The most logical expression of my passion for climate solutions is to marry it with my professional experience in the institutional real estate world and identify a means to scale sustainable real estate solutions. To achieve this, I must first define what “sustainable real estate” is from a holistic perspective – meaning, to consider all inputs relative to real estate’s environmental impact globally. Uncovering a holistic approach to sustainable real estate is not a simple task: it is a relatively new concept, and each firm and trade organization has their own view of what sustainable real estate is. Many groups identify elements of sustainability; not many incorporate all aspects of real estate’s environmental impact.

This is the last of a series of posts detailing what I have identified as a framework for a holistic approach to sustainable real estate. This framework has four components:

1. Reduce embodied emissions (net zero where possible)
2. Net zero operational emissions
3. Optimize location-driven emissions
4. Reduce, reuse and recycle

This post addresses the third and fourth components as well as a few final considerations. Thank you for reading!

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#3 Optimize Location-Driven Emissions

Of the four pillars of sustainable real estate that I have identified, location-driven emissions is the one I feel both the institutional investment world and the U.S. as a whole are missing the most. The principle of location-driven emissions follows a simple logic: the closer together that people live, work and play, the less energy it takes to transport people, goods and services, as well as heat and cool the spaces the people occupy. This is something I covered in detail in my post Sustainable Observations from Europe and I will reuse some of that language here:

Consider this as an example taken to its extreme: if one million people live and work in a city with a footprint of 10 square miles, how much energy will it take to move the people to and from work daily? How much energy will it take to bring the people their food and next-day Amazon deliveries? Think of the subways, bike lanes, cars (if needed) that would be required. Now picture those same one million people spread across the entire footprint of the continental United States. How much energy will be needed to serve those same one million people? In the latter example, far more infrastructure and energy will be required to achieve the same goal.

Now use those same scenarios and apply the test of heating and cooling each building the one million people live and work in. Which scenario will use more energy to heat and cool? In the case of a densely-populated city, unit sizes are smaller and benefit from shared resources (e.g., large apartment and office buildings often have central heating and cooling, and units share walls instead of each having all exterior-facing walls). The spread out scenario requires much more energy to heat and cool.

In addition to the graphics shared in Sustainable Observations from Europe, the below graphic effectively demonstrates the relationship between population density and emissions, shown as distance from the city center (here distance from the city center and population density are inversely correlated). 

Common perception seems to be that cities are juggernauts of energy consumption and thus the key drivers of emissions. While that is true, it also does not tell the full story. The reality is that cities consume less energy on a per capita basis than suburban and exurban communities, and per capita figures are what tip the scale in a holistic view of global emissions¹.

In addition to emissions, which are only one element of the ecological health of our planet, cities require less land use per capita than suburbs and exurbs. The more land we consume with our buildings and industry, the more disruption we cause to the ecosystem, which brings with it an onslaught of side effects such as species extinction and pollution. Vishaan Chakrabarti, a leading architect in New York, puts it simply: if you love nature, don’t live in it².

There are many reasons for the U.S. growing into the spread out, suburban country that it is today, some of which I covered in Sustainable Observations from Europe. Today, it seems intuitive that some folks prefer to live with more space in suburban settings. What is not intuitive, however, is that the creation and expansion of suburbs in the U.S. are far from a natural phenomenon. Suburban living at scale is made possible by a number of government subsidies enacted throughout the last century, including the following³:

• Federal home mortgage interest deduction (MID), making the ongoing cost of homeownership lower
• Government sponsorship of Fannie Mae & Freddie Mac, which increases liquidity for mortgages and ultimately lowers the cost of borrowing for home owners
• Fossil fuel subsidies, which lower the cost of person vehicle transportation (and discourage mass transit, on a relative basis)
• Disproportionate share of federal tax dollars allocated towards suburban and exurban infrastructure, leaving cities starved of critical funding sources resulting in less attractive urban lifestyles
• Failure to price negative externalities associated with fossil fuel combustion (e.g., carbon pricing)

All of these factors have resulted in a monstrous consumption of land, a level that has quadrupled since 1945, increasing at above twice the rate of population growth⁴, and the shift of Americans moving from urban settings to suburban settings. I am not suggesting that we should not have suburbs, only pointing out that the suburban model the U.S. currently sports is made possible by policies, and that without them, more people would live in urban settings. Perhaps it is time to put in place policies that promote urban living or, at a minimum, appropriately account for the societal costs associated with suburban living.

