Building an integrated approach to real estate sustainability
Bold steps real estate leaders can take to help accelerate the transition to a low-emission future
Lauren Pesa
Tim Coy
Parul Bhargava
Renea Burns
Jeffrey J. Smith
Climate-action policies and market forces are driving innovations across industrial systems, infrastructure, and supply chains, while introducing new opportunities by which organizations can create competitive advantage. Deloitte Global estimates that achieving net-zero emissions by mid-century could increase the size of the world economy by US$43 trillion through 2070.1
Catalysts for real estate investment in sustainability
The real estate industry has an important role to play in achieving rapid global decarbonization. Multiple, converging forces point to the need for real estate organizations to adopt a more integrated approach to tackling—and reaching—sustainability goals. They also illustrate a need for firms to focus on sustainability investments now. These include:
Tenant expectations
From 2022 to 2023, the number of corporate occupiers, including large office, retail, or industrial tenants with validated, science-based greenhouse gas reduction targets doubled.2 Demand for low-carbon spaces, those that have lower emissions from property operations, is expected to outstrip new supply: For approximately every 30 square feet of demand, only 10 square feet is expected to be built by 2030.3 Reduced demand for inefficient buildings can significantly increase the risk of stranded assets and further widen the pricing gap between sustainable and non-sustainable assets.4
Insurability
The intensity and frequency of extreme climate events have proliferated over the past several decades. The ensuing disaster losses have contributed to a spike in real estate organizations’ insurance costs: They’ve doubled from 10 years ago.5 Some insurance companies have withdrawn from high-climate-risk markets altogether.6 In Deloitte’s 2024 FSI Predictions series, we forecast insurance costs per building in high-risk states to double again by 2030, increasing by over 10% a year.7
Decarbonization
In 2024, the Biden administration released the US National Blueprint for Decarbonizing the Economy. It targets a 35% reduction in building energy use intensity per unit of floor area by 2035 and a 50% reduction by 2050.8 Advances toward achieving these objectives could require building retrofits to augment energy sources or additional resource consumption efforts.
Renewable energy
The International Renewable Energy Agency’s 2023 report reveals that, when comparing all of the climate change mitigation efforts real estate owners can take, incorporating renewable sources for electricity and heating, ventilation, and air conditioning (HVAC) systems would do the most to help keep the average global temperature rise below 1.5 degrees Celsius.9 Regulations around the globe, such as the Inflation Reduction Act in the United States, and The Green Deal Industrial Plan10 or the REPowerEU Plan in Europe are creating a more supportive environment for real estate owners to invest in renewable energy sources.11
Material circularity
Governments around the world are directing organizations to take a more holistic approach to whole-life carbon assessments, including sourcing, disposal, and reuse of materials. In Europe, regulations like the Carbon Border Adjustment Mechanism target imports of carbon-intensive materials such as cement, iron, steel, and aluminum into the European Union and prevent manufacturing displacement to countries with less stringent emission regulations.12
Operationalizing sustainability: addressing challenges, identifying stakeholders
Near-term challenges may impede real estate firms’ sustainability progress. Challenges to greater cross-functionality of even core business functions in real estate exist both structurally and culturally. Some organizations have been run with fixed team structures, commoditized information, and some even operate as independent companies by geography.13 Siloed operations and ways of thinking can also be key challenges: At best, siloed departments are not speaking the same language and, at worst, they’re simply not talking to each other. And by not talking to each other, they may not know that their interests are aligned.
One big obstacle to investment is the difficulty assessing the return on investment of sustainability investments. In Deloitte’s 2024 Commercial Real Estate Outlook survey, nearly half of the real estate CFO respondents were unable to identify the tie between sustainability strategies and financial returns.14 To help gain visibility into how sustainability investments can help drive financial ROI and manage risk, real estate firms can adopt a multidisciplinary, integrated approach that aligns sustainability with other business functions of the organization. They can take a targeted approach that leverages comprehensive industry-specific solutions to help achieve sustainability goals while also enhancing operational efficiencies, driving sustainable growth, and pursuing competitive advantage in a rapidly evolving market. This can help provide leaders with a fuller picture of how investments are paying off—and what still needs to be done across the enterprise.
Our 2024 Outlook survey revealed that nearly 60% of global real estate CFOs said they don’t have the data, processes, or internal controls they need to comply with current environmental regulations. Respondents also said it would take significant effort to be in compliance, requiring coordinated efforts across several departments to achieve readiness (figure 1).15
How can firms align themselves—and their people—to meet compliance requirements? First, key stakeholders should connect in the early stages of integration. These would include finance leaders, who control the purse strings and evaluate ROI; sustainability leaders, who focus on carbon emissions and reporting; engineers and developers, who are most directly involved with tenant experience and building operations; and tax and accounting leaders, who are looking for credits and incentives and who are responsible for compliance with regulations.
