What makes a high-risk building in 2026? A portfolio manager’s guide.
In portfolio management, due diligence is the difference between a smart buy and a very expensive lesson. Most investors say they avoid high-risk buildings – but what does high-risk even mean?
Of course, poor safety, dilapidated conditions, and lower accessibility all contribute to high-risk status. But, there’s another classification that can make even a new, safe, and accessible building high-risk: environmental risk.
Real estate’s environmental performance matters because buildings sit at the centre of the European Union’s transition. Around 40% of EU energy consumption is used in buildings, and the sector is deeply tied to gas demand and heating loads.
Translation: climate risk hits where it hurts – rules, renters, and running costs. Regulations, buyer/tenant expectations, and actual operating expenses are now inseparable from a building’s climate exposure.
In this piece, what follows is a practical 2026 lens for portfolio managers: how risk is forming, what frameworks investors and auditors are using, and how you can avoid high-risk buildings.
What is a high-risk building (in the context of sustainability)?
In the context of sustainability and ESG (Environmental, Social, and Governance), a high-risk building is one that faces significant threats to its long-term value, safety, or viability due to environmental and regulatory shifts.
These risks generally fall into two categories: physical risks and transition risks.
- Physical risk involves the building's vulnerability to climate-driven events, such as being located in a flood zone or an area prone to wildfires and extreme heat
- Transition risk reflects potential stranding (a building becoming obsolete or financially unviable) as policy and market expectations evolve. If a building fails to meet tightening carbon-emission standards, lacks energy efficiency, or incurs heavy "brown discounts" (a reduction in value) compared to modern green-certified properties, consider it bust
Besides environmental factors, high-risk buildings may also carry social and governance liabilities. For instance, they might have poor indoor air quality that affects tenant health or non-compliance with evolving building safety laws, such as the UK’s Building Safety Act or the EU’s Energy Performance of Buildings Directive (EPBD).
These high-risk properties make themselves known in the books, sporting everything from increased capital expenditure requirements for retrofitting to lower tenant interest.
What type of risks should you watch out for when investing in buildings?
A building is “high-risk” in 2026 when multiple pressure lines converge:
- Regulatory risk (EPC/MEPS, EPBD implementation, local rental/letting restrictions, disclosure obligations)
- Transition risk (misalignment with science-based decarbonisation pathways and future carbon budgets)
- Financial risk (cost of capital, liquidity, capex requirements, valuation haircuts).
- Operational/data risk (missing metered energy data, poor audit trail, inability to model scenarios)
- Market/tenant risk (occupancy, leasing velocity, and pricing power under ESG-driven demand)
Let’s look at each in more detail.
Regulatory risk
The revised EPBD (EU/2024/1275) entered into force in 2024 and must be transposed into national laws by 29 May 2026. That means 2026 is when many member states convert EU direction into country-specific thresholds, enforcement mechanisms, and renovation trajectories. The result for portfolio managers is predictable: buildings near the “worst performer” band essentially become compliance projects. Also, MEPS and national leasing restrictions are already here (and spreading).
But member states aren’t waiting for 2026 to get moving. Some markets have already started restricting the rental of the worst-performing homes. France, for example, has implemented a ban on renting the lowest-rated class G homes since January 2025, with the ban widening in future years (F, then higher thresholds later).
This is the pattern to watch: policy isn’t only about new builds. It increasingly targets existing stock, particularly the worst performers, because that’s where the biggest energy and emissions reductions are.
High-risk signal in 2026: an asset whose EPC band is close to a likely future minimum (or whose measured performance suggests it should be in a worse band). That asset is exposed to income disruption through forced capex, leasing restrictions, or both.
Transition risk
A big reason high-risk has become more quantifiable is the spread of pathway-based tools. CRREM (Carbon Risk Real Estate Monitor) is widely used in institutional real estate to assess whether an asset is aligned with decarbonisation pathways and when it might become stranded under tightening carbon constraints.
CRREM reference material explains how the tool frames performance vs. decarbonisation pathways and identifies a stranding point. High-risk signal in 2026: an asset with a near-term CRREM stranding year (or material “excess emissions”) under a 1.5°C-aligned pathway (Paris Agreement).
