Building a Sustainable Future
The commercial real estate industry will be a key player in helping the nation meet Canada’s net-zero emissions goals
. Whether embarking on new developments or retrofitting existing buildings, it’s a daunting challenge for developers.
We recently spoke with four industry leaders who offered their perspectives on key sustainability topics and the outlook for what's ahead. Karla McCarthy, Head of Atlantic Provinces, BMO Commercial Bank Canada, moderated a discussion that featured the following:
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Jim Ritchie, President, the Tridel Group of Companies
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Graeme Armster, Director, Innovation and Sustainability, the Tridel Group of Companies
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Brent Gilmour, Chief Commercial Officer, Canada Green Building Council
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James Burrow, Director, Sustainable Finance, BMO Capital Markets
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Below is a summary of their conversation.
An evolving situation
Tridel has built nearly 90,000 residential units since its founding in 1934, including about 24,000 green condominiums. In 2003, Tridel launched its Built Green Built for Life program. Since then, the company has led the way in implementing various green technologies to reduce carbon emissions. Over the last 20 years, Tridel has seen both the industry and the culture as a whole evolve.
“When we first started, not a lot of people were asking for sustainability,” Armster said. “That's changed quite a bit. Now, development partners, financial institutions and a lot of the organizations we work with are reaching out constantly asking for data and what we're doing. Customer education has improved, so our condo customers are asking more and more about what our initiatives are in this space.”
Armster added that regulations are also changing rapidly. The Toronto Green Standard, for example, includes implementation dates for the Greenhouse Gas Emission limits to 2025 and 2028 so that buildings constructed on or after 2030 are near zero emissions.
“Building codes are being harmonized to act as a guiding light on how the whole nation is going to meet these targets depending on what they're dealing with in their geographic areas,” Armster said. “We've generated our own net-zero carbon strategy to assist us in meeting this goal. That includes improving building envelope performance, looking at onsite renewable energy generation, considering materials that have lower embodied carbon for our buildings, and working with governments to identify and address industry gaps.”
The regulatory picture
While developers will have to keep pace with changing national standards—including, for the first time, carbon emissions requirements in the 2025 National Building Code—Gilmour noted that many forthcoming regulatory changes will be at the provincial level. He cited upcoming building code changes in Quebec and British Columbia that will likely have significant impacts on the industry.
“We’re seeing really strong regulatory signals forthcoming, particularly with things that matter to those who are giving thought to what might be required in the future for a new project,” Gilmour said. “But what might be a bit more of a shocker--and this is happening at the local level—is the disclosure of carbon [emissions]. In Vancouver, effective in 2024, annual energy and carbon reporting for large commercial multi-residential buildings will be required. That’s only going to ratchet up every year in terms of the size of buildings that are expected to have to report, but also, if you’re an existing building, what you’re going to have to do so you don’t get penalized in terms of your carbon going forward. In Montreal, we’re seeing that all new or existing buildings will have to affix a [greenhouse gas emissions] rating starting in 2024 if bylaws are adopted.”
Noting that the market has shifted when it comes to how it thinks about sustainability, Gilmour said developers are now less concerned than before about paying a “green premium” and more worried about the “brown discount”—the depreciation in properties that are not sustainable—that they may experience down the road.
“Maybe this expectation for carbon disclosure, whether driven by investors, occupants or regulation, is starting to enable people to think differently about how they’re going to have to act now in terms of decarbonizing their assets going forward, and how they can do that through green building,” Gilmour said.
Nonetheless, the industry must step up its efforts to meet the country’s net-zero goals. About 13 percent of Canada’s greenhouse gas emissions are attributable to buildings, including commercial buildings. “But at the same time, we’re seeing less than a 1% retrofit rate,” Gilmour said. “To hit 2050 [net-zero emissions goals], you need to be at about 3% to 5%. That’s a significant gap.”
The way forward
Closing this gap won’t be easy. As Gilmour stated, “Every new large building going forward ought to be zero carbon. Because if it’s not, you’re going to be expected to be there at some point between now and 2050, and it will cost you a lot more to get there later.”
For developers with a portfolio of existing buildings, Gilmour said those will have to be retrofitted to lower carbon performance by 2050. "We can't encourage owners and operators and investors enough to focus on transition planning and targeting your investments carefully, particularly when you're going to have to make those capital investments,” he said. “The number one suggestion right now: [determine] where carbon is in your transition plan for your assets. And if it's not there, it needs to be there soon.”
Tridel knows all about handling this transition. That’s why Ritchie said leadership from the top is crucial. “You need alignment with leadership, and you need it from the very, very top to be supportive,” he said. "There's a lot of bumps in the road to get to the outcome that you're looking for. Like anything else that involves change and additional costs, you need support to help you to get where you want to go.”
Banks, of course, will play a key role in helping to finance those additional costs. From a developer’s perspective, it helps to understand how climate risk will impact your risk profile. Climate risk incorporates both transition risk—which is the risk that a business' model will become obsolete because of the transition to net-zero—and physical risk, which is the risk that changing climate and extreme weather will threaten the business’ operations. Both types will increasingly have a material impact on a borrower’s asset risk profile and the cost of capital to finance assets with climate risk. Incorporating climate strategies into your overall business plan can help reduce those risk exposures.
Beginning your sustainability path can seem overwhelming. Burrow said a good place to start is to understand your emissions profile. A sustainability adviser can help measure your carbon footprint, map your emissions footprint and develop strategies for reductions, including carbon credit trading and purchasing carbon offsets.
Ultimately, the industry’s sustainability efforts are as much a matter of meeting the evolving demands of consumers as they are about reducing energy consumption.
“Today's astute consumer already believes that there is a sustainability value proposition embedded in [green building],” Ritchie said. “It just seems natural that in the world in which we live in, no matter what type of product you're looking at, we have to be cognizant of that. A building that adheres to great sustainability building practices is built better. The home itself is quieter, it's healthier, it's more comfortable. And yes, it does consume less energy, so there is a value to that in terms of the operating cost.”
We discussed a lot more during the event, including how to time decarbonization efforts based on the age of the building, potential retrofitting strategies, the issue of waste and emissions in the construction phase, and BMO’s own sustainability efforts. Watch the full video replay to find out more.
