Can a Property’s Financial Viability and Climate Resiliency Coexist?

Executive Summary

The commercial real estate sector is increasingly challenged to integrate climate resilience with financial viability as extreme weather events become more common. This report highlights key strategies for achieving this balance, with energy retrofits emerging as a high-impact option to reduce emissions—over 50% compared to redevelopment—though adoption remains low due to costs. As building performance standards (BPS) tighten, retrofits are critical to meeting net-zero targets, supported by sustainable financing and digital technologies like digital twins for efficient resource management. With sustainability now a financial imperative, companies are moving beyond compliance to leverage these practices for long-term value. Gallagher & Mohan is equipped to guide property managers and investors in aligning financial goals with climate-smart practices for resilient real estate portfolios.

Introduction

As the planet faces increasingly frequent and severe weather events—intense storms, prolonged heat waves, and widespread wildfires—buildings worldwide are coming under unprecedented strain. With these challenges in mind, the real estate sector is prompted to ask a critical question: How can property managers and investors reduce the environmental impact of their assets while remaining financially viable? This balance between profitability and climate resilience is at the forefront of contemporary commercial real estate (CRE) strategy.

Prioritizing Thorough Energy Retrofits

Transitioning existing buildings to meet stringent energy standards is key to sustainable real estate. Retrofits emit less than half the carbon compared to full redevelopments, making them a preferable option in most regions. Global efforts are underway, notably in the U.S. and EU, where Building Performance Standards (BPS) promote energy-efficient upgrades on a regulated timeline.?

Despite the benefits, deep energy retrofits are rare, with less than 1% of buildings globally undergoing these upgrades each year. The significant upfront costs and operational disruptions are common deterrents. However, raising the retrofit rate to 3% annually could significantly support net-zero goals by 2050. Encouragingly, 76% of global survey respondents expressed intentions to initiate deep energy retrofits within the next 12 to 18 months, a trend propelled by regulatory pressures and investor expectations.

BPS regulations are also gaining traction worldwide. In the U.K., for instance, commercial real estate must meet a minimum energy efficiency grade of B by 2030, potentially leaving non-compliant properties at risk of obsolescence. This creates a substantial opportunity for retrofits, especially in regions where office spaces currently fall short of this standard.

Sustainability: From Compliance to Strategic Impact

Sustainability has evolved beyond a compliance or reputation-driven obligation; it now holds measurable financial importance. Among surveyed real estate professionals, 36% indicated a balanced approach to sustainable investments, aligning legal compliance with modest financial returns, while 22% viewed sustainability as essential to their core business strategy.

However, the financial challenges of deep retrofits persist, particularly given the global increase in interest rates. For instance, green bond issuance by U.S. REITs fell to a six-year low in 2023. Survey participants cited budget constraints, the aging infrastructure of buildings, and design limitations as primary barriers to extensive energy retrofits, though these challenges varied by region. Respondents in Asia Pacific, for instance, cited asset prioritization challenges, while those in North America and Europe highlighted budget constraints and building age as dominant issues.

Greening Potential and Investment Value

A strategic shift from “brown” to “green” assets could significantly enhance a property’s value and climate resilience. Older, carbon-intensive properties, while potentially undervalued, hold considerable opportunities for green investment and may yield strong returns if properly retrofitted.

Investment in digital twin technologies, which allow property managers to simulate resource utilization, is expected to rise as property managers focus on reducing operational costs and minimizing asset obsolescence. Over half of survey respondents plan to prioritize these technologies alongside climate-related risk assessments in the coming year.

BPS and other sustainability considerations are also gaining importance in property transactions, with over 61% of respondents prioritizing these factors during due diligence.

Conclusion

Some real estate investors may limit sustainability efforts to select properties, yet achieving climate resilience demands a more holistic approach that integrates financial, regulatory, and operational perspectives. Sustainability projects can be funded through green bonds, government incentives, and loans. Even amid a high-interest rate environment, sustainability-linked bond issuance remains strong, illustrating continued investor interest.

Deep retrofits require a strategic mindset shift from conventional investment considerations. Regular benchmarking, scenario analysis, target setting, and creative financing models will be essential to drive retrofits forward. Leveraging carbon credits and voluntary carbon markets may also facilitate reaching net-zero objectives, although due diligence is critical given varying accreditation standards.

As property managers strive for climate resilience without compromising financial returns, Gallagher & Mohan stands ready to assist with customized solutions that blend financial viability with environmental stewardship. Contact Gallagher & Mohan today to future-proof your real estate investments and stay ahead in a rapidly evolving market.