How Developers and Builders Are Paving the Way for a Greener Future
Caroline Donlin,
Mark Frankel
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December 18, 2024
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Commercial Real Estate,
Engineering Construction
- Keywords:
- Sustainability Leaders
Caroline Donlin,
Mark Frankel
|
December 18, 2024
|
Commercial Real Estate,
Engineering Construction
As part of our series on sustainability in the built environment, Caroline Donlin, Managing Director and Head, Engineering & Construction, moderated a discussion on the adoption of sustainable practices. Leaders in commercial real estate, engineering and construction, sustainability, and the federal government discussed how these practices not only contribute to environmental preservation, but they also offer significant economic benefits. Our panelists were:
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James Burrow, Director, BMO Sustainable Finance
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Julia Gisewite, Chief Sustainability Officer, Turner Construction, the largest domestic building company in the U.S.
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Barry Howard, Founder and Chief Sustainability Officer, Core Spaces, a leading developer of multifamily and student housing
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Nick Ryan, Technology Commercialization Manager, Department of Energy’s Building Technologies Office
Sustainability Leaders podcast is live on all major channels, including Apple and Spotify.
Following is a summary of the conversation.
Low-carbon new construction: Is there a valuation premium?
We’re seeing more building methods put in place to minimize the carbon footprint of construction projects. How does this translate into a tangible uplift in financial valuation?
According to Burrow, there is anecdotal evidence supporting higher valuations for low-carbon construction. “They’re typically lower cost to operate, so their net operating income is better,” Burrow said. “They’re compliant with current and future regulations. And as you move from gas to electricity to heat buildings, the cost of that electricity is often less volatile, so you're hedging the risk quite effectively.”
What complicates matters, Burrow said, is that the appraisal industry tends to be backward-looking in its valuation process. “If we're taking a forward-looking view, then yes, we believe there’s a valuation premium. But it's not universally accepted that a low- or zero-carbon building should be worth more than its built-to-code counterpart today. I think that's coming, but I don't know that we're quite there yet.”
Gisewite pointed to studies that indicate a small premium for low-carbon buildings, but she cautioned that it varies by market. What’s important to focus on are the potential costs of not adopting sustainable practices.
“Tenants want healthy spaces, they want spaces with wellness, they want low-carbon spaces,” she said. “That baseline is shifting. We have to get over this concept of sustainability as an add-on. It has to be the new reference point. Resetting the mindset has to be part of the underlying effort.”
Howard echoed that sentiment, noting that the current generation of college students has grown up with the realities of climate change, and that awareness will only grow stronger. “We're long-term holders of assets, so in 2024, I’m thinking I’m going to hold this in 2034,” he said. “If you're not thinking of that exit strategy and you're not doing something now, you're going to have a building in the future that's valued way less. Maybe it’s 2% to 4% now, but that could be 10% or higher in the future if you're falling behind in making your building sustainable.”
Reducing embodied carbon
Retrofitting, the process of upgrading existing buildings with new features and technologies to reduce utility costs and carbon emissions, has been a valuable tactic in the industry. The operational emissions from buildings, such as those from the gas and electricity consumed, is one part of the challenge that building retrofits address. From a new construction perspective, however, embodied carbon—emissions generated from manufacturing steel, concrete and other building materials—is equally consequential. How much progress has been made on reducing embodied carbon?
Howard noted that embodied carbon could account for up to 50% of the building’s carbon footprint over the course of it’s life. While it’s not currently top of mind within the industry, he said reducing embodied carbon is starting to become a proxy for good management. “The subcontractors that are starting to figure this out are the ones who know how to manage their businesses well now, but also with an eye on the future” Howard said. “It's a way for us to get comfortable with trades that are thinking this way.”
Gisewite said that while Turner is committed to initiating dialogue on embodied carbon during the design phase, the opportunities for pursuing it vary by region and supply chain readiness. “It can be a very tedious process, which is complicated by the fact that low embodied carbon solutions can sometimes be at odds with operational carbon solutions,” she said.
Emerging technologies to reduce operational and embodied carbon
Reducing the carbon footprint of building materials requires technological advancements. All of the panelists were excited about the potential for heat pumps to significantly reduce greenhouse gas emissions.
“That has the biggest potential to move the needle on operational emissions in the short term” Burrow said.