Density & Human Health

Stepping away from environmental sustainability for a moment, another interpretation of sustainability is relative to human health. To that end, there are health benefits associated with building cities reliant on walkability. While suburban life is romanticized for its access to space, it is all too easy to commute in a suburban lifestyle without walking more than a hundred or so steps: you walk from your house to your car (possibly inside of your house), and then from your car (parked next to, or inside of, your office building) to your desk. We have designed American life to minimize physical engagement.

There are additional negative externalities associated with suburban commuting: longer commuting times are associated with lower levels of physical activity and higher rates of obesity⁵. Naturally, this does not mean that all people who live a suburban lifestyle are less active than those who live urban lifestyles; these are simply observations we can use to inform our decisions now (and in the future) regarding the places we live, work and play.

Global Considerations

Despite the projected population and wealth growth in places like India, China and Africa over the next several decades, there is reason to be optimistic about the real estate development that will accompany that growth. These countries have much higher population densities than the U.S. and, as a result, will (all else equal) incur less location-driven emissions associated with the new building footprint (relative to what the U.S. has emitted, on a per capita basis). However, if those areas of the world elect to follow the U.S. and grow through large-scale suburbanization, location-driven emissions will rise at a markedly higher pace.

[Global population density, demonstrated by the height of each spike. Source: Automatic Knowledge]

Action Items

Bringing this back to real estate, what does this all mean? The solution is not simple; it requires both private and public mobilization and investment. From a private real estate investment perspective, I contend this all means we should focus on creating desirable destinations in urban environments that are dense enough to support rapid mass transit, which is generally thought of as 30 housing units per acre⁶. In building desirable, high-density destinations, the private sector, who will be greatly contributing to an increase in tax revenue in a given locale, will have increased lobbying power to cities to promote public investment in enhanced transportation infrastructure.

An interesting byproduct of the above logic is the dilemma of investing in cities with low density and poor public transit. Should the institutional investment world shun those cities for their inability to curb location-driven emissions? From my view, this is difficult to solve from the private sector. Perhaps the greatest thing the private sector can do is to demonstrate the value dense cities generate by virtue of their efficient rapid mass transit networks. In an ideal world, cities with poor mass transit follow by incentivizing urban development and funding rapid mass transit. This is a difficult one to solve and I challenge city planning thought leaders to tackle it.

From a finance perspective, which is the world I operate in, cities and private developers can coordinate creative financing structures that enable private developers to contribute to the costs of infrastructure development without contributing any dollars upfront. Such structures include issuing bonds collateralized by the future cash flows generated from real estate tax increases spurred from new development around the transportation infrastructure. While developers never like adding to their future tax bills, they do like the ability to charge more for office space and apartments due to proximity to efficient mass transit.

Unfortunate Momentum

As I write this in the summer of 2022, one thing the principle of location-driven emissions has in its favor is that gas prices have flirted with all-time highs (at one point reaching $5.00/gallon) here in the U.S., driven by a global energy crisis. People are questioning why the U.S. relies on countries halfway across the world for its core infrastructure (energy), which is leading to discussion around enhancing mass transit. This recent spike in gas prices has increased mass transit ridership and increased both consumer and manufacturer focus on electric vehicles. One study from 2002 to 2009 showed that for every 10% increase in fuel costs, bus ridership increases 4% and rail ridership increases by 8%⁷. I am hopeful the U.S. will seize the opportunity to add emphasis to furthering its renewable energy goals in this time of volatile fossil fuel markets. The passing of the Inflation Reduction Act of 2022 is a start.

Thought Experiment

If you haven’t read about or watched any content on The Line, it is worth checking out (link at the bottom). The Line is a planned civilization in northwest Saudi Arabia which aims to house 9 million residents in a vertical city that is 500 meters tall (Empire State Building is 405 meters tall), 200 meters wide (roughly two football fields) and 170 kilometers long (roughly the distance between Manhattan and Philadelphia). Designed as a compact urban environment, the civilization will run on 100% renewable energy and will have no need for cars; one can travel end-to-end in 20 minutes via public infrastructure, and all daily needs (residential, food, health, education, retail, leisure, etc.) will be served within 5-minute walking neighborhoods.

