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🌿 Green Retrofitting is Good for Business!

🌿 Green Retrofitting is Good for Business!

Exploring the climate tech trend

Launch Letter is a weekly newsletter that breaks down real estate trends and topics. Subscribers include brokers, developers, industry executives, and investors. If you are not already a subscriber, sign up and join the others who receive it directly in their inbox each week — it’s free.

Here’s what you will learn in today’s email:

Problem: The built environment has a massive carbon footprint
Big Idea: Existing building energy retrofits are good for business
Charts and Data: Exploring the statistics of real estate carbon emissions
Opportunities: How developers, investors, landlords, and entrepreneurs can take advantage
Players: Top investors, VCs, developers, and start-ups in the space
Key Takeaways: How landlords, investors, developers, and entrepreneurs can take advantage

👉 Problem

Real estate contributes 40% of global carbon emissions. Approximately 28% of this comes from the estimated 97 billion SF of existing buildings.

⚡ Big Idea

Climate tech and sustainability in real estate is a massive issue. Bigger than one newsletter.

This is certainly going to be the first of many rundowns on climate tech and sustainability as it relates to real estate and the built environment.

Today we'll start with a small piece of the problem - existing building energy retrofits. Many older buildings are lagging behind current energy standards and are in need of upgrades.

While there are many avenues to explore in new technologies and sustainability in building and real estate, there are also many existing technologies that have been available to building owners to upgrade and reduce their carbon footprint. Many have been looked at as cost prohibitive for building owners. Without seeing a short-term ROI, many landlords have kicked the can down the road when it comes to energy efficient retrofits.

We are at an intersection now with regulations, tenant preferences, and capital allocation that will force industry growth over the coming decade.

Regulation

Local government regulations:

NYC Local Law 97 - requires a 40% drop in GHG emissions by 2030 and an 80% drop by 2050
LA Green New Deal - new buildings must be net-zero carbon by 2030, zero-carbon emission technologies by 2050 for remaining buildings

Tenant Preference

A JLL study showed that 74% of organizations would pay a premium for a sustainable building.

Leading organizations, like Microsoft and Google, have announced carbon reduction goals for the coming decades, so they are likely to seek energy efficient and sustainable buildings.

JLL also finds that green and sustainable buildings with certifications like LEED and BREEAM can command a 6% rent premium and an 8% sale premium!

This trend isn't only for commercial office buildings.

73% of US home owners show a strong preference for environmentally friendly homes and would pay more for this type of home.

Renters show a similar trend in favoring LEED certified buildings. They collect 3.7% higher rent and have 4% greater occupancy than non-green buildings. The overall sale premium for these residential buildings is 8-10%!

Capital Allocation

VCs and Investors are investing more capital into the space.

Fifth Wall, a leading VC in the space, has been diving head first into climate tech and has raised a $500M fund to decarbonize the built environment. Fifth Wall made their mark in prop tech, and their founder, Brendan Wallace, believes that the climate tech market is a huge market ready to be disrupted.

📊 Charts and Data

This chart looks at our current greenhouse gas emissions with no climate policy and how we can reduce with policies that are being put into place. It's clear that there is a path to sustainability with the right regulation and incentives in place.

Real estate is the world's largest asset class and decarbonizing buildings is a multi-trillion dollar market.

Not only is real estate the largest asset class and opportunity, but it is also a big part of the problem, responsible for 28% of global carbon emissions.

🔥 Opportunities

How to Finance Retrofits

Take advantage of corporate and government incentives to upgrade and retrofit your buildings. Many financing options exist through government programs or companies for no or low up front costs. The payments can be made on the back end based on the energy savings.

Attract Top Tenants and Buyers

Residential - buyers and renters are showing a preference for sustainable buildings and have shown that they will pay more for them.
Office - demand from office tenants is only going to grow as companies look to boost sustainability.
End users will pay less in utilities and operational expense in higher efficiency buildings
All classes of real estate will benefit from higher valuations as regulation will push all buildings to higher energy standards

Increase Operating Income and Value

Landlords will boost the bottom line by paying less in utilities and operational expenses. This also results in a premium to the valuation
Building sensors and monitoring systems are now available for greater control and insight into building operations

Reposition buildings and implement building upgrades

This image below gives a great overview on the types of energy efficient retrofit upgrades that can be done.

Source: JLL Report

Here are some of the most common retrofit upgrades to boost the efficiency and value of your building:

Heat pumps
Insulation
Window glazing
LED lighting
Energy efficient appliances
Smart thermostats and sensors

Build Companies to Support Net-Zero Building Goals

There are many opportunities in the space for entrepreneurs to build hardware and software to support this industry.

Y combinator is on the lookout for climate tech start-ups.
Estimated $300B in dry powder for climate tech companies

🤝 Players

Now that we’ve identified the problem and opportunities, let’s look at some of the players in the space.

Investors

Blackrock ESG Investing

Goldman Sachs ESG and Impact Investing

Hanon Armstrong investments in climate solutions

Venture Capital

Fifth Wall

JLL Spark Ventures

Undivided Ventures

Developers

Hines 345 Hudson retrofit project

Empire State Realty Trust retrofit playbook

Start-ups / Companies

Verdigris Technologies

✅ Key Takeaways

Smart investors and developers are going green and retrofitting buildings to higher energy efficiency standards. These investments will result in higher rents and valuations.

In addition to "green premiums", there's also another powerful factor at play - the "brown discount". Buildings that are not brought up to energy standards will lag behind. Not only will they not command higher rent and sales premiums, but they are also at risk for future taxes and government regulation.

Further government action is expected. While cities like NYC and LA have taken action, it's likely that we'll see more federal and local governments rolling out sustainability initiatives to achieve net zero carbon targets.

As more companies create sustainability plans, there will be a greater demand for energy efficient office buildings.

With energy efficient buildings comes greater health and comfort. This will also spur demand in the residential sector as people will demand sustainable homes.

Final thought: Not only is going green good for the planet, it's also proven to be good for business!

Resources:

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