Attending a commercial real estate conference – even a virtual one – in the midst of a pandemic may seem counterintuitive. But at the NAIOP I.CON virtual conference, it was clear that the industry needed to come together, share ideas and find the best path forward in this precarious environment. Perhaps not surprisingly, the industrial real estate sector has remained resilient, and in some ways is even flourishing in light of the pandemic. What factors are leading to this continued growth, and how will the sector remain strong and competitive through this crisis and beyond?
Resilience and sustainability were key themes at the conference, reflecting how critical these issues have become to commercial and industrial real estate groups. Even before this crisis, ESG considerations were moving to the C-suite; now they are core to the survival of entire industries.
Megatrends in Industrial Real Estate
The economic reverberations of COVID-19 have accelerated a transition that was already underway in CRE, which could best be described as “Bigger, Taller, Smarter.” Industrial spaces today are changing not just in the size of their footprint, but in the way they function – from single use to mixed use, from inert shells to smart, sustainable buildings.
Spencer Levy, Senior Economic Advisor at CBRE, noted in his I.CON presentation of COVID’s macroeconomic effects that CBRE’s outlook for industrial over the next two to three years is actually stronger today than it was in January 2020. “[The forecasts] are better because the secular shifts you have seen accelerated have all benefited industrial, from last mile to near-shoring,” Levy said.
The coronavirus has hastened the ecommerce revolution. While CBRE had projected 30% of all retail sales to take place online by 2030, the organization now predicts the number to reach 40% by 2025. While the opportunity this presents to industrial warehouse owners is huge, it is not without challenges.
A Tale of Two Crises
In the wake of this pandemic, corporations have an unprecedented opportunity to broaden their definition of ESG in a way that bolsters resilience while at the same time addressing two of society’s most pressing challenges: climate change and the risk of future pandemics.
The parallels between the coronavirus pandemic and climate change are striking, said Sophie Carruth, Head of European Sustainability for LaSalle Investment Management, in a recent webinar: “Both are global crises that affect human health, in both cases we need to flatten the curve, and in both cases prevention is much cheaper than the cure.”
Commercial and industrial real estate account for roughly 40% of the world’s energy consumption, and therefore have enormous potential to shrink greenhouse gas emissions and ensure the health and well-being of workers.
“The big thing we’re going to be building after the crisis is trust: People will need to trust and believe that going inside your building is safe,” said Richard Francis, Director of Environment and Sustainability at Gardiner & Theobald. “Increasingly, sustainability and healthy buildings will be a way for companies to communicate their values to a customer that is increasingly more discerning.”
The Value of Resilience
According to GRESB, resilience is “the capacity of companies and funds to survive and thrive in the face of social and environmental shocks and stressors.” If this industry is going to weather this storm as it has so many others before, this definition should expand to include the ability to prepare for unknown risks. Defining these risks – to the degree that it’s humanly possible – and mitigating their effects will become part of an organization’s continuity plan, or perhaps more aptly, its “resiliency plan.”
In the post-pandemic world, resiliency planning will become crucial for long-term survival. As the industrial sector becomes more automated, more electrified and more virtual, it will become even more important to safeguard operations and assets with a sustainability strategy that delivers immediate as well as long-term ROI with minimal risk.
The CRE industry can add tremendous value by implementing sustainability measures that tenants increasingly desire. Healthy building features such as better airflow systems and outdoor spaces are just the start, sustainably speaking. While these are valuable to tenants, they are often costly to implement. Renewable energy systems such as on-site commercial and industrial-scale solar can offset these costs and even provide an ongoing revenue stream, while energy storage can provide operational resilience so critical to industrial tenants.
The expense of power outage-related losses can be devastating to businesses, but the monetary value of resilience has been difficult to quantify because it varies widely according to each individual business. However a recent study by the National Renewable Energy Laboratory put forth a formula for valuing resilience based on the avoided cost of outages using customer surveys from 30 different utilities with a range of customer types. From the report:
Essentially, the expected cost of the loss of business or the liability incurred because of the lack of power is used as a proxy for the value of resilience..When solar and energy storage technologies are configured to provide backup power, they create value by allowing businesses to stay open or residents to shelter in place.
Hurricanes Harvey, Irma and Maria have all been highly instructional in understanding the value of resilience in disaster situations. And while many industrial centers have backup power, it’s not only whether the power exists, but about the quality, smoothness and carbon emissions of that power. Whether coupled with solar or stand alone, the clean benefits of energy storage to a local community vs. the harmful effects of expensive and unreliable diesel backup generators cannot be overstated.
The Road Ahead
On the road ahead for CRE, resilience and sustainability must go hand in hand. Now more than ever, sustainable energy systems should be designed to factor in the value of the resilience they provide for industrial tenants. Catalyze can help CRE clients capture immediate cost savings and even accrue revenue for renewable energy built on your premises to ensure operational resilience that is also environmentally sustainable. We also help our clients assess the value of potential real estate acquisitions and/or dispositions from an energy portfolio standpoint, a service you can read more about here.
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How Will You Accelerate Resilience?
In our own roundtable discussion at I.CON, “Lessons from the Pandemic: Accelerating Sustainability and Resilience,” we asked participants a number of questions (found in the slideshare below). How would you respond?