The carbon emissions over the entire life cycle of buildings (WLC) represent the total amount of carbon produced by a building throughout its entire life cycle. With the goal of achieving net-zero, WLC assessments should be integrated into the design and planning phase to be valued over the entire lifespan of the buildings, as stated in the "Building Carbon Footprinting Services" report prepared by Deloitte.

Huge waste increase

Databases on construction materials, such as the "Embodied Carbon Calculator" or the "Structural Carbon Tool," can assess embodied carbon and optimize the use of materials to reduce carbon footprint.

Pivoting towards innovative building materials, such as smart glass, low-carbon alternatives like engineered timber or cross-laminated timber, and low-emission cement, can help reduce carbon emissions.

Procurement policies for embodied carbon have been introduced in several states and cities. For example, in 2022, Vancouver, Canada adopted a plan to reduce embodied carbon in new large buildings by 40% by 2030. The European Union (EU) and the United Kingdom are also focusing on WLC levels.

Estimates suggest that approximately 2.6 trillion square meters will need to be built by 2060 to meet the housing needs of the growing global population. And waste from new construction is expected to exceed 2.2 billion tons annually by 2025, with over 75% of all construction waste ending up in landfills.

Deconstruction or demolition?

When rebuilding, cities worldwide favor deconstruction over demolition, in part because they are trying to salvage and reuse the original components of the building rather than destroy them. For example, in the United States, some top institutions have set a variety of WLC goals to build more sustainable businesses for the future.

However, many real estate firms lack the internal controls they need to comply. Sustainability regulations worldwide are evolving and are likely to require firms to include detailed ESG values in corporate disclosures, with similar levels of transparency as financial reporting.

According to the survey results conducted for the Report, 59% of respondents say they do not have the data, processes, and internal controls needed to comply with these regulations and expect significant effort will be needed to achieve compliance.

European firms seem to be slightly more prepared: 54% of respondents in Europe expect compliance to be a challenge, compared to 65% in North America and 58% in Asia/Pacific. As real estate firms integrate sustainability and resilience performance metrics into their corporate disclosures, ensuring data integrity and internal control accountability will be important.

Using credits and incentives to increase investment profitability

As the focus on cost reduction continues in 2024, real estate tax leaders are increasingly exploring ways to reduce their tax liabilities to support stronger outcomes.

Survey respondents are increasingly concerned about the possible elimination or reduction of deductions and tax benefits, with half of real estate owners and investors selecting it as their most worrying potential tax structure change.

This concern was the top response among respondents in Europe (56%) and North America (47%) and second in Asia/Pacific (47%). On average, it was identified as a top concern, up 10% from last year. In Asia/Pacific, half of respondents say changes in transfer pricing/profit sharing are their top tax change concern.

These results highlight the importance of tax incentives in supporting stronger financing, especially among those prioritizing the use of credits and incentives. Here are some of the initiatives expected to impact real estate companies in the coming months:

Launching the global minimum tax

At the end of 2021, more than 135 countries agreed to the proposal by the Organization for Economic Cooperation and Development (OECD) for a 15% global minimum tax, or Pillar Two, for large multinational enterprises.

Each global member jurisdiction can decide whether to adopt this framework into its domestic law. However, the rules are designed to impact the operations of large multinational enterprises even in those countries that do not incorporate the rules into domestic law.

In early 2023 and again in July, the OECD issued technical guidance to assist governments and taxpayers with implementation, with some countries expected to apply these rules starting in 2024. South Korea, Japan, and the United Kingdom have adopted model laws for Pillar Two, and other jurisdictions have proposed laws that will take effect on January 1, 2024. A EU directive requires implementation as of January 1, 2024 for EU member states.

Multinational enterprises (MNEs) are the entities considered under Pillar Two. The global anti-base erosion rules within the framework are in place to ensure that multinationals pay a tax rate of at least 15% in the jurisdictions where they operate.

To be considered an entity within the scope of Pillar Two obligations, multinationals must operate in at least two global jurisdictions and have a consolidated group income of at least $818 million in at least two of the four fiscal years immediately preceding the effective date of the Pillar Two rules.

The OECD has issued guidance on a safe harbor that could reduce the burden of Pillar Two in the early years. In addition, there are certain exclusions from these rules, especially regarding real estate investment vehicles (REIVs) and investment funds (IFs), such as REITs and other funds focusing on real estate investments.

The subsidiaries of these entities may also be excluded if the REIV or IF owns at least 95% of the investment subsidiary. There are additional ownership thresholds and primary business activity designations that will vary from company to company and may affect qualification for these exclusions. Additional guidance is likely needed to help clarify definitions and determine the applicability of these provisions.

Hybrid work and the office market

Hybrid work may not be the only trend. Recent years have contributed to the idea that hybrid work opportunities are likely here to stay. But the meaning of hybrid work continues to evolve. Companies should provide guidance to employees on where to do their work and build the right infrastructure to support a hybrid environment, as employees try to balance work in two different locations, with different schedules and requirements.

This delicate balance can be costly, and 64% of global workers say they have considered or would consider looking for a new job if their employer wants them back in the office full time.

This age of hybrid work should be defined by flexibility and transparency. Decisions in the days ahead and setting the rules from the top should evolve. This includes involving employee opinions on how many or which days are needed to connect to the office or allocated for deep work at home. Coming to the office for a full day of teleconferencing that could be done remotely is not in anyone's interest. Hybrid work must mean more than working at the office with a computer screen.

Leverage outsourcing capabilities for increased efficiency

Organizations looking to evolve the talent experience and physical workplace are also motivated to transform operations. Lack of talent and lack of agile infrastructure have been identified as some of the biggest barriers to success.

