Capital Ideas: Is Sustainability the New Value-Add?
There's opportunity in obsolescence, according to a JLL report.
Sustainability—or rather, the inability to attain it—will be the downfall of many older properties. But sustainability may also be the answer to obsolescence.
That may be a stretch for owners of properties beset by aging designs in the face of increasing standards and regulation and limited access to capital for retrofits. But in a recent report, JLL makes a pretty good case for why sustainability could be the new value-add.
The report, authored by JLL’s Paulina Torres, global research director/sustainability, and presented during the Sustainable Finance & Investing forum at this week’s Greenbuild conference, notes that there is imperative for cities to reduce the environmental impacts of existing, particularly older, stock. In fact, retrofitting needs to increase by a multiple of five to reach net-zero goals.
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The report, however, identifies five other drivers that are hard to ignore:
- Investment momentum: Sixty-nine percent of investment is actually in markets with sustainable value-add potential. Meanwhile, high construction costs and built-out urban environments will necessitate the overhauling of existing stock.
- Low carbon lease demand: Tenants have made shrinking their environmental footprints a high priority. Three out of four future spaces will be built to climate targets, according to JLL. For landlords, this is a challenge and an opportunity.
- Energy market dynamics: Active management and generation of energy have the potential to add 25 to 50 percent to building revenues, Torres said.
- Physical risk adaptation: Insurance costs have increased 88 percent in the last five years, putting increasing pressure on owners to make their properties more resilient.
- Regulation: It’s still a core driver, but it’s no longer the only one.
The report also introduces JLL’s Value-Added Barometer, which tracks where and why sustainability is best positioned to offer value-add opportunities. Of the 30 cities JLL measured, London, Paris, New York, Toronto and Singapore offer the greatest momentum for retrofits.
The real proof, of course, is in the profits. The report examined the issue from a user-demand perspective. A more complete capital markets analysis will follow.
I recommend giving this research a deep dive. If JLL is right about opportunity in obsolete properties, there is no shortage of prospects.
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