How Carbon Insights Can Power CRE Opportunity

The commercial real estate (CRE) industry is at a pivotal point when it comes to decarbonisation. Many global real estate markets are entering the next cycle phase. We are also using carbon and climate data in increasingly sophisticated ways and going beyond carbon accounting and reporting.  Without the right data driven insights to integrate with the next cycle decisions, CRE investors, investors, lenders, and insurers can easily miss out on key opportunities for growth.     

That’s where carbon insights can be a new and valuable resource. By incorporating carbon data into strategic decisions around retrofitting, repurposing, acquisition and disposals, it’s possible to align strong financial returns with impactful carbon reduction.

Here are some key considerations for investors and operators to incorporate into their next cycle strategies, as decarbonization becomes a more pressing priority for every CRE portfolio. 

Retrofitting: Higher Efficiency and Higher Returns

Retrofitting inefficient, high-vacancy assets presents a dual opportunity: achieving compelling financial returns while lowering carbon emissions. However, there are many data points to consider before taking on a project.

1. Energy Appraisal: Evaluate existing energy systems, identify reduction opportunities, and project associated costs and savings.

2. Leasing Strategy Alignment: Time retrofits to coincide with leasing cycles, targeting optimal tenant profiles at competitive rent levels.

3. Cost-Benefit Analysis: Ensure returns exceed the cost of capital by balancing retrofit investments with anticipated valuation uplifts.

4. Market Liquidity Considerations: Assess buyer appetite for lower-carbon assets to inform exit strategies.

Not every asset will justify retrofitting or at least not in the short term. When financial feasibility is lacking, consider alternatives: selling underperforming properties or repurposing them for higher-value uses.

Repurposing: Unlocking Hidden Value

For assets where retrofitting is impractical, repurposing can unlock new value while enhancing carbon efficiency. Transforming office or retail spaces into residential or mixed-use developments can be worthwhile depending on the housing dynamics in the local market. Mixed use has the added benefit of building in flexibility and optionality to enhance the resilience of assets going forward. 

Repurposing Trends for Commercial Real Estate

Repurposing also offers the opportunity to integrate energy-efficient designs, reducing operating costs and risk profiles. This approach is particularly vital for high-energy-use properties, such as lab spaces, hotels, and data centers, which are among the most energy-intensive asset types in urban markets. 

Follow the Money: Lenders and Insurers Lead the Way

Decarbonisation is also reshaping the financial ecosystem that supports CRE. Tenants are increasingly making leasing decisions based on carbon compliance, creating binary market dynamics: lease if compliant, look elsewhere if not. However, the influence of lenders and insurers is perhaps even more profound.

Insurance Dynamics: Climate risks are reshaping underwriting models, with premiums rising as much as 5x in high-risk locations. Transition risks, such as carbon intensity, are next on the agenda. This will reshape the insurance landscape with new locations becoming insurable and more established locations falling out of favour.  These decisions will also be made at ever higher resolution levels, from city level to neighborhoods and even discriminating between streets.

Lending Impacts: Withdrawn insurance coverage or prohibitively high premiums directly affect lending viability, impacting asset valuations and liquidity. Investors must anticipate lender and insurer preferences, integrating these factors into locational and asset-level strategies.

Is Core Real Estate Still Low Risk?

Core, Grade-A assets with long-term, triple-net leases have historically been considered low-risk investments. However, decarbonisation adds a new layer of complexity. Assets with inherently low carbon profiles remain attractive, but high-energy-use properties pose challenges.

For example, a high-carbon office occupied by a global bank with 24/7 operations and extensive data processing may lock in emissions for the lease term. It offers very little opportunity for the asset owner to retrofit the building until the end of the lease. In some cases, the customer (the bank in this case) and the owner may be able to negotiate an early or phased retrofit plan, however, that’s a huge decision for the bank. For the owner, it’s also a large financial decision to forgo good quality cash flow during the retrofit period.

Ultimately, though, the combination of the triple- net long dated cashflow on an asset with low committed carbon emissions will remain a low risk and highly valued asset.

Electrification: Navigating Grid Constraints

The transition to a low-carbon economy hinges on electrification powered by renewable energy. However, grid infrastructure, designed for a fossil fuel era, often struggles to meet growing demand. Urban areas, responsible for 75% of global energy consumption, are getting hotter and consequently cooling demand from buildings is increasing.  AI and data centre growth are placing further pressures on the energy system.

For CRE investors, electrifying assets—converting heating, cooling, and other systems to electricity—is a priority. Yet this requires confidence in grid readiness. Substations vary in capacity, and grid upgrades are heavily localized and regulated. Investors must thoroughly and carefully assess grid dynamics before embarking on electrification retrofits.

Impaired Assets: A Risk or Opportunity?

Impaired assets—those suffering from abrupt devaluations due to climate risks—are a growing concern in CRE. But rather than viewing impairment solely as a static risk, investors can reframe it as a dynamic opportunity. By mapping assets across a “climate and carbon risk quadrant,” multi-asset portfolios can be positioned and strategies implemented to move from a higher risk quadrant to a lower one.  

This framework enables nuanced decision-making, balancing climate exposure with carbon intensity to safeguard portfolio resilience.

A Future for Decarbonising CRE

The path to a lower carbon future in CRE requires bold, strategic decisions and deeper carbon insights. Retrofitting and repurposing offer immediate opportunities to drive financial and environmental performance. While long-term success depends on navigating systemic challenges like grid constraints and shifting financial dynamics.

Investors who integrate energy, carbon, and market liquidity considerations into their strategies will not only mitigate risks but also position themselves as leaders in the CRE industry. By leveraging these insights, we can collectively build a resilient, lower carbon, and profitable future for commercial real estate.