Net Zero is the Future Baseline for Retail Real Estate, Too

A lot has been said, and written, about the impact of sustainable initiatives on the values of office properties. New research from JLL Valuation Advisory now extends that imperative to the retail sector. 

“People, planet and profit are now firmly at the heart of our risk return advisory services, including the valuation of shopping centers and retail assets,” said Mark Wynne-Smith, global CEO of Valuation Advisory. “If Net Zero is the future baseline for retail, for buildings that are not carbon neutral, offsetting and improvement costs will impact net income and therefore future values.” 

Getting to that baseline is no mean feat. To achieve net zero carbon, retail assets must achieve reductions in their carbon emissions of between 78% and 95%.  

Even with investment in state-of-the-art retrofitting, it will be difficult for shopping centers to reach those goals, says JLL, since offsets of that magnitude would both tenants and consumers make significant changes in consumption. Alternatively, owners could focus on carbon neutrality while utilizing carbon offsets and incorporating impactful sustainability into retail asset management. 

For occupiers, reducing the carbon footprint in these areas is more efficient than focusing on the brick-and-mortar space. However, JLL says only 83 of the 1,422 companies that have signed up to meet science-based sustainability targets are classified as retail.  

Reviewing e-commerce and online retailing is key to reducing a retailer’s carbon footprint, according to JLL Valuation Advisory’s research. Researchers can make a case that physical stores are a more efficient way of transporting products and fulfill a pivotal role in a sustainable retail industry. Data from Sequoia Partnership show that up to 11 times more fuel is required to deliver a single product to a customer’s house from a distribution center.  

Also, physical stores encourage lower amounts of returns and waste. Data from third-party returns processing firm B-Stock shows that 30% of items purchased online are returned, compared with only 10% of in-store sales. Even with physical stores helping aid sustainability goals, managing how spaces could be used in the most sustainable way is still challenging. 

Investors and owners should investigate ways to make impactful and sustainable changes to their retail assets, including seeking green building certifications, incorporating Green Box units and using green clauses on leases. Other methods involve installing solar panels, rainwater harvesting facilities and EV charging stations; transparency regarding an asset’s sustainability; improving natural light and ventilation; incorporating in-use measures of sustainability; improving tenant mix with ESG-focused tenants; and making cost reduction decisions. 

As the minimum requirements for sustainability increase and as stakeholders set ambitious, time-sensitive targets for achieving net zero and carbon neutral operations, “retail assets will need to incorporate sustainability in ways which are both revolutionary and impactful in order to remain an investable asset class,” JLL Valuation Advisory says. “These changes may not be immediately accretive to value, but will provide protection from both value erosion and obsolescence.”