Real estate stung by “sobering” climate report
Can the industry rise up to the climate crisis?
A new United Nations report paints a bleak picture: The world is on a path toward climate destruction, sea levels will continue to rise, ice caps will melt, and temperatures will reach insufferable levels. The impact on real estate could be enormous.
The report, published Monday by the U.N.’s Intergovernmental Panel on Climate Change, says there are ways to mitigate the worst effects of climate change. But at the least, human activity will cause temperatures to rise about 1.5 degrees Celsius within the next 20 years.
The implications for the real estate industry are apparent: Rising sea levels could cause flooding and threaten coastal home values, while insurers could back out of underwriting properties in areas vulnerable to extreme weather.
“Every IPCC report is a call to action,” said John Mandyck , the CEO of Urban Green Council, a New York-based nonprofit that advocates for sustainable buildings. “What makes this one different is the sobering nature.”
Although talk about climate change often centers on the transportation and energy sectors, real estate is a major culprit. In New York City, buildings are responsible for over two-thirds of the city’s greenhouse gas emissions, according to the mayor’s office of climate and sustainability.
In 2019, New York City passed Local Law 97 in a bid to reduce building emissions 40 percent by 2030 and 80 percent by 2050. Landlords who do not comply are subject to fines beginning in 2024 and harsher penalties in 2030.
“Local Law 97 absolutely will be effective in the reduction of greenhouse gas output,” said Anthony Malkin, the CEO of Empire State Realty Trust and chair of the Real Estate Roundtable’s Sustainability Policy Advisory Committee.
But Malkin, who is also on the advisory board for Local Law 97, said he hopes the new mayor and City Council will take into account “embodied carbon,” meaning the emissions from the entire lifecycle of building materials such as steel. He also said lawmakers should look at whether the power grid can support the law’s push to electrify systems that currently use fossil fuel.
“We need to make sure we have a grid that can supply that degree of clean energy for all that electrification,” said Malkin.
The Real Estate Board of New York, the industry’s most prominent trade group in the city, has asked for more ways for landlords to comply with Local Law 97. Part of the problem, industry insiders say, is that landlords are held responsible for energy use by their tenants. Compliance for landlords whose tenants are data centers, or whose buildings are densely occupied, for example, is more difficult.
One possible workaround is to implement a carbon trading system where low emitters can sell credits to high ones. But critics argue that it gives polluters a pass. Others question whether the market will have the necessary scale to be viable.
Another controversial way that landlords are seeking to reduce their carbon emissions is through “carbon neutrality” where carbon output is entirely offset by investments in carbon reduction. Brookfield Asset Management, whose vice chair is U.N. climate adviser Mark Carney, said the firm is carbon net-zero despite its coal, oil and gas investments. Carney was later forced to walk back his statement.
The U.N. report highlighted some areas that could see major investment from the real estate sector.
Greg Smithies of Fifth Wall, a Los Angeles-based venture capital firm that has a climate tech fund, said one of the biggest issues brought up by the report is water. Real estate could invest in technologies that collect water from the top of buildings and recycle it onsite, Smithies said.
“The industry is going to rapidly wake up to the fact that water is not just a commodity that you can believe will come on to the tap when you open it,” he said.
Tony Cho, a Miami-based developer, recently launched Future of Cities, a company focused on tackling climate change through development, policy and venture capital investment. He said the industry needs more incentives and government mandates to push for more sustainable development.
“They won’t pencil without support and incentives, and these incentives need to evolve,” said Cho.
But he adds that the U.N. report itself is a big deal.
“I hope this is a wake-up call for our industry that the climate crisis is real,” he said, “and immediate action needs to happen to avoid catastrophic devastation.”