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Mike Beg: Greetings, everyone. I'm Mike Beg, SVP and Head of BMO's Commercial Bank, Canada, Real Estate Finance team. Thank you all for joining us today. We are excited to be joined by industry leaders who are actively involved in Canadian commercial real estate and have perspective on key sustainability topics and the outlook for what's ahead. It's guaranteed to be an informative discussion. We have a lot to cover this hour, so I'll walk through the agenda quickly and then we'll get started.
We'll start with Jim Ritchie and Graeme Armster from Tridel Group, one of the first and largest high-rise condo builders in North America, who will kick us off with an overview of Tridel and the impact sustainability has had on their business. Jim is, as COO of Tridel, he brings over 40 years of industry experience. In the span of his career, he's directed the introduction of over 100 condominium communities to the marketplace and overseeing the successful sale of more than 38,000 condominium units in the greater Toronto area, noting that since inception, Tridel has built some 90,000 residential units.
Jim is passionate about ensuring the Tridel brand is synonymous with quality, sustainability, and social impact. As Tridel's Director of Innovation and Sustainability, Graeme has in-depth experience implementing green technologies to reduce carbon emissions, including geothermal, VRF, which is variable refrigerant flow, integrated solar PV, which is photovoltaic, and district energy and smart building technology. Following Jim and Graeme, we will have a round table covering key topics and answer questions that were submitted.
Joining us for that round table we'll have, first, Brent Gilmour, Chief Op Commercial Officer for Canada Green Building Council. Brent provides the council with a strategic direction to drive demand for low carbon green buildings and support the building sector. James Burrow, Director of Sustainable Finance for BMO Capital Markets, where he works to identify and address opportunities to grow sustainable finance products across BMO. Moderating that discussion is BMO's own Karla McCarthy. As national Head of Income Property Finance on my team and the real estate finance leadership team, Karla brings over 20 years experience in commercial banking providing banking solutions to mid-market and corporate clients.
One last thing before we get started. If you are watching the event on a desktop or a laptop, you will see a chat box next to the video screen. Please feel free to use that chat box anytime during the presentation to submit questions to the panelists. Thank you for all the questions we received during the registration as well. We will address as many as possible during the round table discussions. With that, I'll turn it over to you, Jim and Graeme, for a quick overview.
Jim Ritchie: Well, thank you, Mike. Appreciate that. Let's get started. Just a moment to talk about Tridel. Mike was gracious enough to describe us earlier. We've been around, roots go back 89 years. We've developed about 89,000 homes, closing in on that 90,000 mark. All are variety of different forms. I'm also proud to say in terms of our discussion today, about 24,000 green condominium homes. Yes, Mike pointed out we are one of the largest developers and builders of sustainable condominium residences. I'm going to take a moment to speak to you about our timelines.
If we go to the next slide, we have our sustainability timeline. Tridel's journey, if you will, of learning. Given that we're talking today about sustainability into the future, I thought it might be a good idea that we look back a little bit in terms of our own journey. Coincidentally, it just happens to be 20 years ago that we started our journey with sustainability. It really came about a conversation around, back in the early 2000s, about building a better built form providing a better environment for our purchasers, and at the same time trying to look at some of the implications of cost.
Our evaluation at the time was that utilities cost about 40% of the operating budget of a typical condominium. We thought that it's got to be a better approach in terms of managing that cost, and at the same time, building a better product and a better outcome for the community at large. We started in 2003, with a project called Element in Downtown Toronto. Just incidentally, [chuckles] I had to look back. We sold this building at about $350 a foot. That gives you some indication of how time flies. I'm not going to talk about every one of these items on the screen, but I'll point out a few highlights.
In 2005 was our very first building that we registered to pursue LEED certification. We marketed that quite a bit because this whole concept of a sustainable condominium project was somewhat new to the consumer. That was our very first lEED community. Again, Downtown Toronto. I didn't mention, but also in the 2003 era, we also had an opportunity to connect directly with the Enwave District Energy system, and therefore, the building was cooled using Lake Ontario water. Our second district energy connection was up in Markham, at a project called Circa in 2006.
It was also in 2006 where we joined LEED, the organization, Canada Green Building Council, in about that time frame. We made a decision on a go forward that in terms of credibility and to manage what was then a bit of a challenge in the industry or a little bit of greenwashing, we decided to align ourselves with a LEED standard and did so starting in 2006. Part of this journey, of course, is creating awareness. We did that in a number of ways. In 2007, we built an Eco-Suite, and demonstrated that, it's like a model suite, obviously with an eco theme, and kept it open for the general public to learn a little more about sustainability building practices.
We did that again in 2010, on another Downtown building. In 2012, we created our Metrogate community in Scarborough, which essentially was 17 acres of paved parking for a truck stop, and redeveloped this community where it became the first LEED Neighborhood Development in Canada. If we go to the next slide. In 2013, we created a penthouse suite in a building on the waterfront that was our first foray into a net zero environment. Incidentally, we called it NetZed, at the time. That was inspired by an individual that we collaborated on our sustainability journey, Jamie James.
That was-- [chuckles] It took some time, effort, and a bit of money to sort that out, but we eventually got there. If I fast forward a little bit more currently, if I go to 2018, this is a little snapshot of The Well, in Downtown Toronto. Another connection with Enwave. In this case, the largest, obviously, installation of an Enwave system with 7 million liters of storage. This is servicing a development. A very large mixed-use development of commercial, of office, of residential rental, and condominium of about 3 million square feet. Huge undertaking, and has a very large green footprint.
In 2019, we received our very first Platinum LEED certification with one of our waterfront communities, and followed that up with our second. As you can see, as we go to currently, we just, in this last year, got our very first ENERGY STAR Multifamily certification. If we go to the next slide, I'm going to pass this over to my colleague, Graeme.
Graeme Armster: Hey, everyone. Jim gave us a good snapshot of where Tridel started on the sustainability journey, and obviously, it continues. This is a good time to maybe talk about where we're heading in the future and some of the things we're looking at. It all starts with some of the key concerns that are on our radar today. You can see here we have a few of them listed. It's physical consequences, managing the physical consequences of climate change, managing this transition to a lower carbon economy. All while continuing to improve on community well-being.