“We see it moving from the traditional spots we use it in the Southeast and coming north like the armadillos
,” Howard said. “As we see [the effects of] climate change coming north and the technology improving, we're finding a better geographic footprint.”
Beyond heat pumps, Gisewite said Turner is exploring materials like green cement. “Cement production is 8% of global greenhouse gas emissions,” she said. "Buildings and highways are really the only places that concrete goes, so it’s our sector that needs to solve this. The innovations happening are pretty incredible. You have blended cements that use alternatives for core cement in the mix, you have carbon-sequestering materials, you have bio-cements, you have alternate clinkers, and they range from 2% to 5% carbon reduction all the way up to 100% carbon reduction.”
Both Gisewite and Ryan pointed out that the biggest obstacle currently facing green cement is the ability to produce such materials at scale. “It's going to take significant capital and market demand to move the needle,” Gisewite said. “These are capital-intensive plants that need to be built or retrofitted, so much more supply is needed to tip the scales. Right now, the demand is outweighing the production of these transformational materials.”
“It comes down to the idiosyncrasies of the supply chain,” Ryan said. “Where are you going to get your materials? Who’s going to mix it? There are all sorts of implications when you start moving these materials within certain cities—union versus non-union labor. Those are where the biggest improvements and conversations need to happen.”
Roadblocks to building green: perceived and actual
The path to sustainable development won’t be simple, as obstacles both real and presumed present their own sets of challenges. Gisewite said the perception that the construction industry is slow to innovate persists, and with good reason. "We are very risk averse,” she said. “We have proven methods that we really like. There's a third-mover mindset here—no one wants to be first, no one wants to be second.”
But there are also real challenges that come with decarbonization projects. For one, Gisewite said, the process tends to be more iterative in nature. “You've got initial concepts that get vetted, they get batted down for one reason or another, and you go back to the drawing board,” she said.
Gisewite also pointed out that the lead times associated with decarbonization projects makes guaranteeing availability of supplies a challenge. Then there’s the matter of cost. “The green premiums are still very real,” she said. “They're a barrier for a lot of our clients. We have clients say, please give me all the low-carbon options, but give them to me at cost and schedule parity. It has to pencil, but pencil doesn't always mean free. Pencil can mean there might be community benefits. There might be other opportunities that we need to make sure we're messaging.”
It was gratifying to hear how the real estate and construction industries are increasingly committed to decarbonization and green practices. Building a sustainable future will require dedication across the value chain. We’re proud to be part of those efforts, and we’ll continue to bring industry insights like these to our clients.
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James Burrow (00:00):
The energy transition and the road to decarbonization is probably not going to be linear. It's going to be a bit of two steps forward and one step back. But I do think that the direction of travel is established.
Michael Torrance (00:17):
Welcome to Sustainability Leaders. I'm Michael Torrance, chief Sustainability Officer at BMO. On this show, we will talk with leading sustainability practitioners from the corporate investor, academic and NGO communities to explore how this rapidly evolving field of sustainability is impacting global investment business practices and our world.
Disclosure (00:38):
The views expressed here are those of the participants and not those of Bank of Montreal, its affiliates or subsidiaries.
Caroline Donlin (00:51):
Good morning everyone. My name is Caroline Donlin and I'm the managing director and group head for BMOs US Engineering and Construction Practice. And I'll be your moderator for today's session. Welcome today, we're excited to continue the conversation. We started in our first session Build for Tomorrow, which focused on big picture questions around why builders and developers were pursuing sustainable initiatives. Today's discussion centers on sustainable horizons and how developers and builders are paving the way for a greener future. We'll cover the adoption of sustainable practices and how they not only contribute to the environmental preservation, but also offer significant economic benefits. And I'm joined here today with an incredible group of panelists who I'm excited to introduce. First, we have James Burrow, who's a director in BMO's North American Commercial Bank on our sustainable finance team. Prior to his appointment, James was part of the capital market sustainable finance team, where he identified opportunities to grow sustainable finance products across BMO Financial Group as a whole.