This is especially acute when:
- The retrofit is technically complex (heritage constraints, façade limits, tenant disruption)
- The energy system transition is blocked (grid constraints, weak district heat availability)
Financial risk
There are two aspects to financial risk. First, of course, is that the asset might lose money through the likes of higher maintenance costs or lower rental income.
Second, financing an asset’s renovations can be tricky. The hard part of transition for many portfolios is not knowing what to do, but funding it at scale, especially when interest rates and refinancing conditions are tight.
On the banking side, the European Banking Authority (EBA) has documented that “green” lending remains a relatively small portion of many bank portfolios. Also, the market is still developing definitions and infrastructure for green loans and mortgages. If green finance capacity is limited or uneven, high-risk buildings can end up in a financing bottleneck precisely when they need capex most.
High-risk signal in 2026: a building that is inefficient and lacks credible third-party proof points (credible EPC performance, recognised certifications, or measured operational performance).
Market and tenant risk
CSRD may be in the political spin cycle, but the pressure hasn’t gone anywhere. European corporations (and their suppliers) remain under pressure to quantify and reduce emissions – including value chain emissions. Buildings show up directly in:
- Tenant operating emissions (energy use)
- Landlord emissions (common areas and base building systems)
- Increasingly in procurement and reporting expectations
Then, there’s the risk that a property with poor environmental performance may not attract tenants or justify a market-competitive rent. In a CBRE survey, half the respondents said they’re willing to pay a premium for sustainable properties.
High-risk signal in 2026: assets that cannot provide tenant-grade data or a credible improvement roadmap, especially in sectors with strong reporting scrutiny (financial services, large industrials, multinational corporations).
The high-risk building checklist for 2026
A building is likely high-risk if you see several of these together:
- EPC/energy performance – in the bottom bands, or close to foreseeable minimum thresholds, or poor measured performance that could trigger recertification issues as enforcement tightens
- Regulatory timing clash – major retrofit required inside 24 to 48 months, especially as EPBD transposition lands by May 2026
- CRREM misalignment – near-term stranding year or significant excess emissions under 1.5°C-aligned pathways
- Data risk – missing meters, poor landlord-tenant data sharing, and inconsistent methodologies
- Liquidity risk – buyers and lenders require credible transition plans and evidence of performance
What transition-ready looks like in 2026 (and how to get there)
A pragmatic approach for 2026 is to treat every building as a mini-business with an explicit transition pathway, backed by data.
Start with three linked workstreams:
Compliance readiness (EPBD, EPC, MEPS, and EU Taxonomy lens)
Translate the EU direction into country-specific risk. Identify which jurisdictions are most aggressive, then map your worst performers and near-threshold assets. The Nordic region, in particular, has better readiness for the forthcoming standards and regulations. For instance, Denmark has invested billions in making green public housing and neighbourhoods. EPBD transposition by May 2026 is your policy “activation moment” in many markets.
Pathway alignment (CRREM lens)
Run CRREM risk assessments portfolio-wide and convert stranding years into an investment sequencing plan. Assets with near-term pathway breaches should be given priority in the queue for capex, lease strategy, or disposal planning.
Data and auditability
Build an asset-level data pack that supports both valuation and financing conversations:
- Metered consumption
- Verified EPC records and assumptions
- Evidence of capex actions and outcomes
It’s better to be safe than sorry
In 2026 Europe, high-risk buildings share a common trait: they remove your optionality. If you wait, regulation tightens, tenant expectations harden, financing becomes more conditional, and the retrofit gets more expensive and disruptive.
That’s not to say that high-risk buildings should be no-go zones. If you have the resources to retrofit or renovate a high-risk asset and bring it into the low-risk (from a sustainability perspective), why not?
Yes, you might need to put in more funds, but those funds could be recovered in the long run, as your asset will be better positioned for current and future regulations and win with the tenants.
And as a reminder, data is key to identifying high-risk buildings. It can also help you identify potentially high-risk assets already in your portfolio that may nudge into that territory once the regulations tighten and standards improve.
After all, the worst surprise in real estate isn’t a retrofit bill. It’s realising you needed one three years ago.
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