When we first started, not a lot of people were looking or asking for sustainability. That's changed quite a bit. Now, development partners, financial institutions, a lot of the organizations that we work with are reaching out constantly asking for data and what we're doing in the space. I'm sure for a number of you on the call, that's the same for you. As well, customer education has improved. Our customers that are buying our condos are asking more and more, what are our initiatives in this space? What are we working on? We had a customer reach out for one of our buildings that they were moving into and ask, what was the decarbonization strategy for the building?
The customer base is well-educated on this and it's changing quite rapidly. Next slide. As well, regulations in the space are changing rapidly. There's a lot of change. It started back with the Paris Climate accords setting a net zero target, being net zero by 2050. Then we have Canada's emission reductions plan that is adopting and setting a target of 2050, and how we're going to meet that. Then different municipalities are setting their own targets. Toronto has their Green Standards.
They've actually set a target of 2040, and then on top of all that, we have our building codes being harmonized now to try and act as a guiding light on how the whole nation is going to meet these targets depending on what they're dealing with in their geographic area. A lot of change, both regulatory and in terms of market forces. Next slide. What is Tridel currently doing right now to continue to develop and continue to look to address some of these key market concerns as well as some of the regulation changes? We've generated our own net zero carbon strategy to assist us in eventually meeting this goal of being net zero.
That includes addressing the building performance on the envelope, with air tightness, looking at renewables, looking at the materials that we're putting in our buildings from an embodied carbon standpoint, some data benchmarking, and then also working with the government. Obviously, there are some utilities that feed our buildings that aren't yet decarbonized so we have to provide assistance and guidance there. As well, we have a DC innovation suite. Like Jim said, in the past, we've done innovation suites. That hasn't changed. We're still working on that.
This innovation suite, the premise of it is looking at how we can put a DC microgrid and have that integrate directly into renewable, solar, photovoltaic technology. Renewables are generated in DC. Power, we consume with our LED. Light fixtures are consumed in DC. Why do we have inverters making a conversion when we can just make them talk to each other and send power directly? Lastly, we're looking at how we can electrify a building. That's it. That's where we stand. I'll turn it over to Karla now, and I guess we can get the discussion going.
Karla McCarthy: Thanks very much, Jim and Graeme. Now we'll move into a round table to dive a bit deeper into some key sustainability topics. As a reminder, if you've not had the chance to submit a question yet and would like to, please submit using the chat box next to the video screen. Okay, let's get started. Brent, could you perhaps give us a quick summary of the Canada Green Building Council and comment on what, if any, energy-efficient regulation we can expect to see over the near term and what building owners can do to anticipate it? How quickly is this moving, and is this something owners should be planning for now?
Brent Gilmour: Thank you, Jane, appreciate that. Jim and Graeme, I think, conveyed exactly what's changed with their last few comments. Carbon has value now, and it's going to be impacting real estate decision-making as we go forward. At CAGBC, we're seeing that firsthand. As an industry-driven nonprofit, we're working with engineers, architects, and designers to builders, manufacturers, real estate professionals, owners, tenants, and policymakers, and advisors, really to enable Canada's building sector to implement on their sustainability efforts. Next slide, please.
To help the building sector Act on its carbon leadership objectives, we provide market-led research, practical and accessible learning for the business community in terms of hands-on insights, but also access to the world's leading certification and rating systems to support validation in the marketplace. We're seeing a significant uptake now for large building developers and owners, with some 200 plus buildings registered to become zero carbon just in the last six months.
We're also seeing a real interest in learning about what zero carbon net zero emissions really means for buildings, with thousands of people coming forward and going ahead trying to seek training and insight on, what does this mean for decision-making? We're also now increasingly seeing a real change in the regulatory space to our advocacy and government affairs efforts. Next slide, please. As you heard from Jim and Graeme, the market has shifted when it comes to thinking about sustainability, but particularly as it relates to ESG and reporting.
This is due to what we heard is a wide variety of drivers and market needs. Whether those are climate solution expectations, risk of climate inaction is becoming maybe one of the bigger drivers. Instead of worrying just about the green premium that you might have in terms of the upfront costs, increasingly, people are even more worried about the brown discount that they're going to maybe be experienced going down the road. There's the explosion, literally, of global reporting frameworks. Some that are in lockstep and none exactly similar, which is creating challenges for how people think they're going to have to report.
Maybe this expectation now for carbon disclosure, whether driven by investors, occupiers, or regulation, is really starting to enable people to think differently about how they're going to have to act now in terms of expectations for decarbonizing with their assets going forward and how they can do that through green building. It's the ladder on the disclosure and regulation that I think is really driving a lot of this is conversation both for new, but increasingly on existing buildings. Particularly large buildings. We have nearly 500,000 plus large buildings across Canada. They make up something like 50 megatons of emissions on GHGs going forward out of the overall nature of emissions for the building sector.
At the same time, we're seeing less than a 1% deep energy retrofit rate. In order to hit 2050, if you've been listening to these objectives of net zero emissions, you need to be about 3% to 5%. That's a significant gap. What's on the horizon that's guiding and informing investment decision-making about just about everything federal? We're seeing a lot going on here in the next little while, particularly the federal government is increasingly focusing and driving its policy and program efforts to crowd in private investment, wherever it can. Case in point, they are launching and will announce their green building strategy, formally referred to as the net zero emission strategy.
It is a unifying narrative across the federal government and how it's going to support this net zero transition. Its expected release is in the fall, following the budget, and so we can anticipate a set of new funding in this space. I think what we're really hearing though is that you're seeing a lot of calls to facilitate and fund the retrofit of large buildings. You're seeing there the importance of the deep carbon retrofit accelerator that was just launched, 185 million, to help those who like to aggregate other building owners and operators already, pull them together to advance the potential for deep carbon retrofit.