(01:57):
His work there included launching BMO's high profile retrofits partnership with the Canada Infrastructure Bank, supporting the acquisition of radical and its post merger integration into BMO scoping early stage real estate decarbonization opportunities with the US Department of Energy and publicly advocating for BMO Climate Ambition via thought leadership spanning national media conferences and podcast. We also have Julia Gisewite, Chief Sustainability Officer at Turner Construction. Julia is their Chief Sustainability officer who's responsible for setting and implementing sustainability policies, standards and strategies across Turner's national and international operations. Turner's sustainability program addresses topics relevant to the building industry, including low carbon materials, energy transition, construction emissions, climate adoption, waste, circularity, green building rating systems, water protection, biodiversity, and much more. Turner Construction is the largest domestic building company in the US and a leader in diverse market segments. They've been named ENR'S number one green builder since 2007.
(03:07):
We also have Barry Howard, who is the founder and chief sustainability officer at Core Spaces and original CFO. As the company has grown various transition to looking at the company and properties more holistically, and it has shifted towards focusing on sustainability and operational effect, very overseas course sustainability efforts both on acquisitions and new developments. Last but not least, we have Nicholas Ryan, who is at the Department of Energy as a technology commercialization manager in the Building Technologies office. Nick directs the office technology go to market portfolio and co-leads the Advanced Building Construction Initiative focusing on industrialized construction and leads the emerging technology collaboration for buildings, which is a stakeholder engagement platform focused on research and development and demonstration activities in nationwide. So starting out, I want to dive right in and talk about low carbon construction, which really focuses on building methods and practices aimed at reducing CO2 emissions and minimizing the carbon footprint of construction projects. I think we understand the sustainability benefits of low carbon construction, but I'm curious how does this translate into a tangible uplift in financial valuation, and do we really believe there is a valuation premium associated with low carbon new construction? James, I'd like to start with you and get your thoughts on this topic to officially kick us off.
James Burrow (04:35):
Yeah, no, absolutely. Thank you Caroline, and happy to be here. So I think the first thing I'd say is, at least in my mind, it makes sense that these buildings would have a valuation premium. They're typically lower cost to operate, so their net operating income is better. They're compliant with current and future regulations. Their energy source is primarily electricity rather than natural gas. As you move away from gas as part of reducing emissions and electricity in terms of price is a lot less volatile than gas. So you're hedging the risk there quite effectively. So it does make sense from a lot of perspectives that buildings like these should have a valuation premium that's different than actually having that valuation premium though. And what I'd say is from what I'm seeing at least at the moment, and I'd be very interested to hear the views of the other panelists, is that we at least have anecdotal for these valuation premiums. So for example, BMOs Climate Institute recently did a study with one of our major asset management clients that found that in the Canadian market at least there is a2 0.5 to 4% valuation premium associated with these buildings. Now, the sample size of that was relatively small. I'll acknowledge you can have a look at the research yourself on BMO's website and I encourage you to do that, but we do believe that does exist a valuation premium.
Julia Gisewite (05:48):
Yeah, I would add to James's comment. There are studies that do seem to validate a small premium for green buildings, low carbon originally put out by some of the certification bodies, but others as well. I think it goes without saying that this varies by market. Maybe another counterpoint to the green premiums of upfront costs, is it not adopting low carbon and not adopting sustainable practices and the ultimate cost that we could be seeing? But I do believe, and Caroline, I remember from the first webinar in this series that this came up, but tenants do want spaces. They want healthy spaces, they want spaces with wellness, they want low carbon spaces. They may not come out and say it, but they do want productivity and the things that come with greener buildings leading to less absenteeism, less turnover. And I do think that that is what tenants are coming to expect personally.
(06:42):
That's what I'm to expect in a space that I'm working in. So I do believe that baseline is shifting, and Barry, maybe you can tell me whether you agree or disagree, but I do think we have to get over this concept of sustainability as an add-on or an other. It really has to be the new reference point. We can't keep comparing low carbon buildings, low carbon systems to not green, not low carbon, right? That just perpetuates all of these outdated benchmarks that aren't really reflecting the urgent need here urgent. And when you compare, if we continue to compare those two, we ignore all of the long-term costs of inaction.
Caroline Donlin (07:19):
I want to switch gears a little bit to retrofitting, which is really the process of upgrading existing buildings with new technologies or features to improve energy efficiency, reduce carbon emissions, or extend the functional life, the operational emissions of buildings emissions from gas and electricity is one part of the challenge, but from a new construction perspective, embodied carbon or those emissions generated from manufacturing the steel and the concrete and other materials that form the building is also very material. And so I'm curious how much progress has been made on reducing embodied carbon and how do you see it showing up?
