Energy Transition - Real Estate and Construction

As part of a series of forthcoming articles on #energytransition, this article explores the challenges facing the real estate and construction sectors to reduce their emissions.

The global energy transition, driven by the urgent need to mitigate climate change, is reshaping industries across the board. As large emitters of greenhouse gases, the real estate and construction sectors need to address their emissions more quickly than most.

Emissions

The UN Environment Programme (Sep-23) said the buildings and construction sector is by far the largest emitter of greenhouse gases, accounting for a staggering 37% of global emissions. Solutions to mitigate buildings "embodied" carbon emissions – originating from the design, production, and deployment of materials such as cement, steel, and aluminium which have a significant carbon footprint – have lagged. McKinsey (Nov-23) points to similar numbers saying the real estate industry accounts for approximately 40% of global combustion-related emissions, but adds that 28 percentage points of these emissions come from building operations, and 12 percentage points from embodied carbon (emissions from building materials and construction).

To keep global warming within approximately 1.5°C and to reach a net-zero-carbon building stock by 2050, the IEA estimates direct building emissions (such as from onsite gas or oil boilers) will need to be reduced by 50%, and indirect emissions by 60% (for example, through energy efficiency measures and grid decarbonisation) by 2030.

The UN Environment Programme (Sep-23) says historically, much of the sector's progress has centred around reducing the "operational” carbon emissions of buildings – those emissions stemming from heating, cooling, and lighting. Projections suggest that these operational emissions will decrease from 75% to 50% of the sector's total emissions in the coming decades.

"Embodied" carbon emissions

Science Direct (Sep-23) says cement and steel are the main materials used in the construction industry and a large portion of the built environment comprises these materials. The high demand for these materials and their huge share of greenhouse gas (GHG) emissions increase global attention toward them. In cement production, the energy-intensive activities to produce clinker (a mix of limestone and minerals) causes substantial GHG emissions. On average, every ton of cement emits 561–622 kg of CO2, while producing a ton of steel emits 1.85 tons of CO2. 

Decarbonising cement and steel utilised for construction demands innovative methods and a shift toward more sustainable practices. Science Direct says this includes rethinking old production techniques, investigating in alternative materials, and implementing greener technology. For example, the use of alternative fuels with lower carbon, enhancing the energy efficiency of cement; implementing carbon-capture; digitalisation of the plant; switching to alternative materials like fibre-reinforced polymer (FRP) instead of steel; and the use of alternative cement like geopolymer.

However, decarbonising the cement and steel industries can be challenging due to some limitations, such as poor profit margins, high upfront costs, slow facility turnover, and historical market dynamics that have hampered the progress toward adapting low-GHG intensity alternatives. 

Retrofitting and upgrading

JLL (Feb-24) says many markets worldwide are struggling with an imbalance between the supply of, and demand for, sustainable buildings. Tenants, largely driven by their own ambitious carbon reduction goals, want spaces that support their progress and demonstrate proof of commitment to employees, shareholders, and customers. Yet JLL says its research across 20 major global office markets shows that only 34% of future demand for low carbon workspace will be met in the next several years. To underline the scale of the challenge, JLL calculates that about 80% of office buildings in mature cities will still be in use in 2050. Retrofitting those assets across 17 major countries will cost at least US$3 trillion.

HSBC (Sep-23) says the pathway to net zero emissions in the commercial real estate sector will require major upgrades to existing building stock and that means electrifying building operations so they can run on clean energy, as well as making significant improvements to energy efficiency. Measures include replacing gas boilers or diesel-powered machinery with electric equipment; enhancing insulation and sealing gaps in walls, roofs, and windows; installing LED lighting; upgrading heating, ventilation and air conditioning (HVAC) systems to more smart and efficient models, or replacing pumps, fans and motors; and installing smart building automation.

McKinsey (Nov-23) says many building owners or occupants have hundreds or thousands of buildings in their portfolios and plans for decarbonising these buildings are often patchwork, adding companies are wise to avoid plans that only get part of the way to net zero, such as plans to reach 30% energy-efficiency improvements in the next two years without visibility past that point. This kind of short-term view can significantly compromise long-term decarbonisation outcomes and costs.

McKinsey also recommends linking Scope 1 and 2 plans. Plans for Scope 1, such as electrification measures, and for Scope 2, such as renewable-power purchasing, are often created separately. For example, facilities managers might handle retrofits, while procurement departments might take on renewable-energy purchasing. This approach does not take advantage of interdependencies between Scopes 1 and 2, such as demand estimates that consider the sometimes-opposing effects of energy efficiency and electrification actions. The result can be slower and more expensive renewable-energy procurement.

JLL (Feb-24) says for buildings that do meet the grade on sustainability credentials, it calculates that green premiums on rents currently range from around 7% in US cities, to just under 10% in APAC, and over 11% in London, UK. JLL says more real estate transition funds are emerging worldwide, aiming to transform an abundance of older, energy inefficient buildings into sustainable spaces. Several major fund managers, including France’s Ardian and Swiss-based Empira Group, have raised, or are currently raising capital. Their focus is on retrofitting and refurbishing commercial and residential real estate.

Conclusion

A recent report, entitled ‘Building materials and the climate: Constructing a new future’, released by the UN Environment Programme (UNEP) and Yale Centre for Ecosystems + Architecture (Yale CEA) addresses the urgent need to decarbonise the buildings and construction sector. The report proposes a three-pronged solution as an essential approach for reducing emissions:

• first, avoiding needless extraction and production;

• second, transitioning to regenerative materials; and

• third, enhancing the decarbonisation of conventional materials.

The report’s results suggest that to avoid excessive extraction and production, a circular economy must be promoted, focusing on constructing with fewer materials through data-driven design, and prioritising building reuse and recycling. Rethinking building design, especially during planning and design stages, is also crucial to prevent unnecessary extraction and production.

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