We're also seeing, as was announced now, last year or the year before, the Canada Infrastructure Banks Building Retrofit Initiative, that was the two billion set to help crowd in private sector capital, starting at 25 million. That's really starting to move. You just continue to see these investments about what can move people to retrofit. Most recently, the commitment by the government of Canada for a 30% clean technology investment tax credit tells you that they are not letting up on what they think they can or need to do in response to the US Inflation Reduction Act.
We won't stop there. We're seeing really strong regulatory signals forthcoming. Particularly with things that matter to those who are assembling land today, who are giving thought to what might be required in the future, only in 2025. We know the national building code in 2025 will be adopted by provinces with 18 months. Why is that? This past year, there was a reconciliation agreement among all the provinces and territories and the federal government on construction codes to bring those into alignment before 2025 as much as they can. In 2025, they're going to introduce new things, such as metrics, and some stringency now on operational carbon. That wasn't there before at all.
That's a big leap in the codes community, and I think for a lot of us who deal with buildings, and they'll go well beyond energy efficiency. In 2030, they expect to introduce embodied carbon, which you started hearing a bit about from Tridel as well. You have provinces, like BC, who are just ratcheting up still, what the level of the building code might be, through their own step code process. What might be a bit more of a shocker, in terms of what we're seeing move so quickly is the standards and performances. That is really happening at the local level, often with permission or endorsement or by legislative enactment of provinces on the disclosure of carbon.
In Vancouver, effective now, in 2024, annual energy and carbon reporting for large commercial multi-residential buildings will be required. That's only going to ratchet up every year, in terms of the size of buildings that are expected to have to report, but also if you're an existing building, what you're going to have to do so you don't get penalized, in terms of your carbon, going forward. The similar is in Montreal. Now we're seeing that all buildings, new or existing, will have to affix a carbon label, A to F. F, you're net zero. F, you probably don't want to be in that level.
Going forward, all of this is going to be changing the mindset of the real estate community. I think increasingly, even going further in Montreal, all existing non-commercial buildings that are rated F, that are over 160,000 square feet, they have to start within four years, how do they get to the next level? There's expectation to move. What do you do about all of this, if you are in this space? Well, let's get right to it. If you are-- Every new large building going forward really ought to be zero carbon right now, because if you're not, you're going to be expected to be there at some point between now and 2050, and it's going to cost you a lot more to get there later.
You're dealing with the portfolio level of buildings. The reality is, they'll have to be retrofitted to lower carbon performance, some time between now and 2050. That transition cycle, you might only have one, maybe two chances at best, to do that, in terms of being a cost effective. We can't encourage owners and operators and investors enough about focusing on transition planning and targeting your investments carefully. Particularly when you're going to have to make those capital investments. The number one suggestion, right now, where is carbon in your transition plan for your assets? If it's not there, it needs to be there soon. Thank you.
Karla: Thanks very much, Brent. That was a lot of great information. Tridel has had a proactive innovation and sustainability strategy for over 20 years. Jim, what advice would you give to others looking to drive better sustainability outcomes in their own businesses? Do you think it's a case of trade-offs or synergies between sustainability and the economics of the business?
Jim: Well, thank you for that, Karla. I would say, [laughs] on this journey you need alignment with leadership, and you need it from the very, very top to be supportive because there's a lot of bumps in the road to get to the outcome that you're looking for. Like anything else that evolves change and additional costs, you need support to help you through to get where you want to go. There are, to your point about trade-offs, the fact is that in our industry, and certainly in the greater Toronto area, our cost of construction has seen, over the last couple of years, double digit increases.
We've had, obviously, those cost pressures, we've had scope changes in the product that we bring to market. Much of it in terms of requirements through the municipal process approvals. Cost is an absolute factor. As much as I think we all will agree that there's a crisis today in affordability with housing, this is something that in the near term, in terms of the capital cost side, we have to try and manage that cost side and get a solution that works on the overall outcome. I think it can be done, but it's not an easy path.
Karla: Great. Thanks very much, Jim. Appreciate those insights. Mike, perhaps you can talk about what role we can expect banks to play, and what will the banks' needs be, given that banks will also be working towards their own carbon reduction strategies and also an evolving regulatory environment.
Mike: Thanks, Karla. I think banks can and should do a number of things. The first of these is lead by example. For instance, BMO's been carbon neutral in our own operations since 2010. In 2021, we set a target to mobilize 300 billion in capital to clients pursuing sustainable outcomes by 2025. A target we're close to meeting one or two years ahead of schedule. Looking further forward, we've set a target for net zero finance emissions by 2050. The second of these, I think, is to look at how we price climate risk into our underwriting.
Climate risk incorporates both transition risk, which is the risk that a business' model will become obsolete because of the transition to net zero, and physical risk, which is the risk that changing climate and extreme weather will actually threaten a business' operations, for example, through rising sea levels. Both of these will increasingly have a material impact on borrow risk profile, asset risk profile, and the cost of capital to finance assets with climate risk. This will increasingly provide powerful economic return optimizing incentives to businesses to adopt climate strategies. Certainly, carrot versus stick.
The final thing I'd like to mention is that banks will need to be bold in innovating in terms of the products and services that they offer. Banks have powerful attributes that can help accelerate the net zero transition. Those include deep databases, a deep client and customer relationship portfolio, as well as partnerships with government regulators and other corporates. While we'll be able to remain focused on being responsible stewards of Canada's financial services, banks can and must be ambitious in contributing to ecosystems where real change can happen. Back to you, Karla.
Karla: Great. Thanks very much, Mike. It's clear that everyone has a role to play in terms of sustainability. Graeme, can you perhaps touch on the concept of timing of decarbonization? Based on the age of a building and how to think about potential retrofit strategies.
Graeme: Yes, thank you, Karla. It's a great question. Tridel is, in terms of the space that we work in, that question has a couple different answers. We do have a long-term asset ownership part of our business in long-term care facilities. From that scenario, we can answer the question looking at it from that angle, but then as well, we build new condos. Often, I guess if I approach it from the new condo side first, in the past when we built our buildings, there was a focus on delivering a product that was a high quality product to our customers that was built to last, and we still continue to take that approach.
