The Move Toward Environmentalism, Sustainability and the CRE Industry
- Jason Gordon
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The Green New Deal, a nonbinding resolution submitted to congress by Representative Alexandria Ocasio Cortez (D-NY) and Senator Ed Markey (D-MA) on 2/7/19, has raised passions to a fever pitch on both sides of the political aisle. While the legislation is comprised of a panoply of government stimulus programs to address economic inequality, its main thrust is the enactment of laws to combat what the authors consider to be catastrophic climate change on the horizon. Included in the proposal, which had about 100 cosigners, is a requirement to retrofit all buildings in the U.S. to achieve maximum energy efficiencies to meet what they contend is an impending environmental emergency. The Republican response was equally impassioned in their opposition, claiming that the implementation of the program would cost trillions of dollars, driving the country into a deep recession, or worse.
But, unfortunately, this forum will have none of it – no fervor, no high passions, no congressional-style flaring tempers or dire warnings. And sorry to those of us who extract occasional real estate lessons from Game of Thrones – no gore. Rather, just a calm reasoned discussion on the merits of sustainability in existing and new CRE developments, and the current trends that are already in motion.
CRE Efforts and Policies
On a more serious note, has the CRE industry made efforts in recent years toward environmentally sound energy policies? After all, commercial and residential buildings in the U.S. account for 39% of the country’s CO2 emissions, and those building emissions are expected to grow nearly 2% annually through 2030 according to the U.S. Green Building Council. In fact, the U.S. CRE industry, while reluctant at first due to the costs they thought such action would entail, has taken major steps toward green energy solutions.
For example, The National Association of Real Estate Investment Trusts (NAREIT) declares that, “Most REITs are now reporting their sustainability efforts publicly, with the percentage growing year-over-year.” And that in 2018, 66 of the top 100 REITs (representing 79 percent of the total market capitalization) reported their environmental efforts publicly on their company websites, in their annual reports, or in stand-alone reports. In this regard, CP EXECUTIVE states that “40% of NAREIT members employ environmental, social, and governance staff whose job it is to find ways to make portfolios more sustainable and to address social and governmental issues.”
Also, the industry has come to understand that green practices are not only environmentally preferable, but crucially, that such measures can actually serve to lower energy costs when implemented properly, and therefore have a positive impact on a company’s ability to realize a return on investment.
In the same CP EXECUTIVE article, it’s clear that major players in the CRE industry are serious about sustainable energy policies. Kyle Goehring, an EVP and chief of JLLs Clean Energy Solutions Group says, “Clients are already participating in renewables, energy efficiency and carbon reduction solutions because it’s not only the right thing to do but because it makes financial sense.” He adds that, “Through sustainable practices, companies are attracting and retaining talent, particularly millennials.”
What are Some of the Programs Available for CRE Owners?
For large commercial projects (multifamily, industrial), the upfront costs of installing energy efficient systems or water conservation technology, have historically deterred many owners. The Commercial Property Assessed Clean Energy program (CPACE) provides a financing structure to help alleviate those upfront expenses. CPACE programs makes it possible to obtain 100% financing when incorporating renewable energy and other green technologies either in new properties or to retrofit older ones. In the 16 states where CPACE programs have been implemented, municipalities offer a specific bond to owners (in the open-market model, private lenders provide the funding). The beauty to the program, is that the full payments are deferred for up to 25 years and are prorated on the yearly property tax bills. In essence, the loans are repaid while the energy costs are simultaneously lower, significantly mitigating the financial burden.
Another innovative financial vehicle available to CRE investors is Energy Performance Contracts. In this case, CRE owners’ partner with a private energy services company (ESCO), such as Siemens or Noresco. After conducting an audit and identifying the energy savings measures, the upgrade is constructed. The incentive in this financing model is that the ESCO guarantees that the improvements will generate cost savings sufficient to pay for the project over the term of the contract. If the savings don’t materialize, the ESCO is contractually required to pay the difference.
Additionally, there are sustainability programs which do not confer direct financial benefits to participants, but nevertheless often yield monetary benefits indirectly. The U.S. Green Building Council (USGBC) is a private non-profit organization which has developed the gold standard for rating the design, construction, operation and maintenance of green buildings. Through its Leadership in Energy and Environmental Design (LEED) program, points are awarded toward encouraging building owners and operators to be environmentally responsible and energy efficient.
Although there are no direct financial incentives to pursue LEED ratings, private sector companies are increasingly drawn to the program because the rigorous certification awards are widely known to result in a superior building projects, long term savings in energy and water costs, and healthier indoor spaces for occupants. Additional benefits often include faster lease up rates, higher resale value, and the enhancement of an owners or builders’ brand.
What Do the Studies Show?
In a study conducted by the International Renewable Energy Agency (IRENA), “The cost of renewable energy is now falling so fast that it should be a consistently cheaper source of electricity generation than traditional fossil fuels within just a few years.” The organization says that power generation costs from onshore wind has fallen 23% since 2010; the cost of electricity generated by solar panels has fallen 73% during that same time period. The IRENA report adds that all renewable energy technologies should be competitive on price with fossil fuels by 2020.
The U.S. Department of Energy, in the largest survey of its kind ever done (almost 23,000 homes), found that homebuyers are consistently willing to pay more for a property with host owned solar generated electricity across a variety of states and home types. For an average 3.6kW system, this equates to a premium of about $15,000. The study also found that there was no significant premium difference in terms of what buyers are willing to pay for new or existing homes.
In a fascinating study of PNC bank branches, conducted by the University of Notre Dame, LEED rated facilities, opened 458 more consumer deposit accounts, and had $3 million more in consumer deposits per facility per year than non-certified branches. The study also found that LEED certified branches opened more consumer loans and had far higher sales per employee. Additionally, utility costs per employee were $675 less per year.
Numerous university and government studies listed on the USGBC website shows that LEED certified buildings qualify for more tax incentives, zoning allowances, and retain higher property values. For residential construction companies, LEED certification can help homes sell faster and at a higher price - especially to environmentally conscious buyers.
The sharp rise in the use of green technologies by the CRE industry has coincided with the lowering of the once prohibitive costs, the rising awareness of the dangers of climate change, and creative financial vehicles - a sampling of which were outlined above.
Regardless of one’s views about the urgency of climate change, the move toward sustainability in the industry offers the likelihood of a cleaner environment, lower costs, and increased productivity.
Clearly, we can’t simply reduce our carbon footprint through passivity; fortunately, the CRE industry is taking action. On that note, let’s wrap this topic up and save some energy for the next person who wants to passionately debate you on this topic.