Sustainability is a hefty consideration for all commercial property owners and managers, but most do not have to factor bedsheets into their calculations.
Thanks to their operationally intensive business models, hospitality assets tend to have a larger carbon footprint per square foot than most other property types. They also use more water and produce more waste.
And, unlike other property types, owners are responsible for every detail of their buildings’ contents, down to furniture, lighting and, yes, even linens – each of which has an emissions profile.
For firms seeking to maximise the sustainability of their properties, this can be both a blessing and a curse.
“In a way, you are solving a bigger problem compared to other asset classes, but it feels like you have more control over what you can do in order to solve the problem,” says Partha Sarathy, head of asset management at Swiss investment platform Pictet Alternative Advisors.
Hotels emit, on average, 96 kilograms of carbon dioxide per square metre, according to data compiled by the Carbon Risk Real Estate Monitor (CRREM), an Austria-based programme aimed at reducing greenhouse gas emissions in Europe, and advisory firm CBRE. Meanwhile, the average commercial property emits about 80kg per square metre. Many countries are seeing average greenhouse gas emissions per square metre reducing, however, with the US achieving an average cut of 8.6 percent from 2017-19, according to Cornell Center for Hospitality research.y
Improving sustainability has become a top priority for investors and lenders as a part of a broader capital market focus on the environment, social impact and governance at the corporate level. It is also a top consideration for some local governments.
New York passed Local Law 97 in 2019, requiring all commercial properties in the city, including hotels, to reduce their emissions by 40 percent relative to 2005 levels by 2030 and by 80 percent by 2050. Those that do not comply will face stiff penalties, notes Steven Schleider, senior managing director of the value and risk advisory group within the brokerage JLL.
“These are not one-shot fines,” says Schleider. “They are annual fines, and the window for compliance gets narrower every five years until we hit this 2050 threshold. The fines become quite significant as we go to different tranches… and it is going to be a real disruptor because of the amount of capital investment that may be needed across the gamut of commercial real estate.”
Similar initiatives have been introduced in London, San Francisco and Washington, DC, he notes.
Consumers are also increasingly conscious of the carbon footprint of their travel destinations. Last year, the travel technology firm Expedia surveyed 11,000 travelers around the world. It found that 90 percent sought sustainable hotel options and roughly 60 percent said they have purposefully opted for more sustainable transportation or lodging during their travels. Seven out of 10 said they have avoided options because of sustainability concerns.
In line with this shift in consumer preference, some see a significant growth opportunity for a new type of hospitality: ecotourism. Market research firm Spherical Insights & Consulting projects the market for this guilt-free style of travel will nearly quadruple in the coming decade, from $212 billion last year to $838 billion by 2032.
Firms seeking to optimise their hospitality assets must do so while contending with the volatile and highly cyclical return profile of the property type, which saw annualised returns swing from -20 percent in the doldrums of 2020 to 10.5 percent through the first quarter of this year, according to the NCREIF Property Index.
Pictet, which invests across a variety of property types, incorporates a 20-point framework for addressing ESG concerns holistically into the investment strategies underlying all its assets. This approach is mission driven, but also economic. Less energy consumption means fewer operating costs and greater net incomes, thereby raising the resale value of properties, Sarathy says.
Installing solar cells is one way to reduce dependence on fossil fuel-derived energy, Sarathy notes, but he adds that the design and footprint of most hotel properties often limits how many panels can be installed. Still, he says, even a 15 percent reduction is a notable improvement.
The bulk of the firm’s carbon reductions come from internal improvements, such as installing heat pumps for simultaneous heating and cooling, and using smart building technology to automatically adjust the conditions in unoccupied rooms. Whether such improvements are done as new developments or value-add expenditures, Sarathy says, the focus is minimising “embodied carbon” – the cumulative carbon output of extracting and refining raw materials, transportation and construction.
“Emissions don’t discriminate. Whether the emissions come from embodied carbon or operational, it doesn’t matter. At the end of the day, CO2 is CO2, and therefore it is contributing to global warming. We try to think of the problem as a more fundamental point of ‘How do I overall reduce the impact, whether it is coming from new refurbishment or operations,’ since they all contribute to the same problem.”
Of course, some circumstances hinder how much control an owner has over a property’s embedded carbon.
The newest mega-resort coming to the Las Vegas Strip, the Fontainebleau Las Vegas, has been under development since 2007 but was stalled by the global financial crisis and has changed hands several times. Now back under the control of its original owner, hotel magnate Jeff Soffer – in a partnership with Koch Real Estate Investments, the property arm of the Koch industrial conglomerate – is attempting to achieve the latest environmental accreditation standards for a property that broke ground with entirely different expectations.
“We have some limitations in the sense that we inherited a 70 percent complete building, but it is something we focus on a lot,” Stephen Singer, the project’s chief financial officer, said during a real estate conference in June. To make up for built-in emissions, he noted the owners are seeking to offset its environmental impact operationally.
Speaking at the same event, Terrence O’Donnell, assistant general manager of the sprawling Caesars Palace Resort on the Las Vegas Strip, said energy use is the top sustainability concern for the properties he oversees.
Caesars Palace spans 85 acres and includes 300,000 square feet of meeting space, including several cavernous ballrooms. A key part of keeping emissions – and costs – low is ensuring those spaces are not being ventilated or air conditioned when they are vacant. While this might seem simple, he noted that doing so for such a large property requires diligence.
“We do those kinds of audits regularly,” O’Donnell said. “We recycle as much as we can, we make sure that all of our food packaging is environmentally friendly. We try to cover everything we can to be good stewards of the environment.”
For managers and owners of hospitality assets, optimising sustainability is a difficult balancing act, but one that is increasingly necessary to undertake.