The products that we put in our buildings were good quality products that had a good life cycle to them, but ultimately, at the end of the day, they would need replacement and a condo would be budgeted for in the form of a reserve fund. Now that's changed slightly, given what Brent said, in terms of regulatory changes, people targeting to be net zero by certain dates.
If you look at the life cycle of a typical component in a building, if it's an HVAC piece of equipment, maybe it's anywhere from 15 to 20 years, and right now, if that piece of equipment burns gas, from a new construction standpoint, we're right on the cusp of, especially in Toronto, if your target's 2040, we're right on the cusp of having to consider either a low carbon solution now, or if you put the carbon solution that creates carbon and puts it in the atmosphere, then, to Brent's point, you could be at risk later on of devaluation your property, potentially a brown discount. That's something you've got to consider now, right at the new construction stage.
Life cycle was always thought about before only from a cost perspective. Now, carbon is coming into the picture there. If you have an existing property like we have, with some of our existing assets, the next thing is, okay, well now, how do we decarbonize what we already have? Really, the best approach there is to map out, through a building assessment, the life cycle of all of the components in your building, and really start to develop a solution that, and an action plan that's communicated to the operations team that's following through with it.
So that they know that when something reaches end of life, you replace it with a low carbon solution so that you're setting yourself up for the future, because you don't want to be in a position where you're retiring a piece of equipment well before its end of useful life. It's not good for the bottom line and the economics, but it's also not good for the environment. Obviously, there's this new topic of embodied carbon coming out, and if you look at the carbon that went into manufacturing that piece of equipment or component in your building and you retire it early, you're doing harm to the environment as well from that perspective.
You got to think of all these things when you're coming up with your capital replacement strategy right from the get-go. It's now money and carbon, and then obviously, if you have an operating building, money and carbon come into play. Thanks, Karla.
Karla: Great. Thanks very much, Graeme. That's a great insight in terms of thinking about your buildings and where you can opportunistically invest based on the life cycle. James, Mike mentioned earlier that BMO intends to lead by example with our own products and services. Can you expand on how BMO is practically doing so?
James Burrow: I'd be very, very happy to, Karla. Thank you. Think of a couple of examples that would be of relevance to our real estate clients on the call here today. I think first of these is the retrofits platform or financing ecosystem that we are developing and will announce publicly very, very shortly. I think this ecosystem or platform is designed to solve a couple of market frictions. The first of these is the availability of the right type of debt to finance retrofits. The second of these is the difficulty would be retrofitters have and actually piecing together products in a seamless way. Piecing together retrofits in a seamless way.
I'll start with the debt. I think traditionally, in many cases, retrofits, particularly deep retrofits that have a fairly aggressive carbon reduction profile, which is what everybody's really looking for, they tend to have longer paybacks. In excess of 10 or 15 years, but debt would typically be term debt that would only be available to be amortized over, say, five years. You have quite short-term debt with long-term paybacks, which means from a short-term cash flow perspective, that's a pretty difficult debt obligation for a lot of developers to take on.
The other thing is really price, especially in these environments where interest rates have gone up over 400 basis points over the last year. The cost of debt is really not very cheap at all, especially at the moment. I think with our retrofits platform, we are looking to address both of those frictions. The price and the term of the debt.
The final piece there I mentioned is the difficulty of actually executing these projects, particularly for smaller building owners with less developed sustainability capabilities or contracting capabilities.
We've actually signed partnerships with Ameresco and with Siemens, who are energy services companies, to be able to deliver retrofits in a very seamless way, alongside BMO. All the legal documentation is prepared ahead of time, and we're able to work really hand in glove with these companies in delivering retrofits. We're also looking at bringing further ESCOs on board into that partnership to make it a true ecosystem.
The idea is that the project delivery, the finance, the incentives, would all be wrapped up within one product to really make an offer that's hopefully, too good to refuse for many of our clients from a cash flow perspective, from a building valuation perspective, and frankly, and importantly, from a sustainability perspective. I think that's one example, and that's something that as I mentioned, we'll be announcing shortly in the commercial real estate vertical. I think the second example is something that we have announced recently, and that was the acquisition of Radicle, now known as BMO Radicle.
Radicle is a company that offers us deep capabilities in carbon markets. Namely, the ability to trade carbon credits, the ability to create carbon credits, and the ability to advise our clients on emissions footprinting. What that means for real estate clients is if you don't necessarily know where to start with your sustainability journey, a great place to start is to understand what the profile of your own emissions is or are. Radicle's emissions footprinting services, or BMO Radicle's emissions footprinting services, we'll be able to work with you to do that.
Once that initial emissions footprinting baseline is set, we are then able to advise on strategies to decarbonize in a way that is timed and cost-efficient and integrate it into your business plan. We're able to integrate carbon credit trading and the purchase of carbon offsets into that plan as well. The idea being that you should strive for as many real-time material reductions in your carbon emissions as possible, because there is no substitute for just real reductions in emissions, but for those emissions that you can't reduce yourself, you're able to buy off offset on the voluntary carbon markets to achieve a net zero building standard, or close to it.
I think that the retrofits platform and our acquisition of Radicle and build out and growth of Radicle are two, hopefully, good examples of how we're innovating and how we're seeking to lead and be our clients' lead partner to a net zero world.
Karla: Great. Thanks very much, James. I'm sure that will be welcome news to many of our clients who are planning for retrofits and carbon strategies. Brent, maybe I'll direct this question to you. As regulatory and stakeholder expectation shift and evolve, can we expect to see impact on demand for certain properties and property value?
Brent: Thank you. I think the short answer is yes. The question might be, how do you have that certainty [chuckles] with so much understanding what's going on in the marketplace? Think of when we're just to take the look at what's happening with carbon disclosure and expectations on getting a label. That will affect perception, but also value, both in both outcomes, the question is when and how fast is carbon valuation entering into new and existing? At the end of the day, it's starting to take off on its own how much carbon is in that building and what is its value?
I think the way we are seeing this now in terms of play out in the marketplace, it's still very early, and I think people should have regard for that in terms of what the implications are, the level of comfort of those who are doing that valuation going forward. For instance, we did some work with JLL and [unintelligible 00:39:01]. We asked asset owners and investors what that cap rate the premium might be willing to pay on a net zero carbon asset. This is where people started to care a little bit more. The response in these kinds of understandings is you're starting to [unintelligible 00:39:18].