Barry Howard (07:59):
I'll take the retrofitting one first and just follow that line. The idea of buying a building, we found that tenants are starting to equate this idea of a gross lease, which is your base lease, what you're paying plus your utilities. So it's interesting, there's some reputation risk if you don't have a efficient building. And so we're going into buildings that aren't efficient and retrofitting them to make them more efficient, enable actually drive more value in terms of what the tenants will pay because we're cutting their utility operating costs, let's anecdotal at this point, but we think there's some momentum there, people thinking it that way. On the flip side of this new construction with embodied carbon, I mean depending on what stats you look, building a building and having it hold for 50 years, the embodi carbon could be up to 50% of that carbon compared to the operating that for 50 years. So it's a huge component that's really not talked about. It's more complex because it's upfront. We're finding that the capital partners that we to like that thinking this because it coming down the point and there is this idea that it's a huge component and very material to the carbon footprint of that building through its lifecycle.
Caroline Donlin (09:02):
Julia, I'd love for you to maybe chime in on how you're seeing this show up with the trades or in the construction process.
Julia Gisewite (09:09):
I'll let James chime in after I go with what is coming from policy and government because I'm seeing a lot of government movement there, particularly at the federal level where the majority of things like concrete are purchased in the us but I'll say I'm seeing states and others issuing things like buy Clean California, New York, Colorado. But the a EC industry is really taking this topic on head on. You see industry organizations like a, a mechanical engineering coalitions like MEP 2040, structural engineering coalitions like SE 2050, they all now have frameworks around embodied carbon reduction and are encouraging member commitments and non-binding pledges around how some of these firms are going to address embodied carbon in our buildings. As are all of the big certifying agencies or entities, U-S-G-B-C, iil, I, well Brian, they're all taking it head on as a key metric. And in terms of supply chain, the education and awareness is nascent.
(10:05):
And I'm with you, Barry. We see the early adopters, the early leaders out there is in the industry and doing great things and making big investments. At Turner, we've committed to making sure this is topic. It comes up at the design tables, particularly when it's not part of our project programs. We're initiating the dialogue and we're saying, what can we do? What are the opportunities here for the individual project? Because individual projects, building projects are not widgets on a factory line. Each one is unique and each one has its own formula. Each one has its own solution. And even when there is alignment that we want to build low carbon, the opportunities vary by region, by supply chain, and it can be a very tedious process which is complicated by the fact that low embodied carbon solutions can sometimes be at odds with operational carbon solutions. And how are we working those things out?
James Burrow (10:59):
And maybe just pick up off some of the stuff that Julia has been saying there. A couple of things I am really, really excited about though is that sometimes the technologies around this are really not complex. Timber is a very, very old technology. We've been building buildings out of timber for millennia and it can potentially be cheaper than steel. High quality timber can be cheaper than steel in the right circumstances as well. And that's not the only example. Concrete injected with co2, very cost comparable to regular concrete and actually can have improved strength properties. So I'm very, very excited about the technologies that are coming on stream and to call timber a technology, maybe that's the wrong word, but some of the materials that we're going to use to reduce embodied carbon and construction in years to come. I'm very excited about that and although some of the regulations are way away yet, I'm excited about some of the early opportunities that we're seeing.
Caroline Donlin (11:51):
And Nick, I know you work a lot, some of emerging technologies and I'd love to hear what excites you and what's on your mind as relates to opportunities in the future?
Nicholas Ryan (12:03):
Yeah, absolutely. So I'll piggyback off the last topic and start with embodied and then move to operational. I think that obviously we are very focused on the primary drivers of embodied carbonide, steel, concrete plastic and things like that. There is a lot of amazing technologies out there, a lot of novel materials, all sorts of things. James, I think you're absolutely right. There are some foundational principles of construction that folks are revitalizing as back to basics, so to speak. I think there's an amalgamation of all these different ethoses that we're going to find a balance of. I think the part that I'm most excited about is not just in the development of those new materials, but the actual scaling and production of them being able to do them at scale. And that was really the biggest limitation is moving from the bench top to able to actually fulfill demand in the real world.
