Retail investors look to sustainability to increase retail asset values

CHICAGO, Sept. 8, 2021 – New research from JLL Valuation Advisory, “Valuing Retail in its Global Journey to Net Zero Carbon” shows how the COVID-19 pandemic has motivated investors to focus more on climate matters and sustainability in real estate decisions. The growing awareness and importance of ESG with stakeholders means that all assets – including retail – will be impacted by long-term sustainability challenges. How owners and investors meet these challenges influences asset valuation.

The value of an asset is tightly interwoven with its impact and benefit to its location, community and stakeholders. An important part of supporting value in any retail strategy is to ensure it has a positive social impact for its stakeholders and environment.

“JLL is the essential guide to the changing face of real estate value,” said Mark Wynne-Smith, Global CEO of Valuation Advisory. “People, planet and profit are now firmly at the heart of our risk return advisory services, including the valuation of shopping centers and retail assets. If Net Zero is the future baseline for retail, for buildings that are not carbon neutral, offsetting and improvement costs will impact net income and therefore future values.”

What drives change?

Investors, tenants, lenders and customer demands will help drive this adoption. Companies around the world are setting their own Net Zero Carbon Commitments, including JLL, which has a profound impact on the markets in which they operate. These companies must balance where to put their capital to help reach their ESG goals while still being profitable.

Making environmental and climate concerns at the forefront of investment decisions can save a company money. Climate risk equals investment risk, as global climate related disasters have increased 83 percent over the 20 years from 2000 to 2020, according to research from the United Nations. Threats from extreme weather like flooding and heat pose significant risks to not just people but to infrastructure and buildings.

The challenge for retail

The European Union’s Carbon Risk Real Estate Monitor (CRREM) data from 2012 shows that European shopping centers were the second-highest power user behind hospitals. To achieve Net Zero Carbon, retail assets must achieve reductions of between 78 and 95 percent. Even with investment in state-of-the-art retrofitting, it will be difficult for shopping centers to reach those goals, as offsets of that magnitude would both tenants and consumers make significant changes in consumption. Alternatively, owners could focus on Carbon Neutrality while utilizing carbon offsets and incorporating impactful sustainability into the retail asset management.

Retail typically involves a physical product trading hands, leading to emissions throughout the product’s lifecycle, including manufacturing, transportation, distribution and disposal. For occupiers, reducing the carbon footprint in these areas is more efficient than focusing on the brick and mortar space, yet only 83 of the 1,422 companies who have signed up to meet science-based sustainability targets are classified as retail.

Reviewing e-commerce and online retailing is key to reducing a retailer’s carbon footprint. Researchers can make a case that physical stores are a more efficient way of transporting products and fulfill a pivotal role in a sustainable retail industry. Data from Sequoia Partnership shows that up to 11 times more fuel is required to deliver a single product to a customer’s house from a distribution center. Also, physical stores encourage lower amounts of returns and waste. Data from third-party returns processing firm B-Stock shows that 30 percent of items purchased online are returned, compared with only 10 percent of in-store sales. Even with physical stores helping aid sustainability goals, managing how spaces could be used in the most sustainable way is still challenging.

Marketable change makers

Investors and owners should investigate ways to make impactful and sustainable changes to their retail assets, including seeking green building certifications, incorporating Green Box units and using green clauses on leases. Other methods involve installing solar panels, rainwater harvesting facilities and EV charging stations; transparency regarding an asset’s sustainability; improving natural light and ventilation; incorporating in-use measures of sustainability; improving tenant mix with ESG-focused tenants; and making cost reduction decisions.

What does this mean for asset value?

As the minimum requirements for sustainability increase and as stakeholders set ambitious, time-sensitive targets to reach Net Zero and Carbon Neutral operations, retail assets will need to incorporate sustainability in ways which are both revolutionary and impactful in order to remain an investable asset class. These changes may not be immediately accretive to value but will provide protection from both value erosion and obsolescence.

JLL Valuation Advisory is one of the world’s most strategic, creative and connected real estate capital advisors, delivering customized solutions to enable you to make the fastest, best informed decisions for your investment interests throughout their entire life cycle.

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