If you're thinking basis points, maybe up to 25 or more of the compression factor. Meaning, in a traditional non-net zero carbon building, it was estimated that at a 5% capitalization factor, that cap rate, what people are willing, going to pay for a net zero carbon equivalent would be about 4.75%. What does that translate into? Maybe a 5% premium, in terms of value, that you might see going forward already today. That was just based on the handful of buildings that are exchanging in the market sector in Canada already.
I think as time evolves, you can assume that this will just grow, and I think as local markets expect or require you to disclose your carbon, someone's going to put a value on that, and it'll find its way into your transaction. It's just a matter of not when, maybe so much as how that transaction is going to start to value carbon.
Karla: Okay. Thanks very much, Brent. Jim, as we look at new construction, does the market place a premium on environmental performance and energy efficiency? Do buyers primarily value reduced utility expenditures, or is the social capital of being green recognized? Perhaps you can also touch on the potential use of renewable wood products in high-rise construction, as that was another question that came through.
Jim: Well, remind me about the wood, if I forget. I think today's astute consumer already believes that there is a sustainability value proposition embedded in this product already. It just seems to be natural to them that in an environment today, in the world in which we live in, I think no matter what type of product you're looking at, we have to be cognizant of that. I can tell you that a building that adheres to great sustainability building practices is it's built better. The home itself is quieter, it's healthier, it's more comfortable, and yes, it does consume less energy.
There is value to that in terms of the operating cost. I don't think the consumer understands that to the extent that they should at the point of sale. This is something that becomes somewhat more relevant when they live in the home and they actually experience the home, with these green features, together with a lower operating cost. It seems to be more relevant at the end of the process instead of the front end. From our brand perspective, it's just part of what comes with our value offering. There's a level of expectation in a Tridel product.
Do we see it in the resale marketplace? I'd say it's very difficult and it's early for that. We, yet to see much in the way of conversations around carbon valuation in that purchase process. Those are early days. One thing we do get a little pushback, and Karla, you did mention that, in terms of carbon burning. We have a wide range of product and prices and we try to touch all elements of the marketplace. When you're in a larger condominium home, maybe it's $2, $3, or $4 million, the buyers for that type of product really do like their carbon-burning appliances. They really do like the gas stove, the gas range, they like the gas fireplaces.
These are things that we are now evolving away from. With new products, which I think a consumer will perceive as value once they've experienced them, but it's a little tough at the front end to tell them, "No, you can't have that gas range that you really want." That's one aspect. The fact is also that over the years we have developed very efficient and very reliable systems in which to provide space heating in the homes, and of course, the domestic hot water. We now have to evolve away from that and look at electrification. We know the products are there, some challenge in terms of that scale and in terms of performance, but we have to move in that direction.
We do get a little pushback. Frankly, if you ask the consumer how much they want in terms of fenestration or a vision glass in their home, they always want more. We know that glass isn't particularly good in terms of protecting us from the outside elements. We try to design it in ways that there might be somewhat less, and we're more strategic on how that happens. There's a little bit of a disconnect with the consumer from that end also.
Karla: Okay. Thanks very much, Jim. Yes, sounds like a balancing act between market demands and sustainable product. Did you have any insights on utilization of renewable wood products in higher-rise buildings? Is that something that you would be able to comment on?
Jim: Well, the wood products, you made me think about, actually, the gas supply, in terms of the range of gas burning, but wood products in terms of what? Maybe you can elaborate.
Karla: Related to the use of wood for framing of more low-rise and maybe even mid-rise construction, with technology going a bit higher.
Jim: Yes, okay. [laughs] Thank you. I'm still in the high-rise condo mode, and we're definitely pouring a lot of concrete. Which, Graeme, I guess maybe you should jump in also talk about that, because we're trying to get a strategy to manage these, the carbon, not just in terms of the construction, but also on an ongoing perspective. Frankly, we have yet to go in that area where we would be moving away from our concrete buildings and into wood, simply because we don't have the built form that's available today that would meet code.
Most of our product is substantially larger. I don't know, Graeme, if you want to jump in and comment on this. We are doing the studies, we're looking at the cost of this, but we're going to need building codes that are going to allow us to get to taller buildings in terms of more alignment with our particular product, so we're not quite there yet.
Graeme: Yes, I'd love to jump in. To Jim's point, we've been looking at, in particular, mass timber for our buildings for a number of years now. We do build a lot of high-rise, and in Toronto, where we predominantly build, prescriptively the building code allows us to build up to six stories with mass timber. There are some buildings going up that are well above that, which is acceptable as well, it's just now you are meeting with the local authority, walking them through design, walking them through how it meets safety standards above and beyond what the prescriptive code allows right now.
Obviously there's, all over North America, buildings from a mass timber perspective going up well above six stories. We're looking at that. As well, we are in talks with some different prefab manufacturers who are utilizing wood as a primary basis of their material. Our understanding is they're actually working with the government of Canada right now to improve the supply chain from that perspective locally here in Canada, which we have the resources, it's just a function of fine tuning, so that the costs of using mass timber, which in the past have been more expensive, there has been a premium for that.
Those costs start to come in line with what we're doing right now. Yes, we're looking at it. I think we're getting very close as an industry for it to become more and more common. You're already seeing that, and more and more buildings pop up, and I think it's going to start to take off.
Karla: Great. Thanks, Jim and Graeme. Perhaps, Graeme, I'll just stay with you for a moment while we're on the topic of construction. Emissions from building operations aren't the only dimension to sustainability in real estate. There's also the waste generated in construction, and the emissions embedded in building materials like concrete and steel rebar. Do you have any advice for other builders out there around minimizing waste and the associated expense due to that waste on the construction site?
Graeme: Sure, yes. To your point, often when we think waste, right away we think of just wasted materials, but that conversation is quickly expanding, right off the hop to your point, we're looking at emissions now and waste generated through emissions. A new term coming out of the industry, [unintelligible 00:49:16] and billing and approaching the construction of a building is the carbon payback period. Often, the thought was if we design a building to be very, very energy efficient, it will use less energy and subsequently generate less emissions.
