Reimagining Real Estate 2024

Managing obsolescence risk and adaptive reuse: The COVID-19 pandemic accelerated shifts in the use and demand for commercial real estate and altered traditional highest-and-best uses. As a result, many assets have begun to face obsolescence risk from reduced demand. This is particularly affecting office space demand. In cities like New York, where a substantial minority of older office space may be competitively obsolete, there is a continued risk of financial distress in the commercial real estate sector and the urban areas it supports. One solution to the challenge is the potential for adaptive reuse. In the context of office space, there is a growing focus on how conversion to residential space might alleviate supply shortages. The most aggressive projections for office conversions may underestimate the very high capital expenditures associated with such conversion, as well as hurdles in areas such as zoning and the suitability of the building floorplate and location. For new developments, designing the structure with flexible uses in mind is increasingly important given more rapidly evolving demand preferences. For existing assets, strategic repositionings and continued improvements that drive asset value can help avoid more substantial write-downs during periods of distress. Managing physical climate and transition risk: One cause of asset obsolescence and asset stranding is the failure to manage transition risk, which is the risk of asset devaluation for not meeting certain emissions criteria. In certain markets, legislation exists that financially penalizes asset owners for failing to meet certain emissions criteria. New York City’s landmark legislation, Local Law 97 (LL97), for example, requires most buildings over 25,000 square feet to meet certain emissions targets over time. Failure to act triggers a substantial financial penalty, helping drive the business case for transitioning. Unfortunately, the vast majority of buildings need substantial work in order to comply with these laws. The 2022 GRESB (Global Real Estate Sustainability Benchmark) results show that the average Carbon Risk Real Estate Monitor (CCREM) stranding year for buildings submitted to GRESB is 2025. In total, 76% of cities worldwide remain highly vulnerable to climate-related risks, including extreme weather events such as floods, wildfires and heatwaves. Future-proofing cities requires robust, climate- smart infrastructure capable of withstanding these events. This includes upgrading physical assets such as roads, buildings and utilities to be resilient to climate hazards while also incorporating real-time data to monitor risks and improve preparedness. At the asset level, physical climate risk can be managed through the design and renovation of assets to better withstand both acute and chronic impacts. Nature-positive solutions, which include more green space to absorb storm surges and improve air quality can support resilience at both the asset and city levels. These include solutions that support the restoration and preservation of biodiversity. One cause of asset obsolescence and asset stranding is the failure to manage transition risk. CASE STUDY 6 The Fullerton Ocean Park Hotel Nature-based solutions can help manage physical climate risk at the asset level and support biodiversity. The Fullerton Ocean Park Hotel, an oceanfront luxury resort in Hong Kong, partnered with Sino Group, Ocean Park, archiREEF and the Hong Kong Innovation Foundation to launch the CORAL REEFStoration project.13 This initiative aims to preserve coral habitats in Hong Kong’s southern waters by deploying 3D-printed terracotta reef tiles seeded with rescued coral fragments . The hotel also collaborated with “Hong Kong’s father of marine conservation”, the late Professor Brian Morton, to publish Sea Creatures & Animals, a meaningful bilingual children’s book that brings to life forty fascinating sea creatures and animals from Hong Kong and around the world, to promote biodiversity and conservation. Source: Sino Group Reimagining Real Estate: A Framework for the Future 28