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How can circularity drive sustainable and equitable building?

By integrating circularity in the building industry, stakeholders and communities can realize economic and social benefits.

In brief

  • Circularity in the buildings and construction industry has the potential to deliver material savings in the short-term and enhance building value in the long-term.
  • Circular design and retrofitting aids in keeping older building stock in play which, in turn, helps to combat the housing affordability crisis. 

The building and construction industry is in a state of flux, responding to post-pandemic changes, an increasing global population, supply chain shortages, emerging pressures on “greener” construction and an evolving regulatory landscape. Today’s building and construction landscape demands innovative solutions to address these challenges. Given that the future built environment will contain a mix of new and existing structures, how can the buildings and construction industry stakeholders (e.g., governments, building developers, real estate managers and occupants) incorporate innovation into the built environment? How can circular economy principles drive growth and innovation in the industry while addressing these challenges?

This article will examine:

  1. The built environment landscape and market (building occupancy changes, new regulations, financial incentives and major challenges posed for implementing a more sustainable built environment)
  2. Circular economy principles in building and construction as a solution
  3. The value proposition for retrofitting across stakeholder interests

How EY can help

Introduction

We interact — unconsciously and consciously — with our built environment every day. This can be at home, our workplace, our afternoon coffee break and everything beyond and in between. Our built environment is under immense pressure to balance two opposing needs — longevity of existence and agility to meet evolving expectations from built spaces (e.g., healthy/green spaces, energy efficiency, affordable housing).

Recent retrofitting projects demonstrate significant potential to support both affordability and reduced environmental impact, as per-unit construction costs can be about 30% lower than new construction projects¹ and retrofit buildings can save 50% to 75% of a building’s embodied carbon,² which is carbon emitted throughout the building’s lifecycle. Circular economy principles offer an opportunity to ease the financial, environmental and social responsibility burdens borne by the building and construction industry to move towards more sustainable and equitable living such that “everyone wins”: governments, building developers, real estate managers, current occupants and future generations.

Industry landscape: major challenges

While US office occupancy rates are at about half of their pre-pandemic level and continue to trail behind Europe and Asia,³ the supply of housing in the US is short 5.5 to 6.8 million homes.⁴ Builders struggle to keep up with historical trends, and natural disasters continue to add complexity (such as supply chain disruptions, material damage and impacts on insurance). The average home price in the US has risen by 60% in the last five years, and the average income in the US has only risen by a quarter of that amount, or 15%, in the same time frame.⁵ As office buildings continue to operate at significantly lower worker capacity and the housing market continues to face a significant shortage, it begs the question: how can we optimize US building stock in light of these challenges?

1. Volatile supply chain and material prices

The use of a new supply chain for each built project, coupled with the reality of post-pandemic supply chain pressures, is challenging supply chain resiliency in the industry and creating obstacles when building new in today’s market. As diminishing natural resources increase prices for materials and regulations limiting new construction gain traction (such as California’s Senate Bill No. 9), the construction sector’s current linear model defined as take-make-waste, where raw materials that are extracted often do not reach the end of its usable life, is under scrutiny. When this “waste” from demolition or deconstruction is produced, there is no clear recovery and reuse process, leaving landfills full of material that has not reached the end of its usable life.

2. Increasing awareness and regulations for greener buildings

Attention is turning to the construction and building sector as public concern for energy efficiency and carbon emissions of infrastructure continues to grow. Building operations and construction contribute nearly 40% of global energy-related carbon emissions, causing⁶ the US government to slowly introduce regulations and incentives for greener buildings. With regulation and public opinion, the industry is challenged to shift its mindset and build models to create healthier environments and living spaces for all inhabitants.

3. Dispersed stakeholders and blurry lines of benefit realization

Construction projects involve coordination and communication across various, sometimes siloed, stakeholders such as the developer, designer, contractor, supplier, financier and local government. The complexity in stakeholder management, therefore, makes coordination difficult, which can limit project capabilities and efficiency. Embarking on a successful project often requires consistent communication and project management at scale, along with the right incentives. Projects that provide overlapping incentives for multiple stakeholders are generally more attractive. When exploring ways to optimize current building stock, finding overlapping incentives will help determine the buy-in for new projects. These incentives can range from financial gain to satisfying compliance and regulation pressures.

Tackling these challenges

With today’s building stock landscape and the growing challenges in the linear construction model, the industry and associated parties should think creatively about our built environment.

A plethora of mandatory and voluntary initiatives is driving the positive shift toward green buildings and thoughtful designs for both new construction and retrofitting existing buildings. Some certifications (e.g., International Code Council's 2012 International Green Construction Code (IgCC) and Green Globes™) encourage improved environmental and health performance through the design and construction process, while some regulations (e.g., San Francisco’s Construction and Demolition Debris Recovery Ordinance No. 26-07) actively drive responsible innovation by focusing on end-of-life regulation (e.g., per this ordinance, no construction and demolition debris can be put in the garbage and landfill — it must be recycled or reused).⁷

There is a pressing shift in focus from a single- or limited-use mindset to prolonging the life of new and existing buildings. Applying circular strategies could help address key industry challenges to create a sustainable and equitable built environment.

