From the climate risk, to the push for net-zero, the wellness revolution and a wave of technology transformation - sustainability is driving a fundamental shift in commercial real estate, creating significant risks and opportunities for insurance underwriting and investment. These are some of the trends in play:
Climate Impacts Push Insurance Costs Upwards
A recent analysis by Moody's Analytics- utilizing data on more than 100,000 properties across the U.S. - found average U.S. CRE insurance costs increasing at 7.6% AGR since 2017, well above the 2-3 percent inflation that market participants generally budget for. In markets particularly exposed to climate-related risks, insurance costs have jumped by as much as 17% - and insurance availability has become an issue. These trends present a challenge for insurers, property owners, CRE underwriters, lenders and asset managers.
Moody's Analytics, Insurance Cost Trends Becoming a Headache for the CRE Market →
Demand for Sustainable, Low-Carbon Office Space Outpaces Supply
In a report released in March 2024, Jones Lang LaSalle (JLL) found that across 21 global cities leading commercial real estate, the existing stock of office space and development pipeline will meet 70% of sustainable/low-carbon demand by 2025, falling to 30% of such demand by 2030. JLL cites the influence of carbon reduction goals on how businesses operate and lease space, noting that 80% of the 7,600 Science Based Targets initiative (SBTi) corporate signatories have joined in the last 2 years alone. JLL argues this will lead corporates to sharpen their focus on scope 1-2 emissions from real estate, especially given that SBT is finalizing buildings sector guidance that addresses in-use operational emissions and embodied carbon. JLL also notes that in addition to voluntary corporate targets, regulations are taking hold in key markets. For example in New York City, Local Law 97 (LL97) came into effect in January 2024, limiting emissions on most buildings over 25,000 sqft (2,300 sqm) and assessing US$268/ton/year of excess emissions. JLL estimates 86% of premium office buildings will comply with the 2024 emissions limit, but only 4% will comply with the 2030 limit at current performance levels. JLL's view is that all of the above is pushing the leasing market to a tipping-point, given that 1 out of 3 leases to tenant with carbon commitment will expire in the next 24 months - and average lease terms of 7-10 years across markets will bump up against the many corporates setting ambitious 2030 carbon reduction targets. According to GRESB analysis of more than 150,000 participating assets, the flipside is that buildings that don't decarbonize will on average become stranded assets as soon as this year.
Jones Lang LaSalle, The green tipping point: Is 2024 the year when carbon commitments change lease markets at scale? →
Building Performance Standards Gain Momentum
A new report from CBRE outlines how Building Performance Standards (BPS) aimed at decarbonization and climate risk management are gaining momentum across the U.S. In 2023, ten new jurisdictions joined the 45 states and municipalities that already have mandatory BPS laws on the books, while 7 additional jurisdictions have rules under development. The federal government's National BPS Coalition coordinates such legislation, which relies on a combination of penalties for and public disclosure of non-conforming assets alongside enabling rules like those governing green leases, submetering, etc. In January 2024, the Biden Administration set its sights on net zero with the releas of its draft National Definition for Zero Emissions Building, and is now analyzing comments received through the March 6th, 2024 deadline. These U.S. policies mirror the trend in the EU, which enacted minimum energy performance standards in December 2023. For insurers, navigating the mandatory and voluntary standards and code landscape is a complex but critical piece of the low-carbon, climate-resilient underwriting and investment puzzle.
CBRE, U.S. Building Performance Standards in 2023 and Beyond →
The Challenge of Small and Medium-Sized CRE
RMI recently published reccomnedations for lenders, investors, and regulators based on a bottom-up carbon analysis of the US building stock, breaking down carbon emissions by segment, subsegment, and building size. RMI found that commercial buildings contribute 37% of US building emissions, and over half of these emissions (56%) are from small and medium-sized buildings - yet large buildings in the commercial sector attract the most climate-aligned investment and capital. The gap creates a decarbonization opportunity for CRE insurers and investors who understand the segments risk and operational profile.
RMI, Financing Building Decarbonization →
The "S" in the ESG, of CRE
The International Well Building Institute reports rapid uptake with nearly 5 billion sqft certified in 128 countries. The Fitwel standard reports 1 billion sqft, concentrated on the U.S. Research affirms the potential for high performance buildings to drive physical and mental health benefits, leading to increased employee satisfaction, productivity and retention, reduced absenteeism and medical costs, and higher rents and asset values. Insurers can capitalize on the nexus of sustainable and healthy buildings as an impact investing theme and strategy to mitigate underwriting risk while positioning for the sizeable health and wellness focused "insurance ecosystem."
A Wave of Tech will Transform Sustainability, and Risk
Technology is at the center of the sustainable building transformation. From smart sensors and data analytics, to intelligent HVAC and lighting systems, energy management and automation, predictive maintenance and more - the future of CRE is powered by technology, AI, and Internet of Things (IoT) solutions that will revolutionize how people interact with the built environment, and how stakeholders leverage real time building data for decision making. While the global smart building market is projected to grow from USD $100 billion in 2023 to over 400 billion by 2030, research from CRE leaders shows that technology adoption is still in its earliest stages. Insurers can proactively work to understand the associated changes in the risk landscape, adjust underwriting, and position tailored policies and risk services. Their asset management functions can in turn leverage that in-house knowledge to identify the CRE segments, players and technology providers that are likely to outperform in digital, sustainable, and healthy future.
Jones Lang LaSalle, Technology and Innovation in the Hybrid Age →
