As property owners come under increasing pressure to operate sustainable, energy-efficient buildings, the case for retrofitting commercial real estate is becoming more compelling.

In a recent webinar, hosted by the Supply Chain Sustainability School and sponsored by NatWest, property specialists from CBRE offered insights into why it makes sense for owners to retrofit now, before legislation potentially forces them to do so.

The panel argued that retrofitting buildings makes commercial property more marketable to sustainability-conscious occupiers and helps avoid the risk of owners being left with stranded assets – property they cannot let or sell because it doesn’t meet legal requirements or market expectations.

Led by Holly Hansen-Maughan, Sector Manager for Retrofit and Construction at The School, the event was part of a wider NatWest-sponsored programme aimed at upskilling stakeholders across the supply chain on retrofitting.

The discussion emphasised the importance of understanding the commercial incentives for retrofitting buildings to achieve higher Energy Performance Certificate (EPC) ratings, and the implications on asset values and climate targets.

The panel spoke about the concept of accelerated depreciation due to climate risks, where assets not aligned with sustainability standards face accelerated erosion of value and suggested that retrofitting had emerged as a crucial strategy to counter this depreciation, ensuring asset resilience and long-term value preservation.

Holly said: “The commercial incentive not to ignore retrofit is just one of many reasons we should be undertaking retrofit and the decarbonisation of the built environment.

“At The School, we have a group of partners who collaborate around retrofit and have come together over the last two years to look at what we need to know about retrofit, what our supply chains need to know, and what industry needs to know.

“We’ve been working with that group of leaders to make sure we can deliver training that helps people and incentivises the supply chain to understand more about retrofit.”

Attendees participated in polls during the session, which showed that many were at different stages of their sustainability journeys, and emphasised the complexity of understanding investment capital requirements for retrofitting.

Sam Carson, Head of Sustainability, Valuation and Advisory Services at CBRE UK, emphasised the critical role of sustainability in valuation, particularly in mitigating risks associated with climate change, such as physical and transition risks.

He highlighted how market forces, occupiers' preferences, institutional investors' net-zero strategies, and regulatory pressures are all helping to shape current valuation practices.

He said: “Values are moving, so standing still is going backwards on this. The regulations are going to catch up, insurance and finance are going to catch up, investors are not going to be there, and occupiers are going to disappear.

“It’s really difficult to predict a scenario where anything that doesn’t get upgraded to align with a decarbonisation agenda maintains value over time, even if it’s resistant to that today.

“There are too many variables stacked up against it, never mind the impact on actual climate that we’re feeling on a day-to-day basis.”

Ben Thomas, Senior Director, Valuation and Advisory Services, CBRE UK, said: “Sustainability and retrofitting are very high on the list of our clients’ concerns at the moment.

“The regulations will drive the amounts of capital expenditure (CapEx) that are needed to get properties up to their required level and it’s making sure that those regulations are not only met, but exceeded in case the rules change over time.”

He underscored the evolving role of lenders, who now factor in retrofitting pathways when providing financing, reflecting the market's response to sustainability imperatives. And he pointed out that by spending CapEx, higher rents were being achieved by owners.

Charlotte Low, Senior Director, Valuation and Advisory, CBRE UK, said she has seen accelerated depreciations of assets that have not built in CapEx for retrofit in the London office-space market.

“We have seen it with some properties that have tried to trade in the market but there have been concerns about what would need to be done to get that building up to the green credentials that occupiers and investors want.

“The price the vendor wants to be paid is not there because there’s too much concern about what those risks really are.”

You can log in and listen to the full webinar by following this link