Sustainable retrofits are a financially responsible choice for building owners, investors and developers even with higher upfront costs and hostile federal politics, panellists agreed at a joint Toronto Real Estate Forum-The Buildings Show event.

Speaking at the Metro Toronto Convention Centre on Dec. 4, the stage event hosted at The Buildings Show discussed the value of upgrades that lower carbon emissions, such as replacing natural gas-fired heating equipment with electrical systems.

Cost was widely agreed on as the biggest barrier to the retrofits, not just by the panellists but also among attendees. A live poll of audience opinion on the obstacles to sustainable retrofits ended with cost having the boldest, largest text on the screen by a substantial margin, dwarfing others such as knowledge and education, expertise, culture, and even U.S. president-elect Donald Trump that popped up.

“There’s a number of ways that these projects holistically add value,” Kit Milnes, vice-president of sustainability and resilience at KingSett Capital, said on stage. This reiterated a point he made with Sustainable Biz Canada about the company’s moves to electrify equipment in buildings such as Arthur Erickson Place and Fairmont Royal York.

Environment, social and governance (ESG) is increasingly embedded into the work of institutional investors, and unambitious targets are costing companies clients, Tonya Lagrasta, head of ESG at Toronto-based real estate services firm Colliers, added.

Even as ESG and Canada’s carbon pricing are under siege from strengthening political opponents, Lagrasta said it is critical to “cut through that noise” and stay firm on the multi-decade path to sustainability that will outlast four- and eight-year government terms.

Sustainable retrofits save costs? Panel says yes

KingSett has seen the retrofits cut operating expenses with amortization — operating costs at renovated buildings are down $1 per square foot on average compared to a business-as-usual strategy that relies on fossil fuels.

It “blew away our expectations” Milnes said. KingSett had expected to break even, but premiums are being paid back in approximately five to 11 years, for systems that will last over 20 years.

Even if the federal carbon tax is abolished with no replacement at the provincial or municipal level, a modelling tool developed by KingSett has found large energy savings, meaning overall operating costs will be kept low.

That is not to say accessing the financing was easy. For the Fairmont Royal York, Milnes recounted how KingSett had the arduous task of compressing a five- or 10-year mechanical replacement cycle into one to three years.

None of the options for up-front capital, such as tapping into existing lines of debt or bringing in new investors, were optimal for fast-tracking. The elevated capital premium and risks also worried some of KingSett’s investors.

CIB assists with financing

The up-front capital for a sustainable retrofit is typically higher than one that does not emphasize low-carbon features, Charles Todd, the managing director of investments at the Canada Infrastructure Bank (CIB), said. It is riskier to realize savings and sustainable technology does not yet have the weighty track record to satisfy long-term lenders.

But the Crown corporation has a mandate to support green infrastructure and “isn’t intended to make a certain return on behalf of government". Rather, its purpose is to "catalyze projects, to make projects happen that otherwise wouldn’t happen”, Todd said.

It aided KingSett, combining projects into the shortened time frame and giving the Toronto-based private equity real estate investment firm access to more capital at a preferred rate. The CIB also shared its analysis of the viability of the decarbonization, lending a second opinion that boosted the confidence of KingSett’s investors and partners.

As compelling as a sustainable retrofit can be, Milnes emphasized how much due diligence is required. KingSett, for example, chose projects it felt had the right timing, the right asset and the right partners.

The mechanical systems should be near or at end-of-life; granular, real-time building data should be accessible; the building ideally in a region that favours electrification; and the asset able to shoulder the capital premium.

Holding the line on ESG

The ESG policies that demand sustainability upgrades are becoming a standard across the industry, instigated not just by regulations but the industry’s own initiative, Lagrasta said. Most Canadian asset owners are facing ESG ques from tenants.

Tenants looking to lease a new space are telling Colliers they must align their ESG objectives with the building owner. If the owner is not sufficiently ambitious or has stunted progress, they will look elsewhere, lest they slide on their ESG goals. International investors from Europe are even more discerning.

The politicization of ESG is not going away, Lagrasta said, particularly with anti-ESG political winds on the rise. In the U.S., Trump’s re-election has ignited fear ESG investing and policies will be phased out because of his pro-fossil fuel agenda and opposition to diversity programs. In Canada, the federal Conservative Party has made ending carbon pricing a key thrust of its election platform.

Lagrasta urged the crowd to keep the faith because provinces, states and cities are advancing environmental regulation as much as the federal governments. A knee-jerk reaction today could mean facing penalties in the future.

“Don’t get distracted or caught up in the high-level politics.”

As the market becomes more accustomed to sustainability and gains expertise, the risks and cost will go down, Todd said.

Milnes also said sustainable building standards in cities such as Toronto, Ottawa, Vancouver and Edmonton will not disappear even if the federal carbon tax is scrapped.

“The momentum isn’t going to be turned around or turned off if a federal program comes and goes. The cities themselves and the provinces are driving it, and the existing building stock is going to look at what new buildings are being held to, and they’re gonna have to be keeping up with the Joneses with this,” he said.