What Retail Real Estate Owners Are Doing To Be Sustainable And Why It Matters

According to the United Nation’s 2021 Global Status Report for Building and Construction, 27% of global energy-related CO2 emissions come from the operations of buildings. With construction added, that percentage rises to 37%. Therefore, the real estate sector will play an essential role in reducing these emissions, a responsibility that lies in the hands of the asset owners.

Tenant demand and government mandates are driving adoption.

The adoption of sustainable practices in real estate has been slow, but the demand is finally there to initiate the change. “It is all about keeping an eye on the future and understanding the needs of stakeholders. What may once have been viewed as an optional improvement expense is growing into expectation from investors, tenants, communities, and partners,” shared Tamara Chernomordik, Kimco Realty’s Senior Director of ESG. Retail tenants, especially those with sustainable values, want sustainable spaces.

“Emerging laws and regulations will also drive the shift towards more sustainable real estate,” added Chernomordik. An example of a government mandate is Local Law 97, which New York City passed in April 2019 and imposed energy efficiency and greenhouse gas limits on buildings over 25,000 square feet. In addition, in September 2021, the National Conference of State Legislatures released an analysis of building efficiency policies by state. Despite progress made over the years, at the time, there were still about 30 states with no building energy efficiency policies.

Mixed-use properties provide scale to test and justify the cost of sustainable improvements.

On May 12^th, Breana Wheeler, Director of Operations for the Building Research Establishment, hosted a webinar with leaders in the sector on revitalizing retail assets. One suggestion that came up from all speakers was the benefit of the scale of mixed-use properties. Increased density means less transportation to shop, work, and live, and multiple buildings can share power and water sources.

“Net-zero is all about the intersectionality between everything… we were even talking about another project where if we did building-by-building solar… it just doesn’t make financial sense. Having the scale across the property, and having it [across the] parking lot, carport coverings, and then also across the roofs, would just make a lot more financial sense,” shared Rhianne Menzies, Director of ESG, Retail at Brookfield Properties, adding “when you can start to connect the stones it can be complicated and it involves a lot more thought up front, but it can make a lot more sense long-term operationally.”

Another benefit of mixed-use is the ability to test sustainable strategies. For example, Emily Paciolla, Director of Sustainability at Federal Realty Investment Trust, shared, “you can test out different things like different building standards or strategy or material choices or efficiency standards… and then use those lessons learned on our more standard strip centers.”

An example of a sustainably designed mixed-use development is Kimco’s Witmer at Pentagon, a LEED Silver, Signature Series^®, and mixed-use property located near downtown DC. “This project avoids an estimated 11% of CO2e emissions annually, saves an estimated 65% in irrigation water use, and was built with 28% locally sourced building materials,” shared Chernomordik. In addition, Kimco is investing in retrofitting its existing properties with common area lighting retrofits, submeters, and energy-efficiency controls.

Energy efficiency is an easy place to start.

One of the most accessible and manageable areas of improvement for any asset owner is energy efficiency. According to Federal Realty’s 2021 Environmental, Social, and Governance Report released this month, the asset owner has upgraded or is currently upgrading almost 65% of its properties, which will involve installing LED lighting in landlord-controlled common areas. Federal also includes green provisions like submetering and the option to purchase on-site renewable energy in its leases with tenants. Given many retail tenants are responsible for their energy usage and utility payments, green lease terms assure alliance and attract like-minded tenants.

The asset owner has also installed solar arrays on nearly one-quarter of its properties, providing 13.6 megawatts of on-site capacity, more than any other publicly-traded shopping center real estate investment trust. Installing on-site renewable energy is an effort shared by many different landlords, including Kimco and Brookfield. However, it’s costly and acts as a long-term, large-scale investment.

In the future, more tenants will demand sustainable retail real estate, and more governments will demand sustainable buildings. And it will be retail asset owners, like Kimco, Brookfield, and Federal, who are ahead of the curve in estimating these demands, that will maintain relevancy with stakeholders and reap the long-term benefits. The rest of the industry will undoubtedly have to invest and adapt to achieve paralleled longevity.