Core Texts: A new climate plan for buildings, UBS flags CRE

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Core Texts | A climate plan for buildings, office loan issues & more CRE news

Discover the latest on USGBC’s new climate action plan and UBS’s emerging office loan concerns, plus more CRE insights!

1. US Green Building Council’s climate action plan 🍃

💡 What you need to know: The US Green Building Council recently unveiled a new report presenting a plan aimed at reducing the carbon footprint of the built environment to expedite building decarbonization. This move is part of a broader American effort to cut global carbon emissions in half by 2030 to cap global warming at 1.5°C: a critical threshold for the planet and a legal stipulation of the US-signed Paris Agreement. Given that buildings account for about one-third of global energy-based emissions, the report calls for a multi-faceted approach to decarbonization, emphasizing:

  • A whole-life carbon approach: We must limit both operational emissions from energy use and embodied emissions from the lifecycle of building materials.
  • Retrofitting existing buildings: It’s critical that we update existing structures and adopt new construction methods to reduce buildings’ carbon footprints.
  • Operational and embodied carbon: The report identifies these as key focuses for decarbonization, advocating for the rapid adoption of proven practices.
  • Building resilience: The report highlights the need for buildings to adapt to adverse events and new information to decarbonize as efficiently as possible.

⚡ Why it’s important: Besides providing a roadmap to save our planet? 🌎

Publication of the USGBC’s new plan follows the organization’s October release of LEED v5 for public comment. The USGBC’s LEED rating system serves as a global benchmark for buildings’ environmental viability and weighs heavily into investor and tenant decisions. The latest iteration of LEED introduced more stringent requirements for existing buildings to boost climate resilience, assess social impact, and cut emissions from embodied carbon, refrigerants, and transportation in order to receive coveted, premium LEED ratings. The report reinforces and expands upon these themes by offering a detailed roadmap towards achieving ultra-low greenhouse gas emissions at scale and setting new standards for sustainability across the building industry.

2. UBS flags its commercial real estate exposure 🏦

💡 What you need to know: In a detailed analysis of the commercial real estate sector, Swiss banking giant UBS identified CRE loan exposure as one of the “top and emerging risks” it faces going forward. UBS’s CRE exposure escalated from $47.1 billion in 2022 to $55.09 billion in 2023 following its acquisition of Credit Suisse. The bank did not identify the commercial real estate sector as one of its top concerns in its previous annual report. In this year’s assessment, UBS unsurprisingly attributed the recent downturn to higher borrowing costs and reduced demand for office space post-Covid.

The bank’s newfound worry comes amid broader concerns over the impact of high-interest rates and structural demand shifts on property valuations, issues which carry the potential to ripple across the banking sector due to its substantial investments in commercial real estate. The report underscores that non-performing CRE loans represent a threat – not just to the US banking system – but to the global economy writ large. The International Monetary Fund recently flagged Swiss real estate exposure as a significant issue, further validating this concern. 

⚡ Why it’s important: ️The situation in commercial real estate is indicative of broader economic and financial system vulnerabilities. Higher borrowing costs, a structural decline in demand for certain types of commercial spaces, and increasing climate-related transition risks – exacerbated by regulatory changes like Switzerland’s Climate and Innovation Act – are challenging the sector. UBS’s significant risk exposure underscores the potential for these issues to impact not only individual institutions but also the broader financial ecosystem.

This analysis is further complicated by the ongoing strategy of “extend-and-pretend” in the banking sector, where loans nearing maturity are extended in anticipation of lower interest rates, contributing to an environment of heightened uncertainty. The reluctance to address these accumulating challenges head-on could lead to a more severe correction down the line, with significant implications for financial stability and the wider economy. The lesson from history is clear: delaying necessary adjustments and interventions often results in more profound and widespread problems, underscoring the importance of proactive measures to mitigate risks in the commercial real estate sector and beyond.

3. More news & notes 📌

🔏 VTS reported that +80% of office owners saw upticks in March renewals.

📉 Savills revealed that Manhattan office leasing declined 23% in Q1 of 2024.

📈 Moody’s noted that the payoff rate for maturing office loans has improved.

🏢 Avison Young found that net vacant US office space now totals over 1 billion square feet.

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