Now is the time for real estate executives to develop a business case for decarbonizing their buildings and making them more resilient to climate change, according to “The commercial case for making buildings more sustainable,” a report by real estate industry services firm Jones Lang LaSalle (JLL).

Three key factors are driving the need to “future-proof” real estate: mounting costs from climate risks, rising demand from corporate tenants and more restrictive finance amid tougher regulation, according to the JLL report.

In 2021, 10 of the biggest climate disasters from around the world cost $170 billion in insured losses, and the price tag will only increase in the coming years.

“The actual value of losses will be much higher as this figure doesn’t account for the disruption to business continuity, as well as the broader human costs,” the authors wrote. “Furthermore, each year the cost of uninsured losses goes up, as the data leads to insurers withdrawing from key industrialized and populated areas.”

It’s not just the increased frequency of environmental disasters such as hurricanes, floods and wildfires that affect some cities more than others—rising temperatures across all regions will result in long-term challenges to existing buildings, infrastructure and supply chains. According to C40 Cities, more than 350 cities already experience summer temperatures of over 95°F, and by 2050, that number will rise to about 970 cities.

“By 2050, as weather patterns become more unpredictable and extreme weather events become more frequent, the risks to building value—and ‘business as usual’ —will mount,” according to the report.

The business case for sustainable buildings is also becoming more imperative as more corporate tenants demand green certifications and better environmental performance indicators, such as energy intensity and electrification, according to the report.

However, demand is starting to outstrip supply: for every 3 square meters of demand, only 1 square meter of low-carbon space is in the current pipeline. Demand from corporate tenants is expected to increase rapidly to satisfy their respective stakeholder sustainability goals, but right now only 34% of future demand for low-carbon workspace will be met in the next several years across 20 major global office markets.

Then there is the expectation of more restrictive finance and tougher regulation to meet more stringent building performance standards and corporate disclosure mandates. JLL outlined three consequences for building owners and investors:

• Assets falling short of evolving standards will find it increasingly expensive to secure funding at preferential terms or could lose subsidies.
• Insurance premiums for nonresilient buildings or those in vulnerable locations will rise to reflect more frequent acute risks. Indeed, the report cited a Swiss estimate that climate risks are expected to add $200 billion to annual property insurance premiums by 2040.
• Long-term capital planning will become more complicated as physical risks become more unpredictable.

  “Given the extended timescales involved in decarbonizing operations and retrofitting buildings, taking action sooner rather than waiting for new regulations to be announced will help companies remain compliant,” the authors wrote.

While many real estate executives are currently hesitant to build a business case for sustainable buildings due to near-term economic headwinds, JLL emphasized they must still act now to prevent long-term harm—particularly to their bottom lines.

“By implementing the right measures in the right way at the right time, owners can minimize the impact of physical and transition risks on their buildings—most specifically on their value and the income they generate—while corporates can reduce the disruption to their spaces and business operations,” the authors wrote. “Both can unlock opportunities by developing sustainable and inclusive spaces that are ready for what lies ahead.”