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Former central banker Mark Carney has cautioned that there will be “substantial stranded assets” in commercial real estate as governments strive to achieve net zero, emphasizing the risks for property owners and lenders associated with older buildings that cannot adapt.
Property investors are encountering a dual challenge due to the steep decline in asset values triggered by rising interest rates, coupled with increasing pressure to invest in energy efficiency.
While stranded assets are typically linked to fossil fuels facing phase-out amidst the green transition, Carney highlighted that older buildings may also “not survive” as nations implement regulations aimed at reducing greenhouse gas emissions across various sectors.
“We will see a continuation of stranded assets . . . that must be rehabilitated, if feasible, or demolished and repurposed,” he stated.
According to a recent report by investment manager AEW, European real estate investors need to increase their annual capital expenditures by 30% to effectively upgrade buildings. The report indicated that the energy performance of European buildings is falling significantly behind the progress required under the Paris Agreement, in which countries globally committed to restricting temperature rises.
During the COP28 climate conference in Dubai last year, countries agreed to double their rate of energy efficiency improvements by 2030.
However, in cases such as older, poorly situated office buildings, initial costs may be prohibitive due to low demand or rental prices.
Demolishing buildings considered obsolete—such as the Marks and Spencer Oxford Street flagship or the former Museum of London—can also stir controversy, as preserving existing structures helps reduce carbon emissions associated with construction materials like steel and concrete.
According to the International Energy Agency, operating buildings contribute to 26% of global energy-related emissions, which has prompted calls for expedited progress to align the property sector with net zero by 2050.
Commercial buildings in the UK are facing stringent deadlines to enhance their energy efficiency ratings by 2030. Approximately 12% of commercial properties missed an energy rating deadline last year, as reported by the Centre for Cities.
Carney cautioned investors against assuming these deadlines would extend. “There will be individuals . . . who either implicitly or explicitly believe these timelines will shift, or that somehow it will not become a binding constraint. But taking that chance is quite risky,” he remarked.
Speaking in London at the launch of Eden Dock, a new waterfront garden at Canary Wharf co-owned by Brookfield Asset Management, Carney emphasized the importance of incorporating biodiversity into urban environments alongside emission reduction.
Last month, Dutch bank ING warned 2,000 of its largest clients, including commercial real estate developers and owners, that they would cease financing them if they did not show adequate progress on addressing their climate impacts. They found that commercial real estate was lagging behind other sectors in disclosing climate impacts.
Despite the climate risks facing the sector, Carney expressed that he was not worried about threats to financial stability emanating from the property sector.
“I remain very optimistic about the risks posed by commercial real estate in the financial sector as a whole because the risks are more widely distributed, and there are less liquidity pressures compared to a bank-dependent commercial real estate sector,” he noted. “I believe the resolution process for those assets requiring attention is ongoing.”