(12:49):
And I think the curve of producing those things more effectively, the embodied carbon of producing those things, all those things are improving very dramatically, I think in what is the recycling of buildings themselves. It'll be of no surprise to anyone that I'm going to start this proverbial list with heat pumps. That's obviously the largest driver of greenhouse gas emissions energy use. In many ways it begins and ends with heat pumps. At least that's what we're taught. But I think for particularly this audience, there's two technology that we're really investing in and really excited about it is rooftop units. We've done a lot of analysis to indicate that that's really a high priority area, large building typology, that it can affect broad climate adaptability. And we are deeply entrenched with the OEMs developing all sorts of new units and things like that, trying to improve in this technology space dramatically.
(13:37):
And then I think maybe on the flip side, but in particular environments thinking about major metropolitan areas in the northeast, Boston, New York, Minneapolis and things like that, or in cold climates I should say, not just the Northeast is the boiler system. These are very complex, old, deeply embedded heating systems in these very critical community buildings. So there's a lot of technical issues and we are making some great advancements in figuring out how to make boiler systems in these large buildings much more efficient. The other part of that really ties into those heat pumps are the control systems and the smart systems that actually operate these buildings. And quite honestly, that is where we're seeing is a growing frontier of potential is the hardware side of things. There's always improvements that we can make to that and we are making those. But the coordination of all those disparate systems that come into a building, especially when we think about more advanced buildings where you have maybe a battery in the basement of some sort, EV charging is in your garage.
(14:36):
This is a very complex system that we are adding onto with all these auxiliary technologies. What is the coordination and the orchestration of all those things? That is a huge space for us that really starts to magnify the energy savings once we can start having these large buildings, not just be part of the grid, but an active set to the grid is really what starts to change the game here. So I think those are some of the things that are really engaging us the most is driving change on body carbon, more heat pump options. And again, unlocking the sum is greater than the parts of these buildings with control systems.
Caroline Donlin (15:13):
James, how do you see things from where you sit?
James Burrow (15:16):
In terms of technologies and everything that's going on there? All the in technologies that are coming on stream? I mean, I guess the one that I'm most excited about is obviously heat pumps that has the biggest kind of potential to move the needle in the short term, particularly sorry, on operational emissions, clarifying operational versus embodied emissions. And look, what I'm really excited about heat pumps particularly is that in tempera areas of the country, for example, where you may not have air conditioning in your building and there are a lot of lower quality older buildings that don't have air conditioning right now, but they do have heating. When it comes up to time to replace that heating, why not do it with a heat pump? Then you'll get free air conditioning effectively on the side because obviously heat pumps are effectively this kind of magic technology that do the heating and air conditioning. So I'm excited about that with heat pumps, the potential just to make the buildings better in a kind of almost two for one way there. To put it very simply. And crudely,
Caroline Donlin (16:06):
One item that I think comes up a lot in any discussion about sustainability and some of the things that you just mentioned is really around tax credits and how much they're driving behaviors and what behaviors are they driving. And so I'm curious about how much we should be relying on tax credits and other, what I'll call carrots to drive such behaviors. Nick, I'd love to hear your perspective on this from the DOE side.
Nicholas Ryan (16:33):
Yeah, absolutely. To be sure, this was a historic investment, right? All of the different cash credits coming out of IRA and it is having a, as states are starting to roll out and take advantage of the opportunity, but in all honesty, it is our call out to the private sector as a way to say, here it's possible. Let us know what we can do for you to be able to take this baton and really maximize it. What things are working, what things are not right. I also think that the value of thinking local, and that's really what I recommend most folks to do, is your operations both as a building owner as well as a developer are far more affected by your local county, your state, your city. The incentives in the programs that are running through those organizations are far more effective to your business and also are a lot more tangible. IRA and BIL is all run through the states, right? We are here as a technical assistance function. The state is really who is going to lay out requirements, all those kinds of things. So I think the incentives are going to be really impactful. I think there is a lot more to do and I would suggest looking local because that's how you're going to be able to operationalize and take advantage of what is out there most effectively.
Caroline Donlin (17:48):
Curious from each of your standpoint, what are the biggest roadblocks, whether perceived or actual, to being able to build green? Julia, if you want to maybe kick us off here for this part of our discussion.