What was often overlooked in that approach though is the amount of emissions that went into the materials, whether it's insulation or other components to that effect, triple glazing, those added materials that went onto that building to reduce energy consumption had manufacturing or embodied carbon emissions associated with them. We can't approach building construction focusing just on one aspect and expect to resolve the problem. The discussion is growing, and the viewpoint on the emissions generated in the construction industry are growing more and more rapidly.
One other thing to consider, which is on the waste side becoming more of a spotlighted topic is resiliency. From a resiliency aspect, we don't want to finish this beautiful building and then all of a sudden have an extreme weather event, as a result of climate change, come in and knock this building out, and next thing you know we're starting from scratch again. All of the emissions that went into building that building are doubled because we got to replace it and do it over again. That's another component. Then even during the construction process, there are tools now that can be utilized to minimize risk and waste from that perspective.
Tridel has rolled out recently our leak detection solution that we leverage during construction. I'm sure many developers or asset holders on this call have had scenarios where they've had losses as a result of floods and leaks that results in damaged material that's removed and replaced and generates emissions. The interesting factor that ties all this together is often, when I think of emissions, I think of emissions as a bank account.
That bank account tends to closely align to the dollars and cents, or the economic bank account. Right back to what I said before about balancing the materials going in the building from an embodied carbon emissions versus an operational emissions standpoint, those materials cost money. The more material, the more costs. If you can balance the two, and balance the emissions, it tends to economically work out if you're looking at the full picture. Leak detection, again, there's an investment there, but ultimately, you're reducing risk and hopefully, saving money on the insurance side by preventing some of these major losses, which again, it all comes back to reducing waste. Thank you, Karla.
Karla: Thanks very much, Graeme. I think we have time for one more question. Maybe I'll pass this one over to Brent. With respect to managing risk relating to climate change and decarbonization, there are a number of underlying things that don't necessarily jump out, such as increased demand for certain materials and increased costs, for example, adding electrical capacity. Are there certain things people should be thinking about now and planning for?
Brent: Yes. I think we've heard some great examples from Graeme, as you think about the trade-offs of costs coming forward in embodied carbon and materials. What you're starting to think about there is, can you start to see, and I'll give three quick examples, in terms of what you might be purchasing. There is the requirement for the importance of declaring, so these EPDs that are on materials, the way you can know what's in the material and its carbon. These are things you're going to have to pay more attention for, in terms of being able to do your whole life cycle costing, potentially for a building going forward, and understanding where those trade-offs might be, as an example.
Are there examples that you're going to have to continue to work through and maybe Tridel might also have run into this, too, is depending on the types of energy systems that you're connecting to, and what you're using, and what you want to do on-site versus what might be provided by utility, could incur additional costs. Particularly if you're trying to focus on aspects, say it is electrification, you may not have been anticipating the need to have to pay or incur the costs of the upgrade to the grid, to your building, and those associated costs with other installations of equipment.
These are things that people are starting to realize that weren't there before might now need to be. As you go through, it's again, about trying to ensure you have a complete picture of what that looks like as you go to cost out, whether it's new or if you're dealing with a retrofit of existing buildings, what are the options that make the most cost-effective sense relative to your carbon leadership objectives you're trying to also achieve? I think the word balance is really critical, but it's also transition planning. Looking to see when the timing might be best for when to invest is increasingly critical.
I'll just add here, something that James really emphasized in his response to timings and the various new products coming from BMO. Not everything is going to be achieved on day one. In terms of when you can move forward, buildings don't work that way, if it's existing. They're not designed as a linear point A to point B. Think of it as more step. It might make more sense to think about your windows at one point just because they're coming up in terms of their life cycle.
It might make more sense to focus on your mechanical system at another time, but you have to have the complete picture to be able to act, and to get the best pricing, the best construction results, and the best opportunity, whether it's for your investor or for those that are providing support. Again, having that capital plan in place takes the shock factor out, allows you to better prepare for your pricing, benefit from the cost savings that come through not just from the aspect of energy savings, which are significant, as we think about these, as costs go up for those sources, but also from the unknowns, as continuation of carbon valuation goes.
Whether it's through carbon price, as it is today, and continue to go up, but also future things that we don't know about and I think excellent example in resiliency. You can't always anticipate the true costs that are coming forward when things are disrupted, whether it's in the operations of your building. Putting that together as your overall valuation of what you're trying to accomplish and the trade-offs within all of them, because they all come down to a cost, really helps you put into perspective the picture of what is maybe your brown discount and what is ultimately the bottom line that you need to try and protect yourself from going forward.
Karla: Great. Thanks very much, Brent. That is all the time we have today with our panel. Thanks to Jim, Graeme, Brent, James, and Mike for all the great insights on this important topic, and I'm going to pass it back over to Mike.
Mike: Thank you very much, Karla, and thanks to our speakers. Listening to Graeme, Jim, Brent, and James is not lost on me that ESG cost savings and waste savings also contribute to affordable housing. A double win, as it were. I'd like to thank everyone on the call for joining us. We hope that you enjoyed today's session. I want to thank you again for taking the time out of your busy days to spend time with us here. It's still very early days in ESG and the evolution between banks and their clients, but if nothing else, we hope that today's speakers may have helped inspire you to have an ESG strategy, if you don't, or further build on the one you have.
On behalf of BMO, we want you to know we're thinking of you, your families, and your organizations. We're here to help. We've been through uncertain times over our more than 200 year history, and are well-prepared to serve our clients. As a reminder, today's call was recorded and is available for playback. You'll receive details on how to access that in an email later this week. This concludes our call today. Thank you and take care.
[00:58:05] [END OF AUDIO]
Mike Beg
Head, Real Estate Finance
Mike Beg as Head, Real Estate Finance, Canada is responsible for management of BMO’s Commercial Real Estate Finance group and its client relationships across …(..)
View Full Profile >The commercial real estate industry will be a key player in helping the nation meet Canada’s net-zero emissions goals. Whether embarking on new developments or retrofitting existing buildings, it’s a daunting challenge for developers.
