Europe has countered the impact of the energy crisis strongly but will be (truly) tested again next winter
Commercial real estate is exposed to the impact of the energy crisis and faces multiple challenges in the near future to secure reliable, affordable and ‘clean and green’ energy. Both landlords and occupiers can and must consider solutions to address these challenges. It must be noted that we cannot fully break down each sector in terms of its challenges and opportunities since most of them impact multiple sectors, if not all. For instance, an impact on data centres could impact big tech, and thus, likely office demand from that sector, and even into the wider economy. Likewise with other challenges and/or opportunities impacting other industries, such as manufacturing or retailers. Therefore, the following paragraphs outline more generic and high-level challenges and opportunities.
First of all, landlords and occupiers can invest in energy-efficient interventions to reduce energy consumption and lower costs over the long term. These interventions should initially focus on improvements to the building fabric to drive down energy demand in the first instance by reducing heat losses. The focus should then be on adopting more energy-efficient building systems that are compatible with national net zero carbon policies, such as heat pumps, although this can also include smaller, easier, and cheaper solutions, such as installing LED lighting. Furthermore, more and better collaboration between landlords and occupiers can help to reduce energy consumption and lower costs. Landlords can work with tenants to identify areas of energy waste and implement energy-efficient practices.
The concept of digital twins, digital replicas of physical buildings and/or spaces, can also further improve energy efficiency and decrease energy usage, with digital twins providing improved tracking and monitoring of energy usage resulting in increased (energy) efficiency. Good communication between landlords and tenants is, therefore, key since landlords and tenants cannot improve the stock in isolation – they need to coordinate to ensure a whole building retrofit approach is followed, consider knock-on effects of interventions, ensure no abortive upgrades take place, and include the question of who’s paying for what.
Secondly, using more renewable energy sources, such as solar and wind energy, can reduce the reliance on traditional energy sources and can lower energy costs. The production and usage of renewable energy has been increasing over the last few decades and has been accelerated since the Ukraine/Russia war and is set to increase only further.
Thirdly, policies and measures from governments and institutions can enforce sustainability, such as reducing energy consumption and reliance on traditional energy sources. The EU aims to be climate-neutral by 2050, meaning an economy with net-zero greenhouse gas emissions. The EU has introduced the European Green Deal to achieve this, which is in line with the Paris Agreement.
The introduction and monitoring of energy performance certificates (EPC) for (commercial) real estate buildings can contribute to energy efficiency awareness and, therefore, to the net-zero goals, as EPC ratings assess a property’s energy efficiency ranging from A (most efficient) to G (least efficient). By introducing laws and policies for commercial real estate buildings to have a minimum EPC rating by a certain year, governments can enforce landlords and occupiers to upgrade their buildings to meet the required EPC rating. Most countries have already set out their own net-zero ambitions and plans to enforce EPC minimums.
It must be noted that, as the EPC system is based on energy costs rather than energy consumption, a higher EPC rating does not necessarily translate to an actual lower energy consumption. The use of energy consumption metrics, as it is the case in France, is a more accurate and transparent way of assessing energy efficiency.
The Netherlands is the first country where, since the beginning of this year, all office buildings are required to have a minimum EPC rating of C. In the UK, a proposal is set to require all private-rented property to have a minimum EPC rating of C by 2025. In France, it is no longer possible to rent any home with an energy consumption of over 450kWh/m2 since the beginning of this year, and from 2025, no G-rated properties will be allowed on the rental market. This is challenging as, in France, in 2022, nearly 2 million primary residences were classified as G, with roughly 800,000 belonging to the private or social rental sector.
Each commercial real estate sector faces consequences of higher energy bills, but each sector has its own solutions and opportunities. Higher energy bills impact both landlords and occupiers as, in general, a higher energy bill implies less room for rental growth. This is reflected by the trend of green premiums, with ‘green’ and higher EPC rating properties being more sought after by investors and occupiers.
In the office sector, small and easy-to-implement solutions can be introduced, such as lowering the heating setpoints, increasing cooling setpoints, installing LED lighting and other smart, energy-saving devices, improving energy-saving awareness, and promoting energy-efficient behaviours amongst employees. Furthermore, the work-from-home (WFH) trend can reduce energy usage if smart solutions are implemented to reduce energy usage on days with low(er) office attendance.
The industrial sector can benefit from installing more renewable energy sources, such as PVs, on their buildings to reduce their (fossil fuel) energy reliance and costs. Savills research shows that in the UK, approximately 250 million sq ft of warehouse space is due to be delivered by 2030. By assuming that, on average, 40% of a warehouse roof may be suitable for PVs, implies that an additional 1,700 MW of energy could be delivered, enough to power more than 1 million homes in the UK.
Retailers are more challenged as they are less willing to pay a premium for renewable energy sources, as shown by the results of our survey. Instead, they could consider other (smaller) solutions, such as lowering temperatures in their shops, turning off the lights outside opening hours and/or closing their doors. Research from Cambridge shows that closing shop doors in winter reduces energy usage and carbon emissions by up to 50%.
Furthermore, retail is just like the other sectors impacted by different EPC policies. Savills Re-Imagining Retail study (https://www.savills.com/reimaginingretail/) shows that a staggering 83% of the UK retail stock needs to be improved by 2030 to prevent any obsolescence. Landlords will have to invest in energy efficiency upgrades of the buildings and will then look to pass the costs on to tenants, with the big discussion arising about who is going, willing and capable of paying for it.
Data centres and life sciences rely more on efficient building fabric and upgrade to newer, more efficient heating, ventilation and cooling systems and technologies to improve energy efficiency. As stated, the PUE in data centres are continuously improving, and current operators are exploring more alternative and greener sources of energy supply, such as on-site hydrogen fuel cells which could also be introduced to the life science sector.
To summarise, Europe is currently strongly positioned to counter the impact of the energy crisis as a result of the mild 2022-23 winter, the reduction in gas consumption, and stocking up on gas levels. However, and although we entered the meteorological spring with warmer temperatures ahead of us, the resilience to the energy crisis will be truly tested in the next winter when governments are perhaps less capable and/or willing to spend as much capital to support households and businesses, especially if next winter turns out to be colder for a longer period.
Read the articles within Spotlight: The impact of the energy crisis on commercial real estate in Europe below.