The Line touches on two key concepts. The first is that by building vertically and in a dense fashion, far less land is consumed (only 34 square kilometers; by contrast, Manhattan is roughly 36 square kilometers), preserving nature and land destruction. The second is that the compact nature of the design allows for walkable neighborhoods, removing the need for cars; what cannot be reasonably achieved by walking can be achieved through leveraging strong public transportation.

#4 Reduce, Reuse and Recycle

The final pillar of a holistic approach to sustainable real estate is the principle of reduce, reuse and recycle. Throughout the decision-making process in a real estate construction or renovation budget, as well as during operations and asset management life cycle, there are opportunities to reduce resource consumption and increase the reuse and recycling of resources. Below are a few examples that I am focused on. 

Reduce

Reducing the resources we consume across the built world is something we do not need innovation to do now. When designing space, architects and developers should consider designs that place a priority on efficiency of materials. One recent aesthetic trend supporting the principle of reduce is the trend of office tenants seeking exposed ceilings in their layouts. For decades, landlords covered up ductwork and electrical materials, which both required extra materials (ceiling tiles and metal brackets to hold them) and lowered operable ceiling heights. Today, many office tenants, favor the exposed ceiling look which creates an industrial feel and raises ceiling heights. What other aspects of the built world have become status quo that we can rethink?

Perhaps the most critical resource we can reduce our consumption of is land, particularly in developed countries like the U.S. As noted in “Optimize Location-Driven Emissions” above, land consumption in the U.S. outpaces population growth; how long can we sustain this? Let’s look to cities such as Hong Kong, which both utilizes careful land consumption and high-performing mass transit, leading to the most efficient transportation system globally⁸. 

To consume less land, we need to focus on leveraging our existing building stock, which takes us to Reuse.

Reuse

As noted in “Reduce Embodied Emissions”, renovating (reusing) existing buildings is the single greatest thing we can do to reduce embodied emissions. The structure of a building is the source of most of the upfront embodied emissions, and so even if renovating a building means only maintaining the structure, that is a better path than tearing the building down. Accessing the reclaimed materials market (detailed in “Reducing Embodied Emissions”) is another opportunity to employ the practice of Reuse; I’ve repasted that section below:

Instead of procuring all new, first-use materials, consider accessing the reclaimed materials market. Reclaimed lumber can be used for both structural and decorative purposes, and so can reclaimed brick. When fitting out tenant space, take advantage of reclaimed furniture and fixtures. In addition to their environmental benefits, reclaimed materials create unique aesthetic features that can drive value.

Recycle

In addition to on-site waste recycling, which should be the bare minimum of any building’s sustainable practices, there are circular opportunities that the real estate industry has slowly begun to take advantage of. 

One of the most obvious opportunities for recycling resources is water. Water that is consumed in commercial buildings is generally all potable (drinkable) water coming from the public supply system; however, many points of consumption in a commercial building do note require potable water. In a multifamily building, for example, points of consumption that do not require potable water include toilet flushing, laundry machines, irrigation and cooling towers. Technologies exist today that allow buildings to recycle and treat wastewater on site so that it can be used for non-potable uses.

One such company, Epic Cleantec, makes systems that can recycle up to 95% of wastewater, resulting in a 95% reduction in demand from the public water supply for the associated uses. By treating wastewater, Epic Cleantech’s systems produce three outputs: clean water, soil products and recovered wastewater heat energy. Epic Cleantech targets a seven year return on investment for its clients (building owners)⁹.

Policies are popping up around the country that require building owners to implement these systems. In San Francisco, for example, all new construction properties over 100,000 square feet are required to utilize on-site water reuse systems¹⁰.

Another opportunity for on-site recycling is in anaerobic digestion, which is the process of breaking down organic matter – such as food and human waste – in the absence of oxygen, resulting in the creation of biofuels and digestrate (e.g., organic fertilizer). HomeBiogas and MyGug are two companies that offer anaerobic digestion systems for both commercial and residential uses.

