital requirements to implement them. On one coast of the US, we have the New York City Green Deal (40% reduction for roughly 50,000 large buildings by 2030 at a cost of US$4B), and on the other are state-wide mandates in California, such as the move to Zero Net Energy (2020 for new homes and 2030 for new commercial buildings). On the private side (or public-private side, as the case may be), several large-scale aspirational developments in the planning stage will push the envelope on innovation and sustainability even further. A good example is Sidewalk Labs, an Alphabet company, which recently published neighbourhood-scale plans for a sustainable smart city on the Toronto Waterfront.

What we’ve been waiting for is a sign of real leadership from the property industry itself (apologies to our friends in the industry who have been announcing their commitments to sustainability in annual reports in recent years, but it’s not enough).  We need a signal that the industry is at last prepared to match a formal commercial commitment to the actual magnitude of the challenge—with no more tinkering around the margins.

Happily, with the announcement that Grosvenor has just committed to net zero across their entire global portfolio, we may have seen the first major owner do just that (disclosure: Grosvenor’s Indirect Investments division is GBIF’s lead investor). I encourage everyone to read the statement issued by the Grosvenor Group’s CEO Mark Preston, which outlines the details of their commitment. The most extraordinary line, which clearly demonstrates Grosvenor’s understanding of the stakes involved, is the following: “We would not typically commit to any real targets without a clear plan of how to achieve them. Yet, unless we make this a top priority and pursue innovation, we won’t build the necessary momentum to make it happen fast enough.” In other words: we acknowledge that the significance of the problem requires us to act now, even if it means figuring it out as we go. Thank you, Grosvenor. Really.

Achieving a low carbon economy for the built environment at scale—and, importantly, profiting in it—will be complex and multifaceted. There are still too few universal, clearly discernible, and non-regulatory commercial mechanisms to account for environmental externalities in a real estate transaction. Fortunately, there are also technological innovation tailwinds that are starting to enable the transition that leaders like Grosvernor are now undertaking.

Three macro-level technology trends are underway that are enabling the low carbon evolution of the built environment: 1) The commodification of energy efficiency and renewable energy equipment; 2) The widespread penetration of wireless technologies and internet-connected devices; and 3) Migration of asset management processes to the cloud and/or smart devices. A fourth innovation area—building materials—is also advancing quickly.  Added together, the innovations and trends in these segments will help leaders like Grosvenor live up to their exemplary commitment, and PropTech innovators must help them navigate their way.

Ten years ago in Toronto, a 10kW rooftop photovoltaic array would have cost a building owner $10/watt. The same installation today is under $2/watt. Thanks to economies of scale, global manufacturing infrastructure, and supply chain integration, the cost of incorporating zero carbon renewable energy into buildings has seen a reduction of nearly an order of magnitude in less than a decade. As a result, we are seeing some real progress in the decarbonizing of electrical grids (even a 10% improvement over the last decade in the US, which is still stubbornly fossil fuel oriented and politically conflicted on the significance of climate change). Aside from cost, the other main challenge constraining widespread reliance on renewable energy is that the sun doesn’t always shine and the wind doesn’t always blow. We need energy storage to be able to fill the supply gaps from intermittent generation. Like solar panels before them, batteries have always been too expensive, but we are now starting to see evidence of a steeper downward cost curve. California is playing the same role in creating economies of scale for storage that it did for solar a decade ago, both by design (mandates and incentives) and by the accident of poorly maintained infrastructure (power grid fire safety shutoffs affecting millions of customers). As a result, the attachment rate of solar + storage will continue to accelerate for some time.

