The Shift to Performance Is Disrupting Real Estate
guest Contributor: Luka Matutinovic - Principal, Purpose Building
New regulations focused on carbon and resilience create big risks for the status quo, and even bigger opportunities for pioneers.
As a co-founder in a building strategy firm with a mission to accelerate real estate toward planet-positive pathways, I wear a lot of hats. But at heart, I’m a numbers guy, and two numbers have been on my mind a lot lately: 90% and 1%. Respectively, they represent the challenge and the opportunity of the climate emergency for real estate.
90% is the percentage of GTA high-rise residential buildings, designed or constructed in the last 5 years, that a recent study predicted would not meet Toronto’s mandatory energy and carbon performance target, in effect January 1, 2020. This study does not represent the entire GTA market, only 95 buildings, but it is a clear indication of how unprepared a lot of people are for what’s coming. In fact, it’s already here.
Toronto Green Standard Version 3 introduced a new way of evaluating building performance. Unlike the Building Code or LEED, which are based on relative savings, TGS (and the BC Step Code) set absolute performance targets: similar to a maximum budget for how much energy a building can use. The City gave developers a runway of 18 months to test this approach, maintaining a relative pathway as an option for that time. However, as of Jan 1, only the absolute pathway is allowed. Tier 1 is mandatory for Site Plan Approval; Tier 2, 3 and 4 unlock lucrative Development Charge rebates (and will each become mandatory in succession).
The 3 new absolute performance metrics are:
Energy Use Intensity (EUI): total annual energy use per GFA
Thermal Energy Demand Intensity (TEDI): total annual energy needed for envelope and ventilation loads
Greenhouse Gas Intensity (GHGI): carbon emissions per GFA
Every 4 years, the targets become about 25% more stringent, creating a pathway for Toronto to achieve the goal of reducing City-wide carbon emissions by 80% by 2050. I love this approach; it sets a clear vision of where we want to be and creates a predictable regulatory pathway of how we will get there. We know what’s coming and we can prepare for it. And the technology required to achieve it is ready to scale.
The challenge for many developers and designers is that the strategies required to achieve the new progressive levels of performance established by the TGS differ starkly from what our industry has gotten very comfortable doing (and which is supported by the legacy supply chain of builders, trades, manufacturers, investors, lenders and the public).
To achieve higher levels of performance required by TGS (i.e. reduce energy use and carbon emissions, and improve the resilience and thermal comfort of our buildings), the solutions are actually very simple:
Reduce the demand for heating with less glazing (or triple glazing), less thermal-bridging, better airtightness (and corridor pressurization) and improved heat recovery ventilators
Reduce and eventually eliminate our reliance on high-carbon natural gas by switching some and eventually all heating to electric heat pumps (or other low-carbon sources)
That’s it, problem solved! Except that design strategies live within a prior business model. The cost premium for triple-glazing in this market is still affected by low market demand, glass buildings with bad thermal bridges are easy to design and fast to construct, and the economics of fuel-switching are challenging in Ontario (our electricity grid is very clean but natural gas is very inexpensive).
Which bring me to the 1%. This is the expected average return on investment from designing new buildings to Zero Carbon (based on the comprehensive study commissioned by the Canada Green Building Council, which looked at 7 predominant asset types in 6 Canadian cities). This important work not only shows the financial upside of aggressive carbon reductions, it highlights a hidden opportunity: that leap-frogging incremental improvements and going straight for the ultimate goal right away may be the least expensive option.
Figuring out the most cost-competitive pathways to zero carbon for individual assets will involve a lot of creativity and wisdom. Success requires re-directing available capital (and design effort) into different strategies. And this will demand changes to current supply chains and the creation of new innovative business models. One interesting example gaining traction in the market already is 3rd party ownership of low-carbon geo-exchange systems (similar to the model of leasing rooftop PV systems already on the market). The premise is simple: amortize the upfront costs of better-performing systems to best align with savings. The avoided upfront capital is a lucrative proposition, which must be weighed against the financing costs later, but the reduction in carbon emissions is undeniable. Geo-exchange systems can help achieve Tier 3 and 4 EUI and GHGI targets, provided the more-difficult TEDI targets are met with envelope and ventilation load reductions.
Taking the strategy a step further involves re-directing the avoided capital cost into other improvements such as a more durable, resilient and thermally comfortable envelope, creating a win-win-win outcome. This business model won’t work for everyone, but it is the kind of creative strategy needed to overcome current financial barriers.
This brings me to the final take-away. The combined impacts of ratcheting regulations, growing public demand for meaningful climate action, the reputational risk of not doing enough, new business models and the financial opportunity of zero-carbon leadership are already disrupting our industry and re-shaping the real estate sector into 3 segments:
A portion of the market that is focused on compliance, who will feel a lot of pain as they take a reactive approach to new regulations that disrupt their procedures and supply chains.
The progressives, typically one step (Tier) ahead of regulations, who will need to re-tool their approach every Code cycle to continue benefiting from market-based incentive programs.
And finally, the bold pioneers, who will look ahead to what is needed to retain asset value in 2030 and beyond, and do the math on leap-frogging incremental progress to future-proof themselves. Their path may be the steepest upfront, but they will get to the summit first and get to enjoy the view the longest.
Guest Contributor: Luka Matutinovic
Principal, Purpose Building