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Additional Considerations

What About the Cost?

The greatest concern for real estate stakeholders when evaluating whether to take the sustainable path is cost: will the costs of sustainable improvements lower their returns (owners) or increase rent (tenants)?

RMI (Rocky Mountain Institute) and Skanksa (global construction firm) collaborated to analyze the costs associated with implementing currently-available embodied carbon reduction practices on a substitution basis. Across three case studies in the Pacific Northwest regarding mid-rise commercial construction projects, RMI & Skanska concluded that current materials and practices allow for up to a 46% reduction in upfront embodied carbon at less than a 1% cost premium when evaluated on a substitution basis for status quo materials and practices. It is possible greater emissions savings can be achieved (at similar relative costs) when a whole-building design is considered (vs substitution as used in this case study).

Regarding operational emissions improvements, many such improvements are inherently associated with cost benefits. By reducing demand for energy, owners and occupiers spend less on ongoing energy costs. The question is a matter of payback period: how long does it take for upfront costs to be repaid via lower operating expenses? In a global study by the World Green Building Council, groups who frequently implement green retrofits have a median payback period of four years for those improvements¹¹.

Ultimately, the cost-benefit analysis is unique to each asset. Some sustainable improvements may not demonstrate a “market” payback period for the capital costs associated with the improvements; when that is the case, stakeholders must ask what the cost of inaction is. While the payback period may seem long, not acting could position the asset negatively down the road as occupiers and investors alike demonstrate greater demand for and attention to sustainable real estate.

Climate Risk

The thesis I have put forth focuses solely on the environmental impact of real estate. The flipside of the equation is the environment’s impact on real estate, known as climate risk. Climate risk is the risk of (i) damage or destruction to a property or (ii) material adverse effects on business operations at a property as a result of a changing climate or severe weather events. Climate risk is a key consideration for stakeholders’ go-forward operational plans as well as capital allocation strategies.

In terms of operations, it is critical that stakeholders understand the prevalent risks to the subject property. There are steps stakeholders can take to better prepare a property for strong winds, flooding, extreme heat and wildfires. Increasingly, properties deemed to be at risk that do not have these protective/preventative features will face discounted valuations in the capital markets as buyers budget these necessary capital costs.

Capital allocators are faced with a dilemma: should institutional capital dollars shy away from areas that are subject to high climate risk? In ways, this is as much a social and moral question as it is an economic question. Investors have become accustomed to assessing micro climate risks, such as flooding risk in the Financial District of Manhattan (particularly those who worked in Manhattan during Hurricane Sandy). Though with cities like Miami gaining institutional attention across a variety of outlets, it does not seem that climate risk has materially altered capital flows on a macro level yet. It is likely that the insurance industry will lead the way here (e.g., a lack of cost-effective insurance in a given market will give buyers concern).

Conclusion

While real estate is arguably the greatest contributor to climate change, we have technologies available today to drastically reduce real estate’s impact on the environment. Perceptions of higher cost have inhibited stakeholders from committing to sustainable improvements. With increased education and awareness of best practices across all stakeholders in the industry, it is my hope that stakeholders in the institutional real estate world not only commit to, but act towards making the industry more sustainable – now.

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If you’ve gotten this far, thank you for reading! I’d love to hear your thoughts on implementing a holistic approach to sustainable real estate. Feel free to ping me via email or on LinkedIn (available on the Contacts page).

PJF JR

Continued Reading & Education

Pique Action

The Line

Sources & Notes

1. A Country of Cities, Vishaan Chakrabarti, page 82.
2.  A Country of Cities, Vishaan Chakrabarti, page 78.
3.  A Country of Cities, Vishaan Chakrabarti, page 38.
4.  A Country of Cities, Vishaan Chakrabarti, page 20.
5.  A Country of Cities, Vishaan Chakrabarti, page 106.
6.  A Country of Cities, Vishaan Chakrabarti, page 21.
7. Bloomberg.
8. A Country of Cities, Vishaan Chakrabarti, page 80.
9. CNBC.
10. The Impact.
11. World Green Building Trends 2018, Dodge Data & Analytics, page 39.