A European Lesson — Old Offices Are Expensive to Decarbonize
Sometimes the best way to see oneself is to use another as a mirror. The EU offers that opportunity to the U.S. office market at the moment.
Europe, more intently than the U.S., is trying to reach a net zero carbon level for office buildings, among other property types. However, as Bloomberg noted, it's increasingly hard given the average age of office buildings, the cost of retrofitting, and falling property values.
First, the age of European office buildings. JLL estimates that 30% of European commercial buildings were constructed before 1945. This varies by country. The U.K. has particularly old commercial buildings. Out of 5.9 million buildings, 600,000 — over 10% — were constructed before 1919.
The older a building, the more difficult and costly it is to retrofit for greater energy efficiency. Insulation, windows, doors, HVAC systems, plumbing, and more often need to be changed to introduce the structures and materials that have proven themselves in the ability to reduce energy use and carbon footprint.
Three complications make upgrades of older buildings more difficult. The first is when a property is historic. As JLL notes, there are often restrictions on what can be done on or with such a building. There may be restrictions on what can be done to a façade, no matter how practically useful a change is. The addition of rooftop solar panels might be prohibited.
The second major complication is addressing the "root causes of energy inefficiency and high carbon emissions within the building's structure and overall systems," Paula Albaladejo, EMEA head of sustainability, project & development services at JLL, said in prepared remarks. Switching over to low-power LED lighting or adding proximity or motion sensors to activate heating or cooling when people are present might seem fine. However, the desired degree of change could require structural changes, not simpler add-ons or replacements.
Age can also have a bigger impact as "old" may be younger. Bloomberg pointed out that 80% of the European office inventory is older than 10 years, making it outdated and needing improvements to meet climate goals. "The cost of works in London and Paris alone could top $77 billion," they wrote.
That is where valuations come in. When values fall, so do the expected rents. If there isn't enough income from the property, there isn't the financial leverage to pay for the needed changes.
The U.S. may be younger than Europe, but it, too, is fighting an aging office building problem. Last fall, JLL research suggested that the demand for climate-friendly buildings would be 75% higher than supply by 2030. Older buildings are difficult to modernize, and yet even top-tier offices aren't necessarily ready for what is required. JLL said that across half a dozen major markets, only 43% of Class-A office buildings are ready. Between now and 2030, JLL also estimated that 75% of new lease requirements by the top 100 office occupiers will have an explicit carbon commitment.
As is happening in Europe, U.S. demand grows for buildings that offer improved energy and carbon performance. And yet, it may not be economically feasible to bring enough older buildings up to par.
Source: GlobeSt/ALM