Arshdeep Sethi, Managing Director at RMZ Corp, plays a pivotal role in defining, shaping & implementing the strategic vision of the company.
getty
The real estate sector has experienced significant disruption in the last few years. The dual threat of Covid-19 and climate change have not only exposed numerous vulnerabilities within our systems, but also illustrated the need for collective action and a paradigm shift in our approach to crisis management. Prevention, preparedness and resilience are key to preparing for the future. With the help of a circular economy, a framework for achieving environmental and social goals can be created, all while encouraging better economic performance.
As the largest consumer of raw materials and producer of waste, the construction industry is positioned as an ideal adversary to a circular economy that aims to reduce dependency on natural resources for economic growth.
Circularity in the built environment includes designing out waste and pollution, keeping products and materials in use and regenerating the environment during building and operations. Research exploring consumption-based emissions has found that “material efficiency interventions for buildings and infrastructure has the highest emissions reduction impact, followed by enhancing building utilisation.”
Therefore, in order to truly achieve circularity in real estate, a two-fold approach needs to be adopted:
1. Optimizing the resources toward the creation of the built environment.
MORE FOR YOU
2. Maximizing the potential of land and built environment in terms of use and adaptability.
High-growth markets have a huge potential to transition and adapt the real estate industry into the circular model, led by thought leaders in design, engineering and asset management and supported by stronger urban and environmental policies.
The Unrealized Value
There are various sources of value staying unrealized in real estate, ranging from the utilization of space to the improper use of land and materials. For example, commercial leases generally prohibit subletting the space to other tenants but, even if it were allowed, most tenants have security concerns and are unwilling to share workspaces with other tenants outside of core work hours. This results in the space being underutilized for over 12 hours a day.
Another reason for the dissipation of value is premature demolition, where divestment decisions are taken based on opportunity cost and the economic life of an asset. Current property spaces focus on single-use occupancy, with building plans and regulations preventing retrofits or any other changes to the property.
Similarly, the problem of land vacancy results from the time taken to assemble plots and secure permission for new developments, particularly complex mixed-use developments on challenging urban brownfield sites. It is common to see property developers choosing to hold onto land without planning permission in anticipation of rising prices.
Lastly, a lot of value is dissolved through the depreciation of materials. Due to the standard industry depreciation rates used for accounting purposes, materials and components inevitably lose value more quickly on paper than in practical use. Most buildings are not designed for deconstruction, so there is an increased cost of recovering reusable materials. These higher costs impact profitability, which in turn affect resource and energy management systems, leading to poorer building performance.
Flexibility And Adaptability
Sustainable environmental design needs to be an integrated part of the real estate industry for it to grow while being resilient to what the future has in store. Circularity will be key to achieving these goals and the following business models give asset owners the ability to optimize, reuse and adapt.
As a report from Arup and the Ellen MacArthur Foundation describes these models, flexibility is achieved by unlocking “the potential of underutilised space in buildings while balancing the risks normally associated with short tenure space.” Adaptability “considers the value of creating buildings which are resilient to both changing market conditions and social expectations by being able to adapt to alternative uses.”
Repurposing unutilized spaces helps achieve environmental and social goals while simultaneously delivering better economic performance. Flexible and adaptable models for building could potentially expand the life span of a building while utilizing unused spaces. Buildings will have to be more malleable about space planning, user flows and user-efficient layout designs that drive organizational performance. They would need to be designed to allow the possibility of future expansion or extension and redesigning for different uses.
After commissioning and filling occupancy, a post-occupancy evaluation and monitoring of building usage would be vital. Currently, according to the same report, “approximately 20-40% of building energy could be profitably conserved, with many buildings not performing as designed.” A model called performance procurement adopts a product-as-a-service approach, where one pays based on performance, rather than a fixed amount, hence pushing building operators to run buildings in a sustainable manner.
Globally, CRE companies have matured and adopted measures to deliver sustainable cities by embracing innovation with future-proof solutions, right from using recycled materials, renewable or sustainable energy, building natural capital, supporting human health and wellness and creating value for investors. Moving toward a circular built environment involves a shift in roles and business models for all active stakeholders, as a collaborative approach is the only way to navigate dependencies on government institutions, financial and investor institutions, supply chain, construction and more, all while improving performance along the way.
Forbes Real Estate Council is an invitation-only community for executives in the real estate industry. Do I qualify?