A 2022 analysis by Cushman & Wakefield estimated that in the U.S., approximately 330 million square feet of office space could become functionally obsolete or stranded by 2030. This risk arises from changing workplace behaviors and stricter environmental regulations. In Canada, similar studies indicate about 20% of commercial office spaces could become stranded within the next decade. Cities such as Toronto, Montreal, Calgary, and Vancouver face particular vulnerability. These spaces must be retrofitted or repositioned to meet new market trends and sustainability targets.
S&P Global highlighted in their report that over 75% of global real estate investors now consider climate risks in investment decisions. This underscores the growing importance of sustainability criteria. Buildings failing to meet evolving environmental, social, and governance standards face significant financial devaluation. They also risk declining occupancy rates and increased regulatory scrutiny.
The commercial real estate sector is undergoing profound disruption. Significant shifts in office space utilization and increased environmental sustainability focus are driving this change. Global adoption of remote and hybrid working models further accelerates this shift. Additionally, stringent sustainability commitments by businesses and governments are rendering many traditional office spaces obsolete.
These properties are termed “stranded assets,” defined as buildings no longer economically viable due to market shifts, technological advances, or regulatory changes. The global transition towards zero-carbon economies, driven by climate commitments, technological innovation, and consumer preference changes, compounds this issue. Real estate assets unable to adapt to sustainability criteria risk becoming stranded. Key sustainability measures include energy efficiency, renewable energy adoption, and minimizing carbon footprints.
Stakeholders in real estate must therefore identify stranded assets, understand associated risks, and explore potential opportunities. Impacts of stranded assets extend beyond financial implications, posing substantial environmental and social risks. However, they also offer unique opportunities for innovation, redevelopment, and leadership in sustainability. Successfully adapting these assets can significantly enhance net operating income, increase asset valuation, and create long-term competitive advantages.
Stranded office buildings carry multifaceted risks:
- Financial Risks: Financial institutions and investors increasingly view assets that fall short of environmental standards as high-risk investments. Owners of buildings with poor energy performance or limited adaptability face difficulties securing financing, insurance, and attractive rental rates. When factors such as building location, age, and renovation history are accounted for, green certified buildings still achieve an average rental premium of 4%. Furthermore, the LEED designation tends to provide a more significant rental premium for Class B office buildings, helping them avoid experiencing a “brown discount”, a reduction in rental rates that can negatively impact leasing performance and occupancy levels.
- Regulatory Risks: As state and municipal governments in North America tighten regulations to meet climate targets, buildings failing to comply with new environmental legislation face penalties and restrictions. This is where Building Emission Performance Standards come in. For instance, New York City’s Local Law 97 imposes hefty fines on buildings exceeding carbon emission limits, potentially costing property owners millions annually if they fail to retrofit and modernize their assets. Starting in 2024, large buildings must meet specific GHG intensity targets based on their square footage and building type. The emission limits become stricter in 2030, requiring many buildings to reduce their emissions by 40-50% from their 2024 levels. Buildings that fail to comply will face steep fines up to $268 per ton of CO2 over the limit. Another example is Vancouver’s Climate Emergency Action Plan that requires buildings over 100,000 square feet to meet GHG intensity limits starting in 2025 and progressively tighten the limits every five years. The city has also introduced the Green Buildings Retrofit Strategy, which provides financial incentives, technical support and low-interest loans to help building owners reduce their emissions.
- Market and Tenant Demand Risks: Companies are more and more recognizing the potential for value creation in transitioning to a low-emissions economy, viewing sustainability not merely as compliance or brand enhancement, but as a driver for innovation, new products, and new business models. Executives broadly believe sustainability and business growth are compatible; specifically, 92% of companies see opportunities to achieve business growth while simultaneously reducing greenhouse gas emissions, and 90% believe global economic growth is attainable alongside climate targets. Over the next five years, innovation in products, services, and operations is expected to be the primary benefit derived from sustainability and climate action initiatives. Contrary to some headlines, companies are not retreating from sustainability commitments. Instead, they’re significantly increasing their investments in sustainability and embedding climate action more deeply into the core of their business strategies. Climate change remains among companies’ top three priorities, ahead of concerns like political uncertainty, supply chain disruptions, and talent competition. Approximately 85% of companies report increased sustainability investments in 2024, marking a notable rise from 75% in the prior year. Moreover, companies increasingly anticipate significant impacts from climate change on their operations and strategies, with 70% expecting a high or very high impact over the next three years.
Sustainable Retrofits: Transforming Office Buildings
Sustainable Building Retrofits: Investments in energy efficiency and sustainability upgrades can significantly reduce operational costs and boost tenant appeal. According to research by the Rocky Mountain Institute, deep energy retrofits can reduce energy consumption by up to 50%, translating into substantial operational savings. Upgrades may include advanced HVAC systems, high-performance insulation, LED lighting, energy-efficient windows, rooftop solar installations, and smart building management systems.
