Dive Brief:
- Given the pressure to decarbonize buildings, the “green debt market should be taking off,” but only 9% of total real estate debt issuance in the last five years was linked to sustainability, according to a JLL report on climate finance released Monday.
- The proportion of sustainability-related real estate debt issuance has declined over the last two years, with “not enough capital currently allocated to improving building performance,” JLL says.
- With market conditions expected to improve in 2025, “now is the time to leverage the upturn” to finance decarbonization projects, but governments must also play a bigger role in increasing access to financing, JLL says.
Dive Insight:
If no action is taken to improve building performance, 65% of office properties and 75% of multifamily buildings face a risk of losing value by 2030, according to JLL’s analysis of 46,600 buildings across 14 cities. Green finance has an opportunity to “be a powerful catalyst for decarbonization in the built environment,” with lenders uniquely positioned to lead this change by reevaluating how risk is assessed across their portfolios, in turn providing a more clear understanding of the financing required to align buildings with performance standards, JLL says.
JLL recommends a blended finance approach that includes lenders accounting for future climate risk and aligning green finance products with the needs and constraints of building owners and investors to effectively drive decarbonization. Additionally, JLL calls for governments to play a greater role in providing incentives and funding schemes, facilitating public-private partnerships and creating a transparent policy infrastructure that helps lenders make informed decisions.
“Significant progress on climate action requires a substantial increase in funding. The current mismatch between available funds and effective allocation is considerably slowing down real estate's efforts to decarbonize,” Nidhi Baiswar, senior director of global sustainability and climate leadership at JLL, says in the report.
Commercial real estate owners in the “Global North” will require debt financing of nearly $2 trillion in the next 20 years to retrofit office properties and bridge the supply gap, JLL says, citing estimates of the debt-to-equity ratio of the cost of retrofitting office stock across 17 major countries.
Given that lenders increasingly value sustainability data in determining funding levels and terms, building owners and operators who can demonstrate energy performance, carbon reduction and sustainability metrics are likely to draw more interest from banks and financial institutions, the report notes.
Access to better data on these attributes can improve risk assessment and strategic planning, allowing banks to identify underperforming assets, estimate necessary capital expenditures and collaborate with building owners to develop green financing conduits that can boost building performance, according to JLL. Lenders do not currently have the data to support better rates for green projects, however, the firm says.
The report underscores the potential of the Commercial Property Assessed Clean Energy program, a sustainable financing mechanism that it says is “quick on the uptake” in the U.S. C-PACE programs, enabled by state-level legislation, provide long-term, fixed-rate loans that transfer with property ownership, enabling asset owners to undertake retrofit improvements in buildings. Through 2023, over $7 billion has been invested in more than 2,300 projects, JLL says, citing data from C-PACE Alliance, a trade association that includes members such as Nuveen, Pace Equity and Petros Pace Finance.
