CRREM’s rollout in the US & Canada

Carbon performance is starting to play a role in commercial real estate investing, and that role may soon have an even greater impact on investor sentiment. The Carbon Risk Real Estate Monitor (CRREM) is arriving in the US and Canada this year. Exactly how it will be adopted remains to be seen, but it’s poised to have a major impact and transform carbon reduction strategies into a must-have rather than a nice-to-have.

“The decarbonizing of the global economy is going to create the greatest investment opportunity of our lifetime. It will also leave behind the companies that don’t adapt,” Larry Fink, chairman and CEO of BlackRock, wrote in his 2022 annual letter.

What is CRREM?  

CRREM is a framework that establishes market-based targets for operational carbon emissions. It allows real estate professionals, key stakeholders, and investors to quantify and compare current and future transition risks in their portfolios. 

By establishing absolute carbon targets for commercial buildings, CRREM aims to inform how owners of existing buildings invest in retrofits to meet their science-based goals, achieving greater transparency, accountability, and consistency within real estate investing. 

CRREM emerged in the EU in 2018 to meet the guidelines laid out in the 2015 Paris Agreement, providing clear pathways to reduce carbon emissions. It’s since been normalized as part of the ordinary course of business in Europe and has become table stakes when raising capital from European institutions. 

In partnership with the Urban Land Institute and the Lawrence Berkeley National Lab, CRREM is now developing granular curves for US and Canadian markets. 

Understanding stranding risk & stranded assets

By showing metrics such as ‘floor area at risk,’ CRREM estimates financial exposure through asset stranding. Stranded assets are those that will have ‘brown discounts’ applied during property transactions, posing significant liabilities to owners and investors who fail to decarbonize. 

It remains to be seen exactly how effective CRREM’s adaptation will be for North American markets, but early conversations with large asset managers (particularly those who rely on European capital) indicate that it’s going to become increasingly prevalent in the latter half of 2024 and beyond.

Absolute vs. relative framework

One of the greatest contributions provided by CRREM’s framework is its focus on absolute instead of relative benchmarks. 

Most benchmarking tools face three primary drawbacks: 

1. They rely on relative comparisons to peers in the market. This can be directionally useful, but not very meaningful if everyone is performing poorly. 
2. They are subject to bias. Because most benchmarking programs are voluntary, the data sample tends to be skewed toward organizations with strong operating track records. 
3. They rely solely on energy use intensity (EUI). It’s useful, but only indirectly, and it is still a step removed from GHG intensity. A unit of energy from natural gas, for example, is not the same as a unit of energy from a hydroelectric plant. To directly address carbon emissions, we need to account for the type of energy being consumed, and, if electric, how clean or dirty the underlying grid is that supplies that electricity, and how it is projected to change.

CRREM, on the other hand, sets absolute targets for each building archetype it covers, accounting for what needs to be true for us to meet global carbon emissions targets. These targets are regionalized to each market’s grids and weather conditions that impact energy consumption.

And while CRREM still provides guidance on EUI, it also introduces the concept of greenhouse gas intensity (GHGi), which we believe to be a step in the right direction to more directly and accurately account for the underlying risk that carbon poses to long-term asset value.

CRREM adoption in the US & Canada will be investor-driven

Whereas CRREM’s adoption in Europe has been largely government-driven via regulations, we can expect its adoption in the US and Canada to be market-driven via investors. In Europe, energy performance standards often go beyond fines, even mandating that a certain level of carbon performance be achieved for properties to be leased.

While a wave of building performance standards will take effect across the US and Canada in the coming years in cities like New York, Denver, Washington, DC, Seattle, and about 40 others, they are not (yet) overly punitive and certainly not ubiquitous.

Instead, adoption of CRREM in the US and Canada will come down to investor sentiment. Early signals suggest that CRREM’s adoption will be similar to GRESB’s — while voluntary, it is likely to increasingly become yet another table stakes evaluation tool for investors to compare and evaluate competing opportunities. Many international investors have already normalized CRREM, and 61% of investors say ESG considerations are a “determining factor” in investment strategy.

At Audette, we work with many of the world’s largest portfolios and several are in the process of adopting a modified version of CRREM this year or next, in direct response to or in anticipation of investor requests. Looking to the market, many of our customers expect brown discounts and green premiums, now well-established in Europe, to emerge in the US and Canada, especially as building performance standards take effect.

The story of office real estate will be an interesting one to watch unfold here. Despite an oversupply of office space post-COVID, low-carbon office space is actually in short supply. And with 66% of Fortune 500s posting public net zero targets, it is not hard to imagine carbon performance becoming a part of the overall “flight to quality.”

In fact, JLL found that demand for lower-carbon buildings is spiking, but supply is struggling to catch up, predicting that only 34% of the demand for low-carbon workspaces will be satisfied in the coming years.

What does CRREM mean for you?  

Investors: CRREM provides a new tool for assessing transition risk to protect the value of your investments. CRREM is able to drive net-new insights over and above other benchmarking tools by evaluating the absolute carbon performance and stranding risk of your investments.

Owners: CRREM can help you prioritize how and where to deploy capital against decarbonization, by focusing on the buildings at greatest risk. While expensive, retrofits driving deeper decarbonization are necessary to protect future asset value and saleability. By leveraging CRREM, you’re better equipped to build a strong business case for decarbonization, moving beyond simple payback and connecting decarbonization to value creation and value protection. Keep in mind that transitioning to lower-carbon buildings can also attract new tenants. 

Tenants: Your real estate, both owned and leased, is a critical lever you will need to pull in order to achieve your own net zero goals. With ⅓ of leases expiring within the next 24 months, you have more negotiation leverage than ever in ensuring that the owner of the next building you lease is taking actionable, capital-backed steps toward decarbonization.  

Expect, however, that it will be an uphill battle to hold your brokers to account. Not all low-carbon spaces are LEED and not all LEED spaces are low-carbon. Your broker is not likely to want to provide you with details on carbon performance and reduction planning. Remember: If they can’t offer collaboration at the outset of the relationship, they likely won’t be good partners to you in the execution of your own goals.

For more details, check out the CRREM North America working group. Thank you to all the sponsors and project team for their contributions and dedication to bringing a new level of rigor to decarbonization benchmarking. 

The future of CRREM in North America

CRREM’s impact in the region will be an ongoing evolution and discussion, but one we’re hopeful will help us create a more resilient, low-carbon future for real estate. Even if CRREM’s first round isn’t perfect, it provides a necessary common language, a more analytically robust framework focused on absolute emissions, and greater transparency into our collective progress on decarbonization.

Be a part of this ongoing conversation. Join our CEO Christopher, Michael Chang of Host Hotels & Resorts, and Cope Willis of Greystar for a webinar on CRREM framework fundamentals and leveraging CRREM for your decarbonization strategy. Save your spot here.