Climate Vulnerability for CRE Is Low Says Fitch Ratings

Climate change has been a big technology issue in commercial real estate for some time now. Whether managing and monitoring energy use, collecting data for reporting to regulators and investors, or watching for climate-related dangers like flooding, many owners and operators have been kept busy understanding what they needed to do.

It’s good to be prepared and better to know that, at least for now, things will be better than you might have thought. The second part comes from Fitch Ratings and its latest report, Climate Vulnerability Signals for Non-Financial Corporate Sectors.

CRE currently has a “low climate vulnerability now, though it will rise “modestly” through 2050. This is not made easier, though, as office, retail, and industrial properties face a “disparate” regulatory environment when it comes to low-carbon standards.

One reason vulnerability will rise only modestly is the seriousness with which the CRE industry, including customers, takes the issue. For example, commercial tenants are typically willing to pay more for greener buildings because they often face pressure to reduce their carbon footprints, with real estate being a significant aspect. The pressures come from both carbon footprint and emissions disclosure requirements as well as the expectations of potential employees and the talent search.

Higher values and rents for energy-efficient properties are evidence. There is also a higher demand for buildings that have the right green certifications. With the increased demand is the “undersupply of green spaces” and a rise in costs to reduce emissions. Retrofitting of existing properties is typically more expensive than including features and tactics to address carbon as a building is being originally constructed.

The office and retail segments seem particularly focused on decarbonization and they’ve been ready to invest and reach economies of scale. The demand for these efforts could help underwrite the costs through higher rents. Sustainability and energy efficiency have become differentiation factors that tenants want. The result is a “significant influence on real estate companies’ market competitiveness and revenue.”

Industrial and logistics may have lower initial costs for retrofit because the construction is often simpler and their owners can more easily pass the costs onto the tenants. But adaptations like renewable energy and electric vehicle infrastructure can be costly.