Although, from the survey, those priorities may differ depending on the size and scale of the organization. The majority of respondents in large real estate organizations (57%) still expect to increase headcount in 2024. This is a significant change from the previous year, where only 29% of large organizations expected to increase headcount in 2023.

However, the reverse is true for smaller organizations: only 45% of respondents expect to increase headcount in 2024, down from 53% in 2023.

Given the weak revenue forecasts mentioned earlier and respondents' expectations for worsening real estate fundamentals in general, organizations should consider many options for transformation and avoid defaulting to standard cost-cutting measures such as acquisitions or downsizing the number of employees.

To that end, the majority of our respondents (61%) are considering outsourcing some operational capabilities in the next 12 to 18 months. Their top goals are acquiring technology capabilities and streamlining processes (42%), adding agility and resilience to their operations (39%), and accessing integrated offerings across lines of business (38%).

An alternative way

While some might perceive outsourcing as a means to reduce headcount and replace it with third-party labor, real estate leaders appear to be pursuing an alternative path. According to the survey, those who plan to outsource operations are the most likely to continue to add headcount, while those who do not outsource are the most likely to cut headcount.

The first group appears to be doubling down on transformation, adding capabilities and resilience through outsourcing, as well as investing in new hires with differentiated skill sets. Labor shortages and high operating cost have affected property management functions. Several real estate companies have turned to cutting-edge technology with more proactive capabilities, such as automating rent collection, leasing and tenant management.

These initiatives help reduce the need for on-site resources and improve customer satisfaction by providing real-time responsiveness. Firms may lean toward incorporating enterprise-wide controls by centralizing internal operations or partnering with third-party service providers. Many are moving away from disjointed technologies deployed in different functional areas.

Apartment owners, BTRs and SFRs also use recruitment outsourcing to meet their employment needs. This can be especially useful when expanding into new markets or for new development projects, when hiring the right talent under time constraints can be a critical differentiator for success.

What can real estate companies do?

Real estate owners and operators are increasingly looking to implement outsourcing or cosourcing models so that in-house teams can focus on core service offerings where they can gain a competitive advantage.

Speed ​​of delivery and complexity can be a strategic differentiator among real estate functions such as lease audits, appraisals and taxes as investors demand greater transparency and pre-investment due diligence.

As the volume of data and demand for detailed information on asset performance increases, investors are coming to terms with the limitations of traditional spreadsheet-based models for fund accounting or investment evaluation.

The top three functional areas most identified by survey respondents for outsourcing in the next 12 to 18 months are:

-property operations and management;

- analysis, financial planning and analysis; and

- risk management and internal audit.

Analysis, financial planning and analysis saw the largest year-on-year percentage increase, while fiscal outsourcing fell eight percentage points, falling in the rankings from fourth overall last year to ninth this year.

Outsourcing these functions could allow real estate leaders to focus on creating, maintaining and growing their competitive advantage in core functional areas such as customer relations, development, procurement or leasing.

Improving real estate technological capabilities

The value of real estate has increased; it now accounts for nearly two-thirds of real assets on the globe. But the technology that supports the industry has remained more or less the same. For example, 61% of real estate owners and investors worldwide are still dependent on legacy technology infrastructures.

And while nearly half of these legacy users plan to make the leap to upgrading, successful implementation is often more complicated than clicking "upgrade." Estimates suggest that up to 73% of enterprise data across industries remains unused, so there are opportunities for real estate industry leaders to put that valuable information to better use.

Most real estate firms still depend on legacy, established, albeit old, technologies that often serve a singular purpose for a given task. On average, firms still use spreadsheets 60 percent of the time for reporting, 51 percent for property valuation and cash flow analysis, and 45 percent for budgeting and forecasting.

These independent data processes can limit the ability of business units to communicate with each other, leading to redundancies and inefficiencies that further slow the flow of data within an organization.

Costs and "technical debt"

The costs associated with simply running and maintaining legacy technology that was originally designed to save time or money is known as technical debt. Estimates suggest that 10% to 20% of new product technologies are spent on solving existing technical debt.

Some suggest that this cost of technical debt can be as high as 60% of every dollar spent on information technology. However, the reality is that only 13% of real estate companies have access to real-time business intelligence and analytics, according to Reality. real estate services firm Jones Lang LaSalle.

Challenges to more systematic digital adoption likely came from the industry's approach to generational diversity, outdated job roles, talent processes and culture.

According to a study by the Deloitte Center for Financial Services, 45% of real estate workers are 55 or older, compared to only 4% of 19-24 year olds. That's behind the industry average of 24 percent and double the banking and insurance average of 22 percent of employees who are 55 or older.

Additionally, three out of 10 new real estate hires are baby boomers and for every Gen Z employee, at least three baby boomers were recruited. Many of these new real estate jobs have targeted traditional skills such as finance, sales or property management, rather than advanced technical skills such as data analysis, software development or cloud computing, contributing to a widening gap of the demand for skills.

A stronger foundation for future commercial real estate

Developments in the commercial real estate industry are likely to be under the microscope for the rest of 2024. How industry leaders choose to navigate the next 12 to 18 months could be crucial in establishing a solid foundation for long-term operations.

Recent changes in the real estate landscape could forever shape the trajectory of the industry. Some real estate sectors are poised to feature drastically different fundamentals than ever before.

Sustainability considerations should be central throughout the entire life cycle of buildings, not only to preserve the environment but also to preserve property value. New and impending tax rules must be navigated.

Hybrid work is likely here to stay, and employers should adapt their workplaces to "win" employee commuting. Efficiency gained through operations and technology transformation can transform the industry.

Leaders who treat these industry changes as new fundamental realities can position their firms on the stable foundations needed to build the future. (Photo: Freepik)