Julia Gisewite (18:01):
Yeah, I'll start with perceived. I think there's a perception that construction is slow to innovate and that we're a hard industry to change. And that comes from cultural factors, it comes from financial factors, it comes from systemic factors. And I will say we are very risk averse. We have proven methods that we really like. We don't like the untested, we don't like lightly tested options. I think there's the third mover mindset here. No one wants to be first. No one wants to be second, everyone wants to be third. And we're seeing this pan out in other aspects of innovation as well. AI, digitalization, we're still placing masonry with a spade and mortar. So I think that we use it as an excuse sometimes that we cannot change and cannot innovate. But two things that I think are real challenges. One is that projects move quickly at times.
(18:47):
As builders, we are incentivized to move projects as quickly as they can go. So when you are taking something like a decarbonization concept that requires an iterative process, right? You've got initial thoughts, you've got initial concepts, they get vetted, they get batted down for one reason or another, usually cause of cost or lead time or some other combo, and you go back to the drawing board and you do this iteratively. But the reality is the pace of construction, let's say design is very rapid. And so your decision making windows can come and go. The other challenge that I think is very real is our supply chain, and we've touched on it, right? There's a lot of education to do, a lot of training to do. The offerings can be very hyperlocal. At the same time, we're also working with global suppliers. So even making decisions around decarbonization upfront in a project, you're not actually putting those materials in place for a year later.
(19:37):
So guaranteeing availability and lead times and things like that of actually executing and deploying is a challenge. So we have to figure out how to bridge that gap. And then I will say the green premiums are still very real. They're a barrier for a lot of our clients. We have clients say, please give me all the low carbon options, but give them to me at cost and schedule parity please. Right? It has to pencil right? And pencil doesn't always mean free pencil can mean there might be community benefits, there might be other opportunities that we just need to make sure we're messaging and we're looking at what are the other bottom lines.
Caroline Donlin (20:10):
Nick, what do you see?
Nicholas Ryan (20:12):
At the end of the day? Right? After all the conversations I have with broad spectrum of different stakeholder groups and things like that is I think the ultimate question is, is it worth it? Is the value there Again, whether perceived or actual, is the value there to do the extra effort? Because on top of all the things that make construction going to be difficult and challenging to coordinate and perform, perform at this point, doing it differently is inviting complication is inviting an extra mile to have to travel. Value is in the eyes of a holder. And I think what we try to do is make a valuable, as tangible as possible, and also educate folks on what the opportunity of that value could be. Give them the future vision of here's what business could look like, here's what opportunities could be part of your future.
(21:06):
But the big question that I think that I ask myself and I think certain groups ask themselves is how are we supporting those who are making these leaps? And I think that's a very fair question to ask. And I think that's the intrinsic part that makes this feasible is not just telling folks, oh, here's what it could be and here's the value of all that stuff, but say, Hey, we'll be there with you. We are your partner in this because our vision is for the overall industry to transform. But I think the part that got a lot of folks into this business is building things, building cool things, energy efficiency allows you to build those cool things.
Caroline Donlin (21:40):
Perfect. James, do you want to hop in with anything else?
James Burrow (21:44):
There's maybe only one thing that I would want to cover, and this is taking a little bit of a different tack to some of the previous presenters, but I do think a perceived roadblock is political churn. People see what's happening, they see political polarization and they think, well, what happens when the president changes over? And he or she may have a very, very different view what happens at the state level, and I think I'd make a couple of points to that. Firstly, the energy transition and the road to decarbonization is probably not going to be linear. It's going to be a bit of two steps forward and one step back. But I do think that the direction of travel is established. So I think, look, the message that I would want to leave the group with is that yes, political churn can be concerning, but don't let it lead to paralysis. I think the direction of travel is clear, and I think it's possible to make progress against this political backdrop.
Caroline Donlin (22:31):
Barry, anything else to add?
Barry Howard (22:34):
Skilled labor, go into something like heat pumps. You just don't have a skilled labor pool yet, at least in the north that's able to handle that. So that's one thing we just need to address unions and other apprenticeships and that kind of stuff would be awesome. Second, the elephant in the room that we keep seeing is the tenants pay for utility bills, and if we have to spend a lot more to make it that much more efficient, where is the feedback loop on the ROI on that? But the third thing we are really starting to do that I think is actually getting rid of this perceived actual roadblock is we're doing 25 year models versus 10. So if you're looking at a central plant with a boiler and a chiller versus furnace and air handler, and you look at that first cost statement, you might be like, oh God, just do air handler furnace.