An integrated sustainability framework for real estate organizations
Here’s a way to think about how sustainability could be integrated across real estate organizations (figure 2). The framework includes focus areas, real estate-specific considerations, and examples of how this could work.
(1) Tax and regulatory
Real estate companies can identify “carrots” (incentives and opportunities) and “sticks” (regulations and challenges) toward achieving sustainability goals. Carrots include international, domestic, or state and local tax incentives; credits; and deductions. Firms that are able to redirect capital flows to more sustainable activities could secure more favorable financing terms. These carrots should align with the sticks: building performance standards. These sticks could prevent companies from selling or leasing properties that don’t meet efficiency or emissions standards.
Opportunities to integrate: Early into the integrated sustainability journey, firms can conduct frequent regulatory scanning to identify the highest priority carrots and sticks, or which tax credits and incentives could result in the greatest ROI. In Deloitte’s 2024 Commercial Real Estate Outlook survey, only 32% of respondents said their firms were planning to leverage tax-savings options such as incentives and credits as a part of their sustainability strategies for 2024, which means the vast majority of respondent firms—nearly 70%—were not yet prioritizing opportunities to bolster their bottom lines.16
(2) Risk and financial modeling
Identifying physical and transition risk should be a priority, not just for regulatory disclosure and compliance, but also as part of the property acquisition and underwriting processes. In the 2024 Outlook survey, respondents said real estate valuations that do not appropriately consider climate-related risk was the greatest material risk to investing in sustainable real assets.17
Physical risk includes those associated with climate-related acute or chronic events: Acute are point-in-time extreme weather cases like hurricanes or wildfires; chronic are progressive, longer-term events, such as sea level rises or extreme heat. Transition risk involves risks companies face when they fail to adequately respond to social and economic shifts toward achieving a low-carbon future. These can include new policy and regulatory changes, along with technology, market, reputational, and legal shifts. Some real estate companies may only be beginning to incorporate these risks into due diligence and forecasting.
Opportunities to integrate: Conducting climate-risk assessments can help firms evaluate their level of understanding, management, and response to climate change and identify risks. Once leaders have achieved a higher level of understanding, they can develop their own climate risk strategy, prioritize improvements or upgrades, and consider how physical and transition risk can best be integrated into existing financial modeling. On a recent Deloitte webcast, Martin Howell, global energy skills leader at sustainable development company Arup, outlined how real estate firms can focus on both small-scale and large-scale improvements in the built environment:18
“There are opportunities for improvement across all building stock. These range from very small, low-cost interventions, such as adjusting set points in control systems to reducing the temperature of hot water. Even backing off a little from maximum temperature can lead to carbon savings. There are plenty of opportunities for energy efficiency in building controls: occupancy sensors, daylight sensors, and there has been a lot of progress made in LED lighting. Greater opportunities are linked to bigger, end-of-life equipment—for instance, older chillers that provide water for air-conditioning systems can be replaced with newer, more efficient, and dynamic models … Building owners are seeing an increase in the due diligence required for energy efficiency solutions. And that’s being driven by commitments made by their organizations.”
(3) Accounting and reporting
With the recent Securities and Exchange Commission climate rule requiring registrants to provide climate disclosures in their annual reports beginning in 2025,19 the European Union’s Corporate Sustainability Reporting Directive, and other recent international regulatory requirements, the ties between sustainability reporting and financial accounting are now more tangible than ever. Controllership should collaborate with sustainability function to help create and execute investor-grade sustainability accounting and reporting.20
Opportunities to integrate: Some firms may still need to identify and take an inventory of requirements and consider how different frameworks and standards could intersect. They’ll likely need to explore the data, processes, and internal controls they may have in place to support reporting. Firm leaders can also conduct regular materiality assessments, implement technologies that can assist with data sourcing and capture, and work with tenants to better collaborate on energy usage and emissions tracking.
But collaboration on sustainability initiatives between landlords and tenants is no simple feat; sustainability goals may not always be aligned. In a recent interview with the Deloitte Center for Financial Services, Tony Malkin, chair and CEO of Empire State Realty Trust, a New York City-based real estate investment trust, told Deloitte about how their company established a 10-step tenant energy optimization program, and made it publicly available for others to access, to help the industry shift that paradigm:21
“The program outlines how to design, build, monitor, and verify lower energy consumption in tenant spaces. There is a lifestyle piece and a consumption piece. The lifestyle piece is through your own actions—how you mitigate water consumption and waste disposal and have landfill diversion. The consumption piece is how we actually design spaces that perform at a higher level and provide the same service at the same quality at lower consumption. All these projects are then undertaken with tenant quality of life and productivity in mind. We also set up case studies for all of those invested in the life cycle of the space: engineers, architects, building managers, brokers, and tenants—all of the pieces of the value chain—to produce a lesser-impact occupancy.”