1. Retrofitting as a reuse and refurbish strategy:

Retrofitting buildings for the same use (commercial to commercial) or new use (commercial to resident) could upgrade existing spaces to meet new environmental and regulatory standards while simultaneously addressing the evolving expectations from built spaces such as equitable housing, green or living buildings, generating material savings and reducing reliance on virgin materials.

2. Design and redesign for circularity:

As spaces are retrofitted, circular design principles, such as modular components and fixtures, material choice and designing for deconstruction may allow for agile shifts between spaces and uses as well as potentially minimizing cost, time and waste from each retrofit.

3. Product passports to trace input building materials:

As more buildings embrace circular strategies, maintaining digital product passports, which are digital passports that store data on a product from across the supply chain and throughout its lifecycle for materials used in the build, would likely allow materials tracing, better extraction in subsequent cycles, and open doors for reliable accreditation and certifications.

Benefits and impact

While circular strategies, like any construction project, require time and investment at the outset, the impacts of these strategies, like a retrofit, can have delayed realization given the building’s extended lifespan and should be considered as a long-term impact. Circular economy principles can address the financial agenda, supply chain resiliency, environmental agenda and housing crisis in today’s industry. Therefore, circularity’s multi-pronged impact could serve as the link for incentivizing each stakeholder to ensure a successful execution of a project.

1. Financial agenda

Financially, prolonging the life of a building and designing for circularity enhances long-term value as inflation increases the building’s worth for as long as the building is standing.⁸ Refurbishing old buildings to stand longer improves the condition and energy efficiency of the building, therefore potentially increasing rental rates and revenue, lowering operating maintenance expenses, and reducing energy costs through improved ”green” systems (i.e., smart HVAC systems and self-cooling windows)⁹. Substantial investment upfront is required to upgrade to a class A building and to realize these impacts. As the value of retrofitting gains more attention, the retrofit market is expected to reach $24B by 2030 in New York City.¹⁰A retrofit project for a commercial building aiming to reduce energy consumption by up to 25%, classified as a “medium” retrofit sits at an average $6.50/sq. ft. versus the $65/sq. ft. for a new construction.¹¹ Additionally, with increased regulation, upgrading buildings to be “greener” gives tax breaks and financial incentives such as $5.25/sq. ft. tax abatement for living roofs or increasing the square foot value of a building by an average of 25% if it is LEED certified.¹²

2. Supply chain resiliency

Exploring sustainable alternatives to common materials, like recovered or recycled materials, and innovative design strategies, like modularity, can reduce the reliance on the extraction of virgin raw materials and drives supply chain resilience. While implementing recovered material usage may mitigate the risk of diminishing virgin resources and the impact of global supply chain complexities, obtaining these recovered materials for use will likely require work to identify the materials and approve them for secondhand sale.

3. Environmental agenda

An additional benefit to recognize is the reduction of the carbon footprint of construction as circularity makes use of a building’s embodied carbon. A retrofit building can save 50% to 75% of a building’s embodied carbon.¹³ Even if a new construction building is deemed “energy efficient,” a study in Chicago found that it can take 25 years for a new commercial building to reach the carbon equivalent of a reused existing building.¹⁴

4. Housing crisis

Implementing circular design and repurposing existing buildings through retrofit can have a significant social impact as well. Efforts to repurpose vacant buildings or keep older housing stock in play can combat the housing affordability crisis. The average new home in the US in 2021 was priced at $397,100, while an existing home in the same year averaged $347,100, indicating that older housing stock is roughly 14% cheaper than new construction.¹⁵ Older housing stock could stabilize housing prices in areas that would otherwise be more expensive with only new construction. In fact, maintaining affordable housing stock can reduce the odds of displacement of low- to middle-income homeowners in the neighborhood allowing for more opportunities for families to build and generate wealth in the long term.¹⁶ Adequate supply of affordable housing can positively impact local economies by leading to higher employment rates, tax revenue and spending.¹⁷ A study conducted by the National Association of Home Builders found that allocating about 100 affordable rental homes generates almost $12M in local income, $2.2M in taxes and other revenue for local governments and 161 local jobs in the first year alone.¹⁸ In keeping with circular principles, this government revenue can aid in funding more retrofits and green construction projects.

Retrofits also provide fertile ground for the growth of public-private partnerships, which are essential for the advancement of social justice in communities across the US. These partnerships can effectively establish overlapping incentives for various stakeholders in the primary stages of a project and can provide a framework for beneficial collaboration.

Way forward

Exploring circular principles in construction to keep existing building stock in play and/or apply “green” updates can save time, money and materials for developers; fulfill government compliance requirements; drive equitable housing opportunities for communities; and create healthier building spaces and environments. With circularity, “everybody wins,” delivering positive ripple effects across direct and indirect stakeholders.

Isabella Canales Claudio, Madeleine Nicholson, Shrestha Padhy, Kristin Bianca and Elizabeth Tual of the Climate Change and Sustainability Services practice of Ernst & Young LLP contributed to this report.
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Summary 

With circularity, “everyone wins.” Implementing circular principles, like retrofitting and refurbishing, in the buildings and construction industry can help reduce construction costs, bolster supply chain resilience, address environmental concerns and help to combat housing affordability. As the industry continues to respond to the flux of post-pandemic building occupancy changes, supply chain disruption, and environmental regulation and consumer pressure, circularity may offer a promising solution for stakeholders and communities.

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