_Understanding commercial asset oversupply and obsolescence

Harriet Hix, Associate, ESG Consultant, emphasised the increasing role of comprehensive due diligence in real estate acquisitions. Harriet revealed that we surveyed 45 investors managing approximately 300 billion pounds in assets to assess how obsolescence influences asset liquidity. This showed that Energy Performance Certificates (EPCs) are only a small part of the larger picture when assessing a building's future readiness. Investors are now utilising more robust frameworks, such as Energy Use data, BREEAM, CRREM (Carbon Risk Real Estate Monitor), and the EU Taxonomy, to evaluate the quality and longevity of assets. EPCs, while still mandated by the government, often fail to consider actual energy data, instead relying on theoretical performance—a major limitation when attempting to future-proof investments. There is a trend towards a more comprehensive, granular, and holistic approach to acquisitions.   

Harriet highlighted the increasing adoption of CRREM, which 74% of the surveyed investors have incorporated into their due diligence processes. CRREM provides a comprehensive analysis of a building’s energy consumption and greenhouse gas emissions, offering a more accurate measure of a building's environmental impact. Buildings exceeding CRREM’s energy and carbon thresholds face the risk of being classified as “stranded,” meaning they are likely to become obsolete if they don’t follow a downward trajectory of emissions.  

The race to net zero 

Harriet highlighted the critical importance of aligning buildings with net zero targets by 2050, a timeline that could help limit global warming to 1.5 degrees Celsius and prevent further irreversible climate change. However, unchecked daily energy consumption and carbon emissions can render buildings unfit for purpose, undermining broader net zero efforts.  
Harriet shared examples of major institutional investors she and the team have worked with whose award-winning developments were found to be stranded due to excessive energy use and high carbon intensity. In these cases, the assets were pulled from the sale process, illustrating the financial and environmental risks of failing to manage energy performance effectively. 

One of the key challenges Harriet addressed was the industry's "data deficit." A lack of reliable and high-quality energy data continues to hamper the accuracy of tools like CRREM. Technology, along with green leases, offers part of the solution, but the first step remains a solid understanding of actual energy use. The team has helped many of our clients build up an accurate picture of their actual energy use. Compared to their EPCs, there are discrepancies of up to 48%.  

Why are tenants' carbon emissions significant?  

Under the Greenhouse Gas Protocol and CRREM, landlords are held accountable for their tenants' energy use and emissions. These emissions, categorised as downstream or scope 3, can significantly impact a building's CRREM stranding date and overall liquidity. While landlords may have limited control over tenant consumption, they are responsible for implementing systems to monitor energy and carbon intensity. Before any asset disposal, evaluating the entire building's emissions is crucial to ensure compliance and avoid potential risks. 

To help clients navigate this, Harriet introduced a liquidity checklist for evaluating assets before taking them to market. This checklist includes the requirements of EU Taxonomy, SFDR (Sustainable Finance Disclosure Regulation), CRREM, EPCs, and BREEAM.  

Preventing obsolescence through effective property management 

Amira Hashemi, ESG Lead for Property Asset Management, expanded on how effective property management can prevent asset obsolescence and drive sustainability outcomes. Amira emphasised that obsolescence, while a potential value deterrent, can also serve as an opportunity to decarbonise assets, enhance amenities, and boost lettings when managed correctly. By integrating ESG services into property management, Amira’s team has been helping clients operationalise their sustainability strategies, reducing the risk of building obsolescence in the process. 

Amira reiterated the importance of reliable operational energy data, such as Energy Use Intensity (EUI), to measure a building's performance against industry benchmarks. According to the UK Green Building Council, buildings should aim for an EUI of 130 kWh/m² this year, but the national average is currently 280 kWh/m², indicating a clear gap that needs addressing. The team works closely with clients to monitor building EUIs, prioritising interventions for underperforming assets. In one case, they helped a client who owns a portfolio of Central London buildings, reduce energy consumption by 11% over 2 years by implementing relatively minor changes, such as lighting upgrades and better Building Management System (BMS) maintenance. 

Meeting occupier expectations: aligning ESG with wellbeing and amenities 

Occupiers today seek more than just physical space; they seek buildings that align with their sustainability goals and provide amenities that promote employee wellbeing. High-quality facilities and wellness support are now at the top of occupiers’ wish lists, necessitating increased service charge budgets to meet these ESG demands. 

Amira highlighted that ESG considerations are becoming integral to good practice in property management. Managing agents must align their services with a client’s overall strategy, ensuring that ESG is a core focus in preserving the value and liquidity of real estate assets. 

Our Property Performance event provided crucial insights into how ESG strategies reshape commercial real estate, highlighting the importance of future-proofing assets to avoid obsolescence and ensure long-term value. 

The first of our three-part sustainability series, Defining a Strategy, focuses on meeting the commercial property retrofit challenge. Our research examines obsolescence and its impact and provides practical guidance on formulating your decarbonisation strategy and driving property performance. The second part of the series, The Business Case for Action, begins to weigh the benefits and costs of intervention to begin to uncover optimal solutions.

How can we support you with asset repositioning? 

We have embedded sustainability and ESG practices into our business and share a committed need to address ESG issues and concerns. Our expert ESG Consultancy team guides clients through ESG considerations as they navigate current challenges and growing regulations. We help identify actions and opportunities for asset repositioning, creating practical and actionable strategies. 

We work holistically across consultancy teams to help our clients maximise their asset performance. Get in touch to find out how we can help.