Performance: greater expectations to achieve – and evaluate – results

The third of our 6 Trends Driving Sustainability in Commercial Real Estate is performance, or the drive to make our buildings energy efficient and cost effective. As part of our Pillars of Responsible Property Investing initiative, we constantly pursue “high-performing” buildings through sustainability strategies, improved operations, and excellence in property management. It’s always been the focal point of our green strategy – to reduce costs, mitigate risks, and add value to our properties. Yet, with recent global market dynamics, competitive pressures, and regulatory movements, the need to achieve even greater savings is growing.

A variety of factors are driving the increased market expectations for performance, but the most important is the signing of the Paris Climate Accord. Signed in 2015, this watershed event brought significant – and not entirely predictable – implications for real estate. Almost 200 countries signed the Paris Accord in an effort to accelerate and intensify a “transition to a near-zero carbon global economy in this century.” Participating countries will pursue aggressive efforts to limit global average temperature rise to well below two degrees centigrade above pre-industrial levels. The Agreement sets country-specific carbon-reduction targets, or Intended Nationally Declared Contributions (INDCs), which will likely drive national and local policy across several industries. While the direction of U.S. federal policy under the Trump administration is far from certain, many individual U.S. cities will likely go beyond proposed national measures. Internationally, investors will likely focus much interest and expectation on this issue.

Because buildings account for about one-third of global carbon dioxide emissions, real estate will be at the center of these policy activities. Many initiatives will target buildings and urban development because it is more cost effective and economically efficient to target the built environment in comparison to other sectors and asset types. In other words, real estate can be one of the areas with positive financial implications, if the Paris Climate Accord is factored into its strategies.

We are already seeing how the Paris Climate Accord aligns with and intensifies efforts around the environmental performance of properties. Setting “science-based targets” has become a growing effort in corporate sustainability programs. This methodology creates enterprise carbon-reduction targets in a manner consistent with meeting the two-degree global maximum. More than 200 companies are participating in the Science Based Targets initiative. In October 2016, Canadian prime minister Justin Trudeau directed provinces to work towards setting a price on carbon by 2018, or the Canadian government would do it for them. California recently approved two major bills, which target dramatic reductions in greenhouse gas (GHG) emissions. California is already on track to reduce GHG emissions to 1990 levels within the next three years. These new bills mandate an additional 40% in reductions by 2030. The state hasn’t provided a plan of action to achieve these emission reductions yet, but you can anticipate that real estate will be impacted. Similarly, the city of Seattle is currently finalizing compliance rules on a “building tune-up” policy that will begin taking effect in 2018. This will mandate that affected property owners “tune-up” energy and water systems every five years.

Likewise, there are continuing efforts to analyze and assess “financial performance” associated with sustainability. In 2015, the Appraisal Foundation (TAF) and their Appraisal Practices Board (APB) released advisories with voluntary guidance on how to value green attributes of commercial real estate and incorporate them into the market value of a property. Additionally, Earth Advantage is working with the U.S. Department of Energy to develop a training course for commercial appraisers on analyzing the impact of energy on real estate valuations.

It’s also worth noting that property performance is the last frontier on the Global Real Estate Sustainability Benchmark (GRESB) assessment, and the primary way for real estate investors to continue to demonstrate leadership in sustainability. As more companies begin to implement policies and management strategies for environmental, social, and governance factors, the green certification and actual energy, water, and waste performance of properties will define the true leaders in our field.

These growing expectations will continue to influence the execution of, compliance with, and communication of environmental policies and performance results to our stakeholders, and ultimately lead to much greater scrutiny of a property’s performance.

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Unless otherwise noted, the information in this document has been derived from sources believed to be accurate as of February 2017. Information derived from sources other than Principal Global Investors or its affiliates is believed to be reliable; however, we do not independently verify or guarantee its accuracy or validity. Past performance is not necessarily indicative or a guarantee of future performance and should not be relied upon to make an investment decision.

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