For asset owners and investment managers, reducing carbon emissions is no longer optional it is a business imperative for future-proofing assets and portfolios against obsolescence. Florence Chong speaks with Frontier’s Jennifer Johnstone-Kaiser about decarbonisation of real estate
The path towards decarbonisation of real estate – which accounts for around 40 per cent of all global emissions – is both necessary and costly for asset owners.
Irrespective of the ever-increasing acrimonious debate on climate change and its impact, in today’s market waiting for a global consensus on climate change is not an option. The demand for greener buildings is already clear.
“Large corporations, in particular, and all employers, are looking for highly sustainable buildings because that is where their employees want to be,” Jennifer Johnstone-Kaiser, Head of Property at Frontiers Advisors, says.
Large corporations, in particular, and all employers, are looking for highly sustainable buildings because that is where their employees want to be
For asset owners and investment managers, reducing carbon emissions is no longer optional – it is a business imperative for future-proofing assets and portfolios against obsolescence.
Frontier Advisors advises some $700 billion of assets on behalf of superannuation, charity, insurance, public and university sectors.
Bifurcation Between Green and Legacy Buildings Grows
The bifurcation of the market is already evident. Newer, greener buildings are securing tenants at higher rents, while older, less efficient buildings are seeing rising vacancies. Studies show the investment can be worthwhile.
Government tenants and major corporations increasingly expect high sustainability standards. New or upgraded buildings not only meet these demands but can generate a green premium when selling or leasing space.
According to a 2024 CBRE paper, Is Sustainability Certification in Real Estate Worth it? buildings with sustainability certifications in Continental Europe command a rental premium of 4.9 per cent.
Investors, too, are increasingly willing to pay a “green premium”. Knight Frank reports that in Australia this can range from 8 to 18 per cent of sales price for green-rated properties.
With some research showing that some 70 per cent of existing buildings today expected to be standing in 2050, asset owners must look to retrofitting their assets to avoid their portfolios falling into obsolescence. The industry is sometimes unable to replace existing stock with new buildings. Already agents say there is a shortage of fully green buildings to meet market demand.
Upgrade or Face Competitive Obsoletion
Research by Frontier Advisors, citing Cushman & Wakefield, indicates that over 20 per cent of US office inventory – more than one billion square feet – is considered “competitively obsolete,” meaning it requires upgrading or repurposing to remain viable.
Cities such as New York, London, Melbourne, and Sydney are home to numerous older buildings at risk of losing value because the cost to convert them into greener assets is substantial, Johnstone-Kaiser notes.
ISPT, an industry fund-owned asset manager, spent $160 million to transform 500 Bourke Street, built in 1977, in Melbourne CBD into a sustainable office tower, in 2021. The project demonstrated the scale of capital expenditure required to compete in today’s market.
Estimates from Frontier Advisors research citing US experience suggest that retrofitting office buildings to meet net-zero targets by 2050 could cost between US$8 to 15 billion, roughly per cent of net operating income annually. Most mature cities are budgeting only a fraction of this.
Net-zero Refurbishments Produce Higher Rate of Returns
However, modelling by international property agency JLL shows that the rate of return on net-zero refurbishments is more than 1 per cent higher than basic refurbishments – 8.14 per cent versus 7.08 per cent. While retrofitting demands upfront capital expenditure, the risks of failing to upgrade – regulatory penalties, reduced tenant demand, and lower valuations – are projected to be far greater within the next decade.
Increasingly, the construction industry is leaning toward retrofitting rather than demolition and redevelopment—a trend known as the brown-to-green movement. The US research institute RMI highlights that retrofitting an existing building can generate 50 to 75 per cent less carbon than constructing the same building from scratch.
“Nearly all new buildings, particularly skyscrapers, will be built of concrete, steel, and glass, some of which have high embodied carbon,” says Johnstone-Kaiser.
“Timber is an alternative, but it is limited to around 18 levels under current conditions. Retrofitting is friendlier to greenhouse gas emissions because it allows you to replace inefficient facades and systems, creating energy-efficient buildings that are more cost-effective to operate for landlords and tenants.”
Timber is an alternative, but it is limited to around 18 levels under current conditions. Retrofitting is friendlier to greenhouse gas emissions because it allows you to replace inefficient facades and systems, creating energy-efficient buildings that are more cost-effective to operate for landlords and tenants
Innovation in building materials and technology is also shaping the path forward. Mass-manufactured eco-friendly housing, for example, can be assembled in days rather than months, potentially reducing construction costs, says Johnstone-Kaiser. She speaks of a number of start-ups in the US which have been established to nurture new technologies for the retrofitting of real estate.
“By making buildings cleaner and greener, investors can capture financial upside in the energy transition and drive long-term returns by underwriting around climate change risk.”
Electrifying Real Estate a Key to Greening Buildings
Electrification is seen as the key to greening a building. New generation buildings have not only been built to use electricity, but also incorporated design features that reduce the use of energy.
Large shopping centres and logistic facilities are increasingly harnessing solar power, with some landlords using electric motors to monitor and convert rooftop solar energy for tenants or even sell surplus energy at reduced rates to associated users.
Johnstone-Kaiser says one company Frontier met in the US is producing small electric motors for groups like Nordstrom, Walmart, and Amazon. They employ this device to monitor and convert energy harvested by solar panels installed on rooftops of buildings. She says some warehouse landlords go a step further and sell the energy at a cheaper rate to their truck drivers and their other associated users.
Despite these advances, the journey to net-zero is far from straightforward. Johnstone-Kaiser points out that asset owners can manage Scope 1 emissions (the direct emissions from a building) and Scope 2 (which covers purchased energy). But Scope 3 includes emissions across the entire value chain, particularly tenants’ operations, over which landlords have limited control.
“Buildings with multiple tenants present challenges because tenants control their energy usage and data,” she explains. “Engaging tenants is critical: improved efficiency lowers operational costs, benefitting both the landlord and the occupiers. It is a win-win on both sides. Efficiency gains lead to lower operational costs and this in turn improves the bottom line for the tenant because of lower outgoings,” she adds.
Falling Behind Sustainability Standards Could Result in Financial Loss
In Australia, super funds collectively control a significant portion of office towers in capital cities, directly or through real estate funds, representing tens of billions in investment. Johnstone-Kaiser notes that these institutional investors recognise that properties falling behind in sustainability standards risk financial loss.
“Asset owners must either commit to upgrading and retrofitting their assets to meet market expectations or exit investments if costs are prohibitive. Either way, there are costs – the cost of compliance or the cost of non-compliance.”
The economics of retrofitting are increasingly attractive. Beyond regulatory compliance, high-performing sustainable buildings command higher rents, lower vacancy, and reduced operational costs, creating long-term value for investors and tenants alike. As the global push toward net-zero intensifies, early movers are likely to reap competitive advantages while laggards risk economic and financial obsolescence.
“Most organizations are committed to the Paris Agreement in principle,” Johnstone-Kaiser concludes. “But meeting the 2030 or 2050 targets will be highly expensive, and many will fall short if they don’t act decisively now.”
For real estate owners, the message is clear: decarbonisation is no longer a choice; it is an investment in the future resilience of their assets, with costs and rewards that will define the next decade of real estate.
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