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CRE experts outline progress, roadblocks toward net-zero goals

Tenants may be more willing to learn about sustainability than to pay for it, NAIOP panel hears

IMAGE: The NAIOP panel in Toronto
From left to right: Stuart Galloway, SOFIAC's executive vice-president; Toby Wu, QuadReal Property Group's executive vice-president of development; Michelle Xuereb, director of innovation at BDP Quadrangle; and Randy Gladman, managing director at Colliers Strategy and Consulting Group. (Courtesy Redstone Agency)

Sustainability remains a key priority for many businesses, but in the post-COVID environment it is not the most important consideration for a large block of employers grappling with difficult return-to-office and staffing issues.

That was one of the key discussion points during a NAIOP panel of experts at the forefront of Canadian commercial real estate as they updated the industry’s progress toward its net-zero goals.

“I would say that in the post-COVID environment where back-to-work and flex work is at the forefront of every single employer’s decision-making, that's probably garnered the highest consideration,” QuadReal Property Group executive vice-president of development Toby Wu said. “So sustainability and ESG, still very important.

"But I would say that most employers are just trying to figure out how to get their employees back in the office. And sustainability is important, but it's almost expected and it's about to drop down a little bit.”

The discussion, titled Developing through the turbulence and pathways to Net-Zero, took place during a NAIOP Q2 event at the Design Exchange in Toronto.

The other speakers were BDP Quadrangle director of innovation Michelle Xuereb, and SOFIAC executive vice-president Stuart Galloway. The panel was moderated by Colliers Strategy and Consulting Group managing director Randy Gladman.

NAIOP represents commercial developers, owners, investors and related professionals in office, industrial, retail and mixed-use real estate. Its Greater Toronto chapter was founded in 1977 and is the second largest in North America, with 1,100 members representing over 300 companies.

Pathways to net-zero

Regarding relatively new technologies that are helping building managers achieve their net-zero goals, Xuereb singled out geothermal for its slow rise to prominence and available financing models.

“I had my first geothermal project about 15 years ago and it was really slow to come along, and now we see it living up to (its potential),” she said. “I think part of that is this move towards decarbonization and modification, and it's a really good way to get your GHG (greenhouse gas) emissions down.”

Xuereb has noticed more net-zero curiosity from tenants, but not necessarily a sense of how far they are willing to go. This sentiment was echoed by Wu, who mentioned QuadReal’s tenant surveys, highlighting the issue of sustainability costs.

“Surveys consistently show 55, 60, 65 per cent of people actually care about better ESG sustainability and any kind of green,” he said. “But when you ask how (many) of them are willing to pay for it, it was 20 per cent. So that gap is still there.”

While the economics of a deep retrofit or new build may not always work in a tenant or developer’s favour, it will pay off in the long run, panelists agreed.

“What we're putting in the buildings today determines whether we actually get to net-zero in 2050,” Galloway said.

Future challenges

Xuereb cited a Canada Energy Regulator report entitled Canada’s Energy Future 2021, which predicts total electricity demand will increase by 47 per cent from 2021 to 2050, or about 263 terawatt-hours. Half of that increase, according to the regulator, would be driven by heightened electrification in the industrial, residential and commercial sectors. However, that increased electrification will need financing.

Galloway observed two major issues regarding that financing.

“One, the triple-net leases,” he said. “Two, sorry (commercial developers), they do not like to invest in something that is going to take five, or maybe any longer than five, maybe eight years to demonstrate the value back.”

There was acknowledgement that not all developers and owners have dedicated teams for every aspect of decarbonization, namely data collection and financing.

“Having a group like Stuart’s group (SOFIAC) to help you navigate through that process, with a financial program that they could provide for smaller loans and honours is a very viable strategy in absence of actually building up your team,” Wu said.

Galloway also cautioned against the paralysis that can come from simply waiting for grant money to decarbonize. He called anyone who says they can finance net-zero for free a “liar,” but recommended striving to get that last 20 or 30 per cent in reductions so as to not wait until 2035 or longer.

“(They) still might have to just top it up themselves, or kick the can down the road to 2030. But working on those different schemes to maximize your potential to get to that net-zero, you can demonstrate on your balance sheet, you've demonstrated for your own ESG reporting,” he said.

Most important, however, is demonstrating that effort to tenants.

"Therefore, you're attracting a tenant that is perhaps sitting at the moment with your competition.”

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