By now, it is fair to say that environmental, social and governance (ESG) principles are here to stay and will contribute to the betterment of real estate holdings and property management. Moreover, companies that adhere to the environmental guidelines will benefit from owning resilient and attractive assets, and landlords who ignore or delay will be placing their real estate’s future at risk.
As more and more companies adopt ESG practices, a cornerstone of which is carbon emission reduction, renting office space in buildings with dated technology is increasingly considered problematic. In fact, a growing cohort of tenants are threatening not to renew leases unless landlords invest in sustainable retrofits.
Most commercial landlords are not modernizing their so-called “brown,” or energy-deficient buildings, according to Ben Lipowitz, co-president of Kolostat, a 97-year-old mechanical contracting firm that specializes in decarbonizing commercial, residential and industrial buildings. Whether due to the present economic conditions, high interest rates or uncertainty in the office and retail sector occupancy rates, there is no sense of urgency for many building owners to move ahead with decarbonizing their buildings, said Lipowitz.
Despite a reluctance to make changes now, building owners know that they will have to address sustainability issues in the coming years. The risk of avoiding or ignoring the next environmental standards is best demonstrated by Ontario’s defined and escalating carbon tax which is expected to double by 2030. The tax is presenting landlords with the choice -- do I reduce my gas consumption now -- or do I pay a tax that will directly eat into my income and ultimately lower the value of my asset.
“We see clients in Ontario, who are calculating the return from a decarbonization project investment not only as enabling a rental increase and a decrease in operations cost but also as a tax saving, said Lipowitz.
When considered along with the benefits of having a resilient and attractive asset, the question is not if landlords will decarbonize their asset, but when.”
Quebec emerges as a Canadian green leader
Lipowitz noted that the province of Quebec for now, is the best province to start the decarbonization process. The province has the cleanest energy sources and offers up to 60 per cent of the cost for energy and GHG reduction retrofits in the form of grants. Taking government project funding into account, the average energy retrofit project has a three to six years return on investment.
Quebec’s grants program is Canada’s most generous, but other provinces offer other incentive-laden programs as well.
“When it comes to funds set aside for asset renewal, instead of replacing a gas boiler with a new one, the money should be directed towards decarbonizing designs, equipment and technologies,” he said.
“While these combined solutions could sometimes cost 20 to 30 per cent more, grants and programs offered by the government as well as available, targeted big banks financing, landlords save money by lowering operating and energy costs”.
Lending institutions expect decarbonization
Canada’s chartered banks are applying pressure on landlords to green their assets while at the same time offer financing opportunities for sustainable retrofits. Available funding dispels the notion that decarbonization and green technologies are too expensive as an investment.
In fact, some of Canada’s largest banks, pensions, and investments fund, are refusing to invest, finance or refinance commercial real estate, if decarbonization and sustainability retrofits are not included in the property owner’s plan.
“All of the Schedule I banks and investment groups are very supportive,” Lipowitz said, “because it is part of their own ESG commitment.”
Retrofits are time-intensive endeavours that involve detailed engineering, procurement, Government approvals, and construction planning and implementation. Securing a crane to refurbish the rooftop of a downtown Toronto tower for example, is more difficult than it sounds — and the bigger the portfolio, the longer the process.
As more commercial real estate owners wake up to the looming surge in carbon tax, generating a rise in overall corporate and investment pressure,“ the ensuing frenzy might mean that some building owners and operators will be left behind and will not be able to adhere to their corporate ESG commitments” LIpowitz warned.
CAPREIT moves to retrofit its entire portfolio
One of Kolostat & Krome’s clients, CAPREIT—a real estate investment trust with more than 65,000 units in its portfolio— started the retrofit and decarbonization program for its entire portfolio in 2017.
With leadership that realized the urgent need and market trend toward decarbonization, CAPREIT embarked on the project much earlier than most, securing its place as a leader in sustainability and building ownership. The REIT strategically secured its operations while other landlords will be scrambling at the eleventh hour to modernize their assets.
Lipowitz credits CAPREIT’s leadership with having the sagacity to heed its in-house sustainability team’s recommendations.
“Unfortunately, there is sometimes a clash in philosophy in the leadership teams, whereby the sustainability leaders—who understand the standards, financials, banks’ demands, government demands, and who have keen understanding of grant programs—are sometimes overruled,” Lipowitz said.
“Corporate and operations leadership should listen more to the sustainability team because their push for sustainability will ultimately save a lot of money for the operations and will assure the resiliency of the portfolio with better financing, investments, occupancy and longevity of the assets”