Climate change is more ominous than the spectre of regulations and taxes for a small majority of commercial real estate leaders responding to REALPAC’s recent survey of their expectations for the next decade. An overwhelming majority — 94 per cent — also indicates that the industry is well positioned to reduce greenhouse gas (GHG) emissions.
Those findings are among more than two dozen projections gleaned earlier this fall when industry strategists and decision-makers were asked to identify societal and organizational challenges and opportunities, and to assess their preparedness to respond. Drawing on REALPAC’s membership comprising many of Canada’s most prominent commercial real estate companies and investment managers, insight comes from 33 highly placed players who collectively represent more than 16,500 direct employees and more than CAD $220 billion in assets under management.
More than 50 per cent of respondents see climate change and regulations/taxes as significant business challenges, with a slightly higher margin (55 vs 52 per cent) assigning concern to the climate. Talent attraction and retention ranks as the next most pressing challenge, with 30 per cent of respondents deeming it significant.
When viewed through the lens of potential policy constraints, taxation is rated considerably more threatening (71 per cent) than ESG (environmental, social, governance) policies (32 per cent). Policies related to affordable housing (43 per cent) are also viewed as more daunting than potential ESG regulations, while deficit spending (29 per cent) is less off-putting.
In addition to 94 per cent consensus that real estate can be a societal leader on climate action, respondents also suggest the industry has a role in: affordable housing (73 per cent); equity, diversity and inclusion (55 per cent); health and wellness (30 per cent); and accessibility (18 per cent).
Capital improvements and retrofits are the most frequently named options for reducing GHG emissions (37 per cent), while equal quotients of respondents are looking to new technologies or investment and financing strategies (26 per cent).
Nearly three quarters (73 per cent) of respondents will rely on investment criteria to navigate the physical risks of an extreme climate, while 38 per cent expect to augment resilience measures within buildings. There is less certitude in new technology for climate change adaptation, with only 8 per cent of respondents ranking it as a trending tactic.
Looking to investors’ expectations and evolving performance criteria, 82 per cent of respondents agree that investors will demand ESG strategies and 70 per cent expect those demands will be explicitly stated in mission statements and directions to the board. Also aligned with climate action, 13 per cent of respondents foresee heightened emphasis on risk management.
Those are themes that REALPAC chief executive officer Michael Brooks likewise underscored in early November during the online presentation of the 2021 Canadian results of the GRESB assessment and benchmark of ESG performance in commercial real estate portfolios.
“One of the things we’re going to see is climate competent boards. Not just one person; the whole board needs to be trained on what’s happening in this space,” he predicted. “There’s also convergence of major standards occurring. The new Value Reporting Foundation, for example, is all about the integration of sustainability in financial reporting. There are more groups popping up and everybody is converging on the same goal, and that’s going to continue to push ESG.”
In addition to overarching ESG policies, 36 per cent of respondents predict investors will specifically scrutinize equity, diversity and inclusion, and 30 per cent anticipate companies will reflect commitment through performance metrics, mission statements and/or board composition. Respondents also recognize equity, diversity and inclusion as a foremost expectation of employees and as a key means to attract and retain staff.
Interestingly, after equity, diversity and inclusion (71 per cent), respondents were most likely to cite flexibility (61 per cent) as an employee expectation. However, a flexible work environment (34 per cent) was considered less critical to attracting and retaining staff than compensation (52 per cent), positive corporate culture (41 per cent) or equity, diversity and inclusion (38 per cent). Similarly, although a positive corporate culture is ranked as the number two lure for attracting or retaining employees, only 14 per cent of respondents see it as an employee expectation.
Meanwhile, tenants’ ESG demands are deemed less pressing. Across the four main commercial real estate functions — office, retail, industrial and multifamily — respondents only discern expectations from office and multifamily tenants, and, in both cases, ESG is slotted fifth in the top five considerations.
Flexible space (48 per cent) is ranked the top tenant expectation for office tenants, while multifamily tenants are considered to place most emphasis on amenities and services (68 per cent). Industrial and retail tenants are both tagged to favour strategic locations. However, respondents see that as a more clear cut choice for industrial (70 per cent) compared to retail (38 per cent), where demands for e-commerce support (33 per cent), amenities and services (33 per cent) and technology (24 per cent) are also noted.