Empire State Realty Trust also regularly engages with existing tenants to aid in their energy usage reduction targets and reporting needs. In 2023, they partnered with over 200 tenants to produce space-usage sustainability reports for their own company reporting and disclosure.
(4) Strategy
More than 39% of carbon emissions come from the built environment.22 In the United States, the power grid is often complex and highly localized. How and where real estate companies choose to source that energy from can have an impact on individual asset and portfoliowide emissions, costs, and resiliency. In fact, when given several options for top sustainability initiatives for 2024, 40% of global real estate respondents to the 2024 Outlook survey said installing or procuring renewable energy sources such as wind or solar was their top priority.23 Real estate organizations like Toronto-headquartered Slate Asset Management24 and funds managed by CBRE Investment Management have made investments into renewable energy businesses including electric vehicle charging and solar power providers, respectively.25
Opportunities to integrate: Firms should consider aligning geographically specific energy sourcing needs with tax incentives and credits that are most likely to have the greatest impact on ROI. These efforts should align with the organization’s sustainability goals and targets. For many firms, operationalizing sustainability in these ways could require a delicate balance, especially for real estate investment trusts because the IRS has recently relaxed some of its restrictions.
(5) Technology
Developing a smart building often requires bringing multiple, often independent, buildingwide systems such as HVAC, lighting, or alarms together into a single information technology system that manages infrastructure. Smart building technologies can enhance tenant comfort while delivering cost savings by optimizing building energy efficiency and consumption. Some real estate leaders have taken notice: In our Outlook survey, investing in Internet of Things devices and smart technologies to track consumption was chosen as the top sustainability-related initiative by global real estate executives for 2024 (figure 3).26 Still, for some real estate leaders, the greatest challenge could be understanding the art of the possible and how to best integrate these systems within their enterprise.
Opportunities to integrate: Real estate organizations should build a foundational infrastructure and data capabilities that can support further transformation. Various stakeholders, from IT and finance to the developers and engineers who will build and monitor smart systems, should work together to develop this infrastructure. Digital twins could be deployed to help with consolidation and alignment efforts. Global logistics REIT Prologis27 and Nanyang Technological University in Singapore28 have leveraged digital twins to aid in building management and space optimization. During a Deloitte April 2024 LinkedIn Live event, Mark Bawtree, chief sustainability officer at the proptech company Akila, noted:29
“Within buildings, you have different siloed systems and teams. The operational teams all have different knowledge and understandings of how different pieces of equipment work within the building. A digital twin brings all of that knowledge from the equipment manufacturers and the equipment operators into one place. It enables you to track the performance of that equipment and how the different teams are maintaining that different equipment, again in one place. On top of that, you are monitoring the electricity, water, gas, temperature, humidity—all the building performance data—in one place. This one place is what we refer to as a single source of truth. Now you have all this information into one place, it can be organized and automated for streamlining the reporting for the regulations, frameworks, standards or certification required. You can then analyze that data to look for opportunities for optimization of the equipment and operations to plan, implement, and track those changes. This helps establish an ongoing change management process of review, rinse, and repeat of all of these actions to fully optimize your portfolio of buildings.”
Digital twins can help consolidate data in building management systems to monitor current performance and also help plan for how major systems, and the environment affecting those systems, might change over a building’s lifetime. When owners are considering large capital expenditures, Bawtree remarked:
“… Particularly for major retrofit deals, where you’re potentially looking at replacing an HVAC system, for instance, you’ll need to consider how the outdoor environment is going to be affecting the building as well. And not only just now, but in 10, 15, or 20 years over the system’s potential lifetime. So, you need to do that scenario analysis and this is where digital twins can run simulations of how the outdoor environment is going to affect that building over time.”
As part of a broader building management system process, either at individual buildings or across a portfolio, real estate leaders can seek vendors that can help them achieve their integration goals. Leveraging specialized third-party players can help firms accelerate adoption, rather than starting from scratch (and with substantial investment) and trying to develop capabilities in-house.
Meeting the moment: Adopting a broader sustainability strategy
The future for real estate sustainability will likely be dynamic, shaped by evolving regulatory standards, shifting market expectations, and advances in technology. As environmental standards become more comprehensive, firms should invest more in sustainable practices such as material circularity and renewable energy sourcing. Successful adaptation will likely require a shift toward greater corporate responsibility and cross-functional collaboration.
Real estate companies can transform sustainability operations by incorporating them into the planning and execution phases of capital projects across tax, risk, accounting, strategy, and technology from the ground up. By prioritizing sustainability integration into core business operations, owners and investors can work to combine existing capabilities across many functions to create a sustainable business that’s bigger than the pieces alone. By leveraging comprehensive industry-specific solutions, firms can navigate these complexities more effectively and achieve their sustainability goals while sustaining a competitive advantage.
