The market for office space continues to look dangerously sickly.
A couple of weeks ago, I noted that the market for office space was looking dangerously sickly, but there’s no problem that building a (supposedly) green economy cannot make worse.
Buildings account for 39 per cent of global energy-related carbon emissions, according to the World Green Building Council, an industry group. Roughly three-quarters of that comes from running them; the remainder from the construction process.
But new environmental regulations to tackle the problem are kicking in at the worst possible time for an industry still reeling from the impact of the pandemic. Companies were already having to think about jettisoning space which homeworking has left surplus to requirements; now the new rules will be phased in as economies tip into recession.
That will put acres of office space worth hundreds of billions around the world at risk of redundancy, say market analysts. . . .
To be clear, “buildings” does not just refer to office buildings, but to all buildings everywhere.
Turning, naturally, to those helpful people at the World Economic Forum (“Davos”), I discover that:
According to the United Nations Environment Program, the built environment accounts for 39 percent of gross annual carbon emissions worldwide, a figure comprising both operational carbon, the ongoing carbon emissions from its day-to-day use, and embodied carbon — all the CO2 emitted in producing materials. Embodied carbon is estimated from the energy used to extract and transport raw materials as well as emissions from manufacturing processes.
When we account for embodied carbon, the building industry is the biggest offender when it comes to global emissions.
As always with the Davos crowd, action needs to be taken, and it needs to be taken now:
With the problem of embodied carbon now taking center stage, this is the moment to make bold commitments and take immediate action.
Where “bold” means suicidal.
To say that the FT’s article makes depressing reading is an understatement. Central planning is almost always an invitation to disaster. But its effects are made even worse when the planners are in the grip of fundamentalist ideology (see, say, the USSR for details). In a more rational world, even those who believed that better construction techniques in future could make a difference to the climate would accept that retrofitting older office buildings in parts of the West in the name of the climate makes no sense. It will have little or no effect on the climate and could well prove economically devastating.
But climate world is not a rational world, and so we are now faced with the possibility that large numbers of office buildings (particularly older office buildings) must be expensively reworked or be rendered unlettable. With the office market in trouble, the response by many owners will be to walk away from those properties. These will then be left to rot, hitting jobs and tax revenues at the worst possible time, and threatening severe urban blight.
If you have access to the full article, it’s well worth reading, but here are a few details that point to major trouble ahead:
In New York, researchers at Columbia and New York University estimate $500bn in office value could be destroyed by 2029 as demand falls and green standards kick in.
Savills estimates the cost of upgrading a building from today’s standards to 2030 requirements to be roughly £40 per sq ft, on top of normal refurbishment costs. Leading landlords in the West End or City of London, charging as much as £100 per sq ft, might be able to absorb the cost. But for owners of buildings in smaller towns, charging more like £20 per sq ft, bearing that cost is impossible.
“There are going to be tonnes of stranded assets, let’s be honest,” says Jacob Loftus, founder and chief executive of General Projects, which specialises in green refurbishments. “Even for those owners which would like to improve [their buildings] there are vast numbers of buildings where it just won’t make sense.”
Some words of reassurance from the central planners in Brussels:
Ultimately, tougher regulations will “cut emissions, tackle energy poverty, reduce people’s vulnerability to energy prices and support the economic recovery and job creation”, according to the European Commission…
Ultimately.
The FT:
According to a report published last year by estate agency Savills, the stock of commercial property worldwide is worth close to $33tn, much of that made up of offices. Even if the costs of transitioning are lower than widely expected — 5 per cent of a building’s value, for instance — commercial landlords and investors will have to find $1.65tn to finance the green transition.
This is a disaster heading in our direction, and this time it is undeniably manmade.