A Sector Facing Major Challenges

Aaliyah Pollock, Data and Tech Analayst at RICS

The built environment now contributes to almost 40% of global energy-related emissions making carbon management greater than ever. The RICS Whole Life Carbon Assessment (WLCA) is key tool, offering a consistent and transparent methodology to measure carbon emissions across the entire lifecycle of buildings. This standard is essential for the industry as it navigates the complexities of decarbonisation, providing essential insights into embodied, operational, and user carbon. By embracing the WLCA, the industry can make informed decisions that align with global net-zero targets, ensuring sustainable development and operational practices.

In this article, our Tech Partner, Optiml, give their perspective on the challenge facing the sector and how AI, data, and technology can be part of the solution.

Nico Dehnert, Dr. Evan Petkov, Co-Founders at Optiml

The real estate industry faces an unprecedented array of uncertainties, from macroeconomic conditions such as inflation and high interest rates to sector-specific factors such as cost pressure after years of growth and increasing regulatory requirements. These requirements have made new construction particularly expensive, adding additional burden to the industry. A central issue is ESG, which more than 90% of real estate entrepreneurs see as the topic with the greatest impact on the industry by 2050 (1). Despite this high priority, the industry has not yet triggered a significant wave of renovations as aimed for by the EU. The urgency of this situation is underscored by the fact that more than 35 million buildings will need renovation by 2030, and currently more than 70% of properties in Europe are not considered energy-efficient (2). These figures illustrate the extent of the challenges facing the sector.

Inadequate Data & Tools and Individual Buildings Complicate the Achievement of Net Zero Goals

Despite the recognized urgency of a comprehensive renovation wave to achieve the Net Zero target, the real estate industry remains far behind the necessary progress. A core problem is Excel spreadsheets, which are still used as the primary planning tool by more than 50% of real estate companies (3). The detailing of renovation plans is done via manual, costly, and time-consuming building inspections by energy consultants. This situation is further complicated by a constantly changing regulatory context and the unique properties or condition of each building. Additionally, insufficient data points hinder the ability of decision-makers to take actions that meet both corporate goals and “E”SG & climate requirements. This situation is further exacerbated by the fragmented data situation, as only 13% of companies have access to current or real-time data, 88% distribute their data in fragmented systems and different teams, and 78% have no data and technology strategy that promises relief (4). Overall, the established approach has led to the mistaken view that energy renovations are often not profitable (5). The result is a standstill, partly caused by the fear of too costly measures, partly by the risk of not being ESG compliant.

The Opportunities of Decarbonization for Consultancies & Asset Managers

Despite the various challenges, decarbonization also offers significant opportunities for real estate companies. Especially in times when new construction is limited, optimizing existing stock offers an opportunity to create added value beyond cost efficiency. A vivid example of this is the recent value increase for "green" properties compared to "brown" properties, which was recently estimated at almost 20% (6), with peak values of over 33% for rural areas (7). This offers the opportunity to exploit the price difference through careful planning and implementation and to create value outside of prime locations. In addition, prices for energetically inadequately renovated properties (energy efficiency classes C and D) fell by -8.0% between May 2022 and May 2023 (8) - standstill is not only not an option but even reduces portfolio value. This not only opens up opportunities in the own portfolio to create value through energy renovation today, but also in the purchase or sale of properties, where the sector currently acts very cautiously, except for opportunists or value-add investors. Another opportunity lies in "repurposing", especially from office buildings to residential buildings. The idea is no longer just to be understood as a trend, but has meanwhile become a relevant part of all buildings on the part of the owners for a possible change of use (in the UK about 1/3 of all buildings(14)). Here, the costs of "repurposing" are often known, but not the requirements and costs for decarbonization and renovation. With sufficient transparency about the total costs for repurposing and renovation, this enables much better decision-making. Transparency is the key, but it also allows avoiding wrong decisions. What most companies lack so far, however, are the right tools. These are often available, but the adoption of innovative tools and in particular the use of artificial intelligence (AI) is not really gaining momentum in the industry.

Untapped Potential of Innovations and AI

Although 47% of real estate companies see AI as a major driver for change (9) and 91% see digitalization as crucial for climate protection in the industry, the full potential of these technologies remains untapped (10). Many companies hesitate to invest in new technologies, partly because of concerns about additional complexity in IT systems (48%), fear of a lack of industry understanding on the part of startups (25%), and unclear ROI for the technologies (15%) (11). The need to digitize existing processes and integrate innovative solutions is, however, obvious. On the other hand, startups are also skeptical in dealing with real estate companies. 70% do not see companies sufficiently open to technological innovations or prioritize them, 53% do not see the necessary resources or interest in management to implement solutions, and 45% believe they are not dealing with the right decision-makers (11). The result from 2024 is not new —already in 2019, a study by the Boston Consulting Group showed that although 65 percent of established companies work with startups, dissatisfaction is high on both sides: Incorrect expectations of each other, lack of mutual appreciation, long and complicated decision-making processes, lack of competencies, or the unwillingness to embrace new ideas were just some of the reasons (12).

Conclusion

The real estate industry not only faces one of its greatest challenges with decarbonization but also a "project of the century." Almost 40 percent of energy-related emissions come from the building sector, and so far, too little has happened, especially in decarbonizing existing buildings to contribute towards achieving Net Zero (13). Solutions are available, often at competitive prices, yet their implementation requires a clear strategy and the willingness to use and invest in new technologies. ESG is no longer just a "nice to have" but a "license to play." The real estate sector must see this change as an opportunity and take the necessary actions not only to strengthen its own position but also to contribute to global climate protection. The future of the real estate sector depends on how effectively it can leverage innovations and AI to achieve the urgently needed transformation.

Author profile

Nico Dehnert is the Co-Founder and Chief Commercial Officer, and Dr. Evan Petkov is the Co-Founder and Chief Executive Officer of the SaaS startup Optiml. Founded in 2022 as an ETH Zurich Spin-off, Optiml provides a platform for real estate companies and consultants to make balanced financial and environmental decisions for renovation and decarbonization strategies.

Sources:

_{1 “Emerging Trends in Real Estate”, PwC & Urban Land Institute (2024)}

_{2 “A Renovation Wave for Europe - greening our buildings, creating jobs, improving
lives”, European Commission (2020)}

_{3 “Technology and the Future of Real Estate Investment Management”, University of
Oxford Said Business School & pi labs (2021)}

_{4 „Sanierungsquote im Sinkflug – Prognose für 2024: weiter schwach“, BuVEG (2024)}

_{5 “A new way to decarbonize buildings can lower emissions – profitably” McKinsey
Quarterly (2023)}

_{6 „Wohngebäude mit schlechter Energiebilanz verlieren weiter an Wert“, JLL (2023)}

_{7 „Marktdatenmonitor Wertsteigerung energieeffizienter Immobilien im Jahr 2023“,
BuVEG (2023)}

_{8 “Preise für unsanierte Immobilien fallen”, ImmoScout24 (2024)}

_{9 “Trendbarometer Immobilien-Investmentmarkt 2024”, EY (2024)}

_{10 „Digitalisierungsstudie 2023“, ZIA & EY (2023)}

_{11 „Tech & Innovation Survey 2024“, BPF, UKPropTech Association, REDIRECT (2024)}

_{12 “After the honeymoon ends – how to make corporate -startup partnerships work”,
The Boston Consulting Group (2019)}

_{13 “The State of Climate Action 2023”, WEF & BCG (2023)}

_{14 “Repurposing Real Estate: The future of the world's towns and cities”, CMS}