The rapidly declining price of renewables is good news for de-carbonizing power grids around the world.  A low or zero carbon grid sounds like an easy solution for the property industry—we could switch to all-electric buildings and plug in. Unfortunately, in places with high heating demands, it is expensive to switch from natural gas to electric heat. Building owners would need to increase their overall rate of adoption of energy efficiency measures in order to reduce their loads and keep operating costs down. The good news is energy efficiency technologies, like renewables, have also seen significant cost reductions. The broad industry-wide conversion from electronic (fluorescent) lighting to digital (LED) lighting, which was considered too expensive by most property managers in North America as recently as two years ago (Europe’s adoption was earlier), is an impressive example. And low-cost sensors for everything is the latest one enabling the digital IoT revolution. On the HVAC side, advanced cold climate electric heat pump technology has started to be adopted by large builders in northern latitudes, and several innovative third-party financing and micro-utility ownership models are helping to amortize investments in large energy saving installations.  One of the most extraordinary examples is taking place in downtown Toronto, where Enwave, a local district energy utility, is installing two enormous water cisterns 150 feet below a community that will support 11,000 people in order to provide a thermal reservoir for energy efficient heat exchangers to mitigate heating and cooling peak loads (see The Well). Cost-effective electric buildings plugged into a decarbonized grid is no longer just a technological or financial pipe dream.

A second major technology trend that supporting carbon reductions in real estate is the propagation of wirelessly enabled internet connected devices. Sorting through the plethora of wireless communication platforms and protocols (WiFi, LoRa, Zigbee, 6LowPAN, LiFi, 5G, Sigfox, data over sound waves, etc etc) may be a challenge for property managers, but it is a symptom of an evolving ecosystem that promises to lower the installation costs associated with upgrading millions of existing static buildings to make them more responsive, intelligent ones. The IoT revolution would be much harder to scale if the billions of new control devices and sensors needed wires and conduit to connect to each other and to the internet. Wirelessly networked devices and internet routers mitigate some of the capital barriers to smarter buildings.

Which leads to a third enabler: the cloud. Thanks to the proliferation of cloud-based software services, building managers now have detailed visibility in real time on building operations at a very granular level. These new services offer a range of functionalities that can significantly improve building performance and achieve a range of carbon reducing energy management objectives: remote commissioning, retro-commissioning, HVAC and lighting controls, etc. Although tech companies and investors are still experimenting with monetization models for the enormous data sets generated by the new IoT devices, they have already developed new AI algorithms that are contributing to improvements in the way space is utilized and conditioned.

A final frontier in real estate innovation and technology that has massive potential for carbon reduction is building materials. Presently, 2/3 of the GHG contributions from real estate result from building operations; 1/3 from embodied energy/carbon. Over time that will change to a 50-50 split. As we strive for an ever-shrinking carbon footprint, construction materials will become increasingly relevant, stretching up the supply chain to highly impactful natural resource extraction industries and manufacturing processes. There are exciting developments in this area, including new carbon capture and re-use technologies addressing the concrete and steel industries. Some sustainability pioneers have announced they will be adopting natural replacement systems, such as cross-laminated timber (CLT) frame structures.

Property technology on its own cannot deliver a low-carbon built environment. It would be nice to have cost-effective solutions at our fingertips that we can buy and turn on to solve all of our challenges. But we aren’t there yet. In the meantime, we need to consider our own behavior as real estate builders, buyers, managers, and tenants. How do we instruct our architects and engineers to design new properties? What measures will tenants and landlords take to improve the operations of their buildings? What are they prepared to pay for?  How should climate risk (or mitigation) be factored into our underwriting? Just because technology has evolved and solutions exist to improve our prospects, doesn’t meant that landlords will implement them. They still take time to understand and cost money to purchase.

There has long been a tension between pessimistic environmental forecasts and hopeful expectations that technology will constantly evolve to maintain a balance. The problem is that purchasers often wait for regulations to change or for the right market signals to influence our buying and investment decisions. While both of these factors are improving the enabling environment for a less carbon intensive future, we still need corporate real estate leadership—leadership prepared to act in advance of mainstream codes and market drivers. Bold measures from forward-thinking companies like Grosvenor need to lead the way. Technology and innovation will be there to support them. Let’s hope the rest of the industry will be there too.