Buildings With No Path to ESG Won’t Make Office Tour Lists

Landlords who aren’t reviewing “every single aspect” of how they operate and manage buildings will see the value of their portfolios decrease as decarbonization becomes industry standard.

That was the blunt message CBRE Canada Chairman Paul Morassutti delivered to a recent Building Owners and Managers Association (BOMA) event in Ottawa, “Making Sense of ESG.”

“A number of buildings in Canada right now are melting ice cubes: buildings whose asset value will only go down,” Morassutti said during a discussion alongside CBRE Client Care Senior Director Amy Bugg, hosted by Colonnade BridgePort CEO Hugh Gorman.

“If you’re a building owner and you know that tenants increasingly want to be in a sustainable building or a building with a net zero commitment, and you’re not a part of that discussion, you’re just hastening the value decline.”

Canada and the U.S. are lagging the rest of the world on embracing ESG, in part because of the politicization of ESG, which is all too often conflated with ‘wokeness,’ Morassutti said. “Some landlords are understandably wary of the costs involved, and they’re not too sure they need to go there too quickly.”

“Well, tenants increasingly have a requirement to be in these kinds of buildings, and if you do not have a (decarbonization) strategy in place then don’t be surprised when your building doesn’t even show up on the tour list.

“It’s something that a few years ago was a nice to have,” Morassutti added. “Today’s it’s a must-have.”

Don’t Forget the ‘S’

Bugg noted that while the commercial real estate industry tends to focus on the ‘E’ of the ESG equation – the environmental and sustainability aspects – companies would be “remiss not to address the 'S' piece, or the Social.”

“Our most valuable assets are our people, and our internal stakeholders are demanding more from an S perspective,” she said. “This goes above and beyond, corporate donations. It involves more candid conversations around corporate culture, more diverse hiring practices, and more women in senior leadership roles. And we are seeing real changes in this area.”

Bringing forward the social aspect of ESG is essential, Bugg added. “Landlords of buildings need to acknowledge the humans using them and how those people interact with the space. It’s not just about a high-performing sustainable box. It’s about a humanistic approach to the built environment.”

And what about the ‘G’, or the Governance aspects of ESG, an audience member asked. “If you’re a public real estate company, your board is well aware of these issues,” Morassutti said. “So even if you’re a CEO and you don’t take it seriously, your board will remind you that you do have to."

Attracting Tenants, Maintaining Value

There’s been an exhaustive amount of press on hybrid work and its impact on office building values. Every owner in Canada would prefer to see more people in-office. In this regard, however, landlords are not in the driver’s seat, Morassutti said.

“Companies will decide what’s best for them and landlords have little say in that. What landlords can do is ensure that their buildings match up with occupier needs. And today, one of those needs, among others, is a sustainable building. And good landlords are providing exactly that.”

This brings some owners back to cost/return considerations in a manner that is almost identical to the discussions around building to LEED standards decades ago. When LEED designations were just taking off, many owners focused on the incremental costs and what sort of rent premiums could be achieved.

That conversation disappeared quickly, Morassutti said, as developers and owners realized certain tenants would not occupy buildings that had no LEED certification. “Owners were focused more on what they could expect to get in rent by getting their assets LEED-certified.

“That’s how we’re looking at ESG now and that’s the wrong way to look at it. Ultimately, do you want to own a portfolio that is economically obsolete, or a portfolio that will remain competitive for the next two decades? That is the real question.”

“Trying to parse out the incremental value of these things is a mug’s game.”

Not Enough Sustainable Space

The prevailing narrative in the office world at the moment is that there is a glut of empty space on the market.

“This may seem very counterintuitive, but the reality is we don’t have enough of the kind of space that tenants want,” Morassutti told the BOMA Ottawa audience.

“If the federal government is reflective of the demand and wants all its office space to be net zero by 2030, then we don’t have enough space to satisfy that requirement. 

Many landlords and institutional investors have set targets to decarbonize their portfolios by 2030. Morassutti noted that the deadline is drawing near and Canada has so far decarbonized “maybe 1%” of its total building inventory.

“At that pace we’re on track to hit those targets by 2070. So there’s a lot more that has to get done.”

ESG Leadership

Asked which companies are leading the way on ESG, Morassutti pointed to the global logistics real estate giant Prologis.

“ESG and sustainability is not simply a silo that’s bolted onto their business, it’s embedded in everything they do, all across their supply chain, including upstream and downstream emissions.

“They’re also making space in their warehouses around the world for humanitarian aid and disaster relief, and they’re active in the communities in which they operate.”

In the era of climate change, no one wants to be compared to an ice cube. So this is a moment of reckoning for landlords in Canada.