The World Ahead 2022
Commercial property’s biggest challenge is not the pandemic
Landlords face tightening regulation driven by climate change
TO MANY PEOPLE’S surprise, offices have largely avoided the calamity affecting shops and restaurants after more than a year of lockdowns. Office-owners have been spared any substantial demand shocks, and sale prices in big cities have held up despite lower rents in many places. Delinquencies and distressed sales have been rare.
But there are still dangers. If remote working sticks, office space could become expendable. By one estimate, demand in Europe could drop by 17% over the next decade; in America by 16%. The price per square foot in America could fall by more than half if employees work from home for three days a week. But losses from the pandemic may take years to materialise. For now, corporate tenants are locked into long leases and workers are returning to the office.
The main challenge for 2022 is of a longer-term nature, in the form of regulators’ attempts to deal with global warming. The changes required could mean that many offices will decline into obsolescence.
Energy used to light, heat or cool buildings is responsible for nearly a third of all greenhouse-gas emissions globally. In cities like New York, 71% of greenhouse-gas emissions come from buildings. Worldwide, construction accounts for 40% of energy usage and nearly a quarter of all air pollution.
A deluge of policies aims to change that. The first, in England and Wales, wants to improve the energy efficiency of buildings. The rules mean that one in ten offices in central London risks becoming obsolete within a year, and more than half could become unusable by 2027. European policymakers will require 49% of a building’s energy to be derived from renewable sources by 2030. For property investors, the new regulations raise questions about the future of their ageing office blocks.
Globally, construction accounts for 40% of energy usage
Tenants are also applying pressure. One-fifth of the world’s largest 2,000 companies have set net-zero goals for 2050, with many going even faster. That will involve decarbonising their buildings. Landlords who fail to greenify their portfolios in time face a brutal leasing market. Globally, tenants are already prepared to pay up to 11% more to occupy top-performing buildings.
Decarbonising the world’s office stock won’t happen overnight. But for landlords who fail to prepare, 2022 will be a reckoning.
Vinjeru Mkandawire: Global property correspondent, The Economist■
This article appeared in the Finance section of the print edition of The World Ahead 2022 under the headline “Challenging climate”