Research article

Commercial real estate exposed to higher energy costs

Each real estate sector is impacted by the energy crisis differently

The European commercial real estate sector is not immune to the effects of the energy crisis. It faces various challenges due to rising energy costs, energy security, and reducing carbon emissions. According to the European Commission, the built environment in the EU accounts for approximately 40% of total energy consumption and roughly 36% of the total greenhouse gas emissions.

The aforementioned drop in gas demand across Europe was partially the result of reduced gas demand from buildings, both from households and public and commercial buildings. According to the IEA, buildings in the EU used 20% less gas in 2022 compared to 2021, driven by a combination of a mild winter, i.e. less gas used to heat up buildings, and behavioural changes, such as lowering the thermostat and reducing hot water usage.

Nevertheless, the energy crisis has led to a significant increase in energy costs, making it more expensive to operate commercial real estate properties. As a result, occupiers are struggling to maintain profitability. The higher operating costs impact their profit margins and, therefore, can impact their ability to pay rent.

Although the effects of the energy crisis affect all commercial real estate sectors, some sectors are more susceptible than others. Energy costs as a share of the total costs differ per sector. For instance, the energy costs for an (older) industrial building with cold storage facilities are proportionally higher than for a modern Grade A office building.

Analysing Savills service charge data for different commercial sectors in the UK shows that the share of the utility bills as a percentage of the total service charges differs significantly per sector. On average, in 2022-23, UK office occupiers' utility bills reflected 22.5% of the total service charge, while utility bills for industrial and retail sit around the 8% and 10% mark, respectively.

However, these numbers reflect the share of utility bills of the total service charge and not as a share of the total (operational) costs. Total operational costs are harder to estimate and generalise since these differ per geography and per industry (e.g. professional services, manufacturing and F&B). The following paragraphs break down and analyse on a sector-by-sector basis their resilience to the energy crisis.

Read the articles within Spotlight: The impact of the energy crisis on commercial real estate in Europe below.

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