(23:13):
That's easy. But if you look at the replacement costs coming year 8, 10, 12, and the maintenance cost over time changing filters, all of a sudden, this 25 year horizon, unfortunately, you have to use a net present value to bring it back to today. That gets the numbers a lot closer than just looking at first cost. So there's a lot of other variables that you can look at being a little bit more sophisticated with a lifecycle of a building, we wouldn't probably hold it 25 years, but we'll sell it in year 10. That person's going to value that next 10 years and put that kind of replacement cost in there. So that's how we're able to get more comfortable with some upfront costs that are a little higher than otherwise.
Caroline Donlin (23:48):
Excellent. Well, I think this brings us to the end of our conversation, and I just want to thank our panelists for what I found to be just an incredibly wonderful and insightful discussion. So thank you all for your time. And until next time, thank you so much for joining us and have a wonderful day.
Michael Torrance (24:13):
Thanks for listening to Sustainability Leaders. This podcast is presented by BMO. You can find our show on Apple Podcasts, Spotify, or your favorite podcast player. Press the follow button. If you want to get notified when new episodes are published. We value your input, so please leave a rating review and any feedback that you might have or visit us at bmo.com/sustainability leaders. Our show and resources are produced with support from BMO's Marketing Team and Puddle Creative. Until next time, thanks for listening and have a great week.
Disclosure (24:48):
For BMO disclosures, please visit bmocm.com/podcast/disclaimer.
Caroline Donlin
Managing Director and Head, Engineering & Construction
Caroline Donlin is a Managing Director and Head of BMO’s Engineering and Construction (E&C) practice nationally. BMO has the largest, dedicated E&C pr…(..)
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Mark Frankel
Managing Director, Co-Head of Core Commercial Real Estate
Mark Frankel is a Managing Director and Co-Head of BMO’s Core Commercial Real Estate team which is focused on serving institutional real estate clients with a…(..)
View Full Profile >As part of our series on sustainability in the built environment, Caroline Donlin, Managing Director and Head, Engineering & Construction, moderated a discussion on the adoption of sustainable practices. Leaders in commercial real estate, engineering and construction, sustainability, and the federal government discussed how these practices not only contribute to environmental preservation, but they also offer significant economic benefits. Our panelists were:
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James Burrow, Director, BMO Sustainable Finance
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Julia Gisewite, Chief Sustainability Officer, Turner Construction, the largest domestic building company in the U.S.
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Barry Howard, Founder and Chief Sustainability Officer, Core Spaces, a leading developer of multifamily and student housing
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Nick Ryan, Technology Commercialization Manager, Department of Energy’s Building Technologies Office
Sustainability Leaders podcast is live on all major channels, including Apple and Spotify.
Following is a summary of the conversation.
Low-carbon new construction: Is there a valuation premium?
We’re seeing more building methods put in place to minimize the carbon footprint of construction projects. How does this translate into a tangible uplift in financial valuation?
According to Burrow, there is anecdotal evidence supporting higher valuations for low-carbon construction. “They’re typically lower cost to operate, so their net operating income is better,” Burrow said. “They’re compliant with current and future regulations. And as you move from gas to electricity to heat buildings, the cost of that electricity is often less volatile, so you're hedging the risk quite effectively.”
What complicates matters, Burrow said, is that the appraisal industry tends to be backward-looking in its valuation process. “If we're taking a forward-looking view, then yes, we believe there’s a valuation premium. But it's not universally accepted that a low- or zero-carbon building should be worth more than its built-to-code counterpart today. I think that's coming, but I don't know that we're quite there yet.”
Gisewite pointed to studies that indicate a small premium for low-carbon buildings, but she cautioned that it varies by market. What’s important to focus on are the potential costs of not adopting sustainable practices.
“Tenants want healthy spaces, they want spaces with wellness, they want low-carbon spaces,” she said. “That baseline is shifting. We have to get over this concept of sustainability as an add-on. It has to be the new reference point. Resetting the mindset has to be part of the underlying effort.”
Howard echoed that sentiment, noting that the current generation of college students has grown up with the realities of climate change, and that awareness will only grow stronger. “We're long-term holders of assets, so in 2024, I’m thinking I’m going to hold this in 2034,” he said. “If you're not thinking of that exit strategy and you're not doing something now, you're going to have a building in the future that's valued way less. Maybe it’s 2% to 4% now, but that could be 10% or higher in the future if you're falling behind in making your building sustainable.”