- Empire State Building, New York City: A landmark retrofit project invested over $31 million into energy efficiency upgrades, including advanced HVAC systems, smart building sensors, efficient windows, and intelligent controls. The retrofit achieved a 38% reduction in energy usage, saving approximately $4.4 million annually in operational costs, significantly enhancing NOI and asset value.
- 111 Richmond Street West, Toronto: This downtown Toronto office tower built in the 1950s was at risk of becoming stranded due to energy inefficiency and outdated facilities. Oxford Properties invested approximately CAD$100 million to retrofit and modernize the building, improving energy performance, enhancing tenant amenities, and achieving LEED Gold certification. As a result, occupancy rates soared, and the property’s value dramatically increased, demonstrating the economic and environmental benefits of proactive retrofitting.
Adaptive Reuse and Strategic Repositioning: At its core, adaptive reuse extends the useful life of existing buildings, aiming to minimize additional resource and energy use. This practice, in turn, helps lower waste generation and reduces harmful emissions associated with the global built environment. Adaptive reuse involves converting obsolete office buildings into alternative uses such as residential, mixed-use, hotels, or innovation hubs. Adaptive reuse projects generally cost up to 16% less than new construction and generate substantial environmental benefits by preserving existing infrastructure. Adaptive reuse projects also save money by eliminating demolition costs, which can account for 5 to10% of new construction expenses.
- Hudson Commons, New York City: Hudson Commons, originally a dated warehouse-style structure built in 1962, faced obsolescence due to outdated infrastructure and poor sustainability metrics. In 2019, developers Cove Property Group undertook an extensive adaptive reuse project. The building was repositioned as a modern, flexible, and sustainable office space featuring LEED Platinum certification. Post-renovation, Hudson Commons attracted major tenants like Peloton and Lyft, achieving nearly full occupancy and significantly enhanced asset valuation.
Leveraging Smart Building Technologies: Integrating advanced property technology (“PropTech”) solutions can dramatically enhance operational efficiency, tenant experience, and asset management. Solutions such as intelligent building management systems (BMS), IoT-enabled energy monitoring, real-time occupancy analytics, and predictive maintenance technology reduce operational expenses, boost NOI, and increase long-term asset value. Smart technology-enabled buildings reduce energy and maintenance costs by approximately up to 30%, generating immediate operational savings and longer-term valuation gains.
- 1,2&8 Prologis Boulevard in Ontario: Proactive deployment of advanced smart building technologies at the Prologis properties has set a benchmark for technology-driven property optimization, significantly enhancing net operating income (NOI), tenant experience, and overall asset value. These buildings have earned esteemed sustainability and operational excellence certifications, including LEED Gold, BOMA BEST Gold, and TOBY International awards. By implementing continuous performance optimization strategies, Triovest leverages sophisticated building analytics to further reduce energy consumption while prioritizing tenant comfort and satisfaction. Advanced data analytics allow proactive monitoring of building systems. Fault detection and diagnostic algorithms help manage these systems effectively. They enable real-time adjustments to building operations. These technologies significantly enhance building adaptability and resilience. These buildings achieve an impressive energy use intensity of approximately 90 kWh/m² (8.7 kWh/ft²) and maintain a low carbon footprint, averaging a greenhouse gas (GHG) emissions intensity of 0.6 kgCO₂/m² (0.55 kgCO2/ft²).
Future-Proofing Office Buildings
The rise of stranded real estate assets is inevitable in the transition to net-zero economies. Stakeholders who proactively identify and address these challenges strategically can unlock substantial value. Adaptive reuse, strategic retrofits, and innovative financing can transform obsolete properties. These approaches create vibrant, sustainable, and economically viable assets.
Despite evident risks, stranded assets offer significant opportunities for innovation and sustainability leadership. Retrofitting, adaptive reuse, and strategic repositioning enhance asset value and attract tenants. They also align properties with decarbonization goals. Sustainability-focused retrofits, such as energy-efficient HVAC systems, renewable energy integration, and smart building technologies, improve building attractiveness and reduce operational costs. Additionally, these measures secure long-term tenant loyalty.
Industry best practices indicate that deep energy retrofits can reduce building energy usage by up to 50%. Such retrofits also enhance occupant comfort and productivity. Innovative financing mechanisms, including green bonds, sustainability-linked loans, and government incentives, offer attractive funding options for upgrades and retrofits.
The real estate industry’s ability to navigate this transition successfully will determine its resilience and competitiveness. Climate action and sustainability imperatives increasingly shape the market. Forward-thinking property owners and operators will view stranded office buildings not merely as liabilities, but as opportunities. They can lead the market by enhancing asset value and reinforcing their commitment to environmental responsibility and innovation.
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