Global real estate advisor Knight Frank has released the first part of a new report series, "Meeting the Commercial Property Retrofit Challenge," addressing the rising challenges posed by sustainability requirements in commercial real estate.
Part one emphasizes the growing need for owners and investors to implement effective decarbonization strategies to meet regulatory demands and market expectations.
Sustainability-related risks are accelerating property obsolescence, particularly as regulatory standards evolve. With 70% of commercial floor space currently rated EPC C or below, much of the UK’s commercial property is at risk of becoming unlettable if proposed minimum energy standards take effect. The Knight Frank report highlights the scale of this challenge and provides new insights into how the industry is responding.
Investor Strategies for Mitigating Risks
The report notes that many investors are beginning to take action. According to Knight Frank's 2023 ESG Property Investor Survey, more than three-quarters of European investors are focused on improving their portfolios through refurbishment, while 58% are targeting underperforming properties with plans to upgrade them. However, obsolescence risks are still not fully integrated into market pricing, presenting financial opportunities for those who can get ahead of the curve.
"Obsolescence is nothing new but is accelerating due to sustainability factors. The risks are complex, interlinked, and driving investor and developer strategies," said Flora Harley, Head of ESG Research at Knight Frank.
The report also highlights a growing trend in occupier demand for amenity-rich buildings that support corporate sustainability goals. According to Knight Frank’s data, those who view ESG strategies as a critical factor in their real estate decisions typically require 4.2 amenities on average for their workforce, with high demand for food and beverage services, mental health spaces, and gyms.
Knight Frank's survey of 400 retrofitted offices in England and Wales found that those achieving BREEAM Outstanding certification offer, on average, 5.2 amenities, compared to 4.2 for properties rated Excellent. London properties with BREEAM Outstanding certification averaged 5.5 amenities, with 84% featuring green spaces such as gardens or terraces.
Accurate data is crucial for businesses to validate the success of their retrofitting efforts. However, the Knight Frank report points to a performance gap between predicted and actual energy use in buildings. Findings from an analysis of over 1,000 Display Energy Certificates (DECs) showed that operational energy performance often differs significantly from modelled EPC ratings, with DEC ratings in some cases being twice as high.
"Progress in improving energy efficiency has been slow, and the inadequacies of the current EPC system for rating performance doesn’t help. This research reveals the scale of the performance gap between EPC projection and DECs measuring actual use," Harley noted.
The next two parts of Knight Frank’s "Meeting the Commercial Property Retrofit Challenge" series will address the financial viability of retrofit strategies and explore critical questions around cost-benefit analyses, capital expenditure, and alternative approaches. As the pressure to meet sustainability targets intensifies, real estate owners and investors will need to carefully consider their strategies to stay competitive.