Reducing embodied carbon
Retrofitting, the process of upgrading existing buildings with new features and technologies to reduce utility costs and carbon emissions, has been a valuable tactic in the industry. The operational emissions from buildings, such as those from the gas and electricity consumed, is one part of the challenge that building retrofits address. From a new construction perspective, however, embodied carbon—emissions generated from manufacturing steel, concrete and other building materials—is equally consequential. How much progress has been made on reducing embodied carbon?
Howard noted that embodied carbon could account for up to 50% of the building’s carbon footprint over the course of it’s life. While it’s not currently top of mind within the industry, he said reducing embodied carbon is starting to become a proxy for good management. “The subcontractors that are starting to figure this out are the ones who know how to manage their businesses well now, but also with an eye on the future” Howard said. “It's a way for us to get comfortable with trades that are thinking this way.”
Gisewite said that while Turner is committed to initiating dialogue on embodied carbon during the design phase, the opportunities for pursuing it vary by region and supply chain readiness. “It can be a very tedious process, which is complicated by the fact that low embodied carbon solutions can sometimes be at odds with operational carbon solutions,” she said.
Emerging technologies to reduce operational and embodied carbon
Reducing the carbon footprint of building materials requires technological advancements. All of the panelists were excited about the potential for heat pumps to significantly reduce greenhouse gas emissions.
“That has the biggest potential to move the needle on operational emissions in the short term” Burrow said.
“We see it moving from the traditional spots we use it in the Southeast and coming north like the armadillos,” Howard said. “As we see [the effects of] climate change coming north and the technology improving, we're finding a better geographic footprint.”
Beyond heat pumps, Gisewite said Turner is exploring materials like green cement. “Cement production is 8% of global greenhouse gas emissions,” she said. "Buildings and highways are really the only places that concrete goes, so it’s our sector that needs to solve this. The innovations happening are pretty incredible. You have blended cements that use alternatives for core cement in the mix, you have carbon-sequestering materials, you have bio-cements, you have alternate clinkers, and they range from 2% to 5% carbon reduction all the way up to 100% carbon reduction.”
Both Gisewite and Ryan pointed out that the biggest obstacle currently facing green cement is the ability to produce such materials at scale. “It's going to take significant capital and market demand to move the needle,” Gisewite said. “These are capital-intensive plants that need to be built or retrofitted, so much more supply is needed to tip the scales. Right now, the demand is outweighing the production of these transformational materials.”
“It comes down to the idiosyncrasies of the supply chain,” Ryan said. “Where are you going to get your materials? Who’s going to mix it? There are all sorts of implications when you start moving these materials within certain cities—union versus non-union labor. Those are where the biggest improvements and conversations need to happen.”
Roadblocks to building green: perceived and actual
The path to sustainable development won’t be simple, as obstacles both real and presumed present their own sets of challenges. Gisewite said the perception that the construction industry is slow to innovate persists, and with good reason. "We are very risk averse,” she said. “We have proven methods that we really like. There's a third-mover mindset here—no one wants to be first, no one wants to be second.”
But there are also real challenges that come with decarbonization projects. For one, Gisewite said, the process tends to be more iterative in nature. “You've got initial concepts that get vetted, they get batted down for one reason or another, and you go back to the drawing board,” she said.
Gisewite also pointed out that the lead times associated with decarbonization projects makes guaranteeing availability of supplies a challenge. Then there’s the matter of cost. “The green premiums are still very real,” she said. “They're a barrier for a lot of our clients. We have clients say, please give me all the low-carbon options, but give them to me at cost and schedule parity. It has to pencil, but pencil doesn't always mean free. Pencil can mean there might be community benefits. There might be other opportunities that we need to make sure we're messaging.”
It was gratifying to hear how the real estate and construction industries are increasingly committed to decarbonization and green practices. Building a sustainable future will require dedication across the value chain. We’re proud to be part of those efforts, and we’ll continue to bring industry insights like these to our clients.
This is part 2
of a
2-part series on
Sustainability in the Built World
PART 1
Building for Tomorrow: Real Estate, Construction, and Sustainability
Caroline Donlin, Angela Adduci | October 25, 2024 Commercial Real Estate, Engineering Construction
Decarbonizing the built environment, which represents about 40% of global greenhouse gas emissions, is a key component to achieving a net-zero world.…
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