We recently spoke with four industry leaders who offered their perspectives on key sustainability topics and the outlook for what's ahead. Karla McCarthy, Head of Atlantic Provinces, BMO Commercial Bank Canada, moderated a discussion that featured the following:
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Jim Ritchie, President, the Tridel Group of Companies
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Graeme Armster, Director, Innovation and Sustainability, the Tridel Group of Companies
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Brent Gilmour, Chief Commercial Officer, Canada Green Building Council
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James Burrow, Director, Sustainable Finance, BMO Capital Markets
Listen to our ~16-minute episode.
Listen to our ~25-minute episode.
Sustainability Leaders podcast is live on all major channels including Apple, Google and Spotify.
Below is a summary of their conversation.
An evolving situation
Tridel has built nearly 90,000 residential units since its founding in 1934, including about 24,000 green condominiums. In 2003, Tridel launched its Built Green Built for Life program. Since then, the company has led the way in implementing various green technologies to reduce carbon emissions. Over the last 20 years, Tridel has seen both the industry and the culture as a whole evolve.
“When we first started, not a lot of people were asking for sustainability,” Armster said. “That's changed quite a bit. Now, development partners, financial institutions and a lot of the organizations we work with are reaching out constantly asking for data and what we're doing. Customer education has improved, so our condo customers are asking more and more about what our initiatives are in this space.”
Armster added that regulations are also changing rapidly. The Toronto Green Standard, for example, includes implementation dates for the Greenhouse Gas Emission limits to 2025 and 2028 so that buildings constructed on or after 2030 are near zero emissions.
“Building codes are being harmonized to act as a guiding light on how the whole nation is going to meet these targets depending on what they're dealing with in their geographic areas,” Armster said. “We've generated our own net-zero carbon strategy to assist us in meeting this goal. That includes improving building envelope performance, looking at onsite renewable energy generation, considering materials that have lower embodied carbon for our buildings, and working with governments to identify and address industry gaps.”
The regulatory picture
While developers will have to keep pace with changing national standards—including, for the first time, carbon emissions requirements in the 2025 National Building Code—Gilmour noted that many forthcoming regulatory changes will be at the provincial level. He cited upcoming building code changes in Quebec and British Columbia that will likely have significant impacts on the industry.
“We’re seeing really strong regulatory signals forthcoming, particularly with things that matter to those who are giving thought to what might be required in the future for a new project,” Gilmour said. “But what might be a bit more of a shocker--and this is happening at the local level—is the disclosure of carbon [emissions]. In Vancouver, effective in 2024, annual energy and carbon reporting for large commercial multi-residential buildings will be required. That’s only going to ratchet up every year in terms of the size of buildings that are expected to have to report, but also, if you’re an existing building, what you’re going to have to do so you don’t get penalized in terms of your carbon going forward. In Montreal, we’re seeing that all new or existing buildings will have to affix a [greenhouse gas emissions] rating starting in 2024 if bylaws are adopted.”
Noting that the market has shifted when it comes to how it thinks about sustainability, Gilmour said developers are now less concerned than before about paying a “green premium” and more worried about the “brown discount”—the depreciation in properties that are not sustainable—that they may experience down the road.
“Maybe this expectation for carbon disclosure, whether driven by investors, occupants or regulation, is starting to enable people to think differently about how they’re going to have to act now in terms of decarbonizing their assets going forward, and how they can do that through green building,” Gilmour said.
Nonetheless, the industry must step up its efforts to meet the country’s net-zero goals. About 13 percent of Canada’s greenhouse gas emissions are attributable to buildings, including commercial buildings. “But at the same time, we’re seeing less than a 1% retrofit rate,” Gilmour said. “To hit 2050 [net-zero emissions goals], you need to be at about 3% to 5%. That’s a significant gap.”
The way forward
Closing this gap won’t be easy. As Gilmour stated, “Every new large building going forward ought to be zero carbon. Because if it’s not, you’re going to be expected to be there at some point between now and 2050, and it will cost you a lot more to get there later.”
For developers with a portfolio of existing buildings, Gilmour said those will have to be retrofitted to lower carbon performance by 2050. "We can't encourage owners and operators and investors enough to focus on transition planning and targeting your investments carefully, particularly when you're going to have to make those capital investments,” he said. “The number one suggestion right now: [determine] where carbon is in your transition plan for your assets. And if it's not there, it needs to be there soon.”
Tridel knows all about handling this transition. That’s why Ritchie said leadership from the top is crucial. “You need alignment with leadership, and you need it from the very, very top to be supportive,” he said. "There's a lot of bumps in the road to get to the outcome that you're looking for. Like anything else that involves change and additional costs, you need support to help you to get where you want to go.”
Banks, of course, will play a key role in helping to finance those additional costs. From a developer’s perspective, it helps to understand how climate risk will impact your risk profile. Climate risk incorporates both transition risk—which is the risk that a business' model will become obsolete because of the transition to net-zero—and physical risk, which is the risk that changing climate and extreme weather will threaten the business’ operations. Both types will increasingly have a material impact on a borrower’s asset risk profile and the cost of capital to finance assets with climate risk. Incorporating climate strategies into your overall business plan can help reduce those risk exposures.
Beginning your sustainability path can seem overwhelming. Burrow said a good place to start is to understand your emissions profile. A sustainability adviser can help measure your carbon footprint, map your emissions footprint and develop strategies for reductions, including carbon credit trading and purchasing carbon offsets.
Ultimately, the industry’s sustainability efforts are as much a matter of meeting the evolving demands of consumers as they are about reducing energy consumption.
“Today's astute consumer already believes that there is a sustainability value proposition embedded in [green building],” Ritchie said. “It just seems natural that in the world in which we live in, no matter what type of product you're looking at, we have to be cognizant of that. A building that adheres to great sustainability building practices is built better. The home itself is quieter, it's healthier, it's more comfortable. And yes, it does consume less energy, so there is a value to that in terms of the operating cost.”
We discussed a lot more during the event, including how to time decarbonization efforts based on the age of the building, potential retrofitting strategies, the issue of waste and emissions in the construction phase, and BMO’s own sustainability efforts. Watch the full video replay to find out more.
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