Owners and investors can strive for benefits through sustainable real-estate practices. Here's how.
Sustainable real estate has been a growing trend in the commercial and residential markets for years. Featuring environmentally friendly qualities such as energy efficiency, water conservation, or alternative energy generation from the sun or wind, it’s a trend that was reinforced in January of 2020. That’s when a law took effect in California that required new single-family and multi-family homes up to three stories tall to have a solar photovoltaic system, which generates electricity directly from sunlight, as a power source.
For commercial real estate owners—and for investors interested in real estate—the trend has the potential to help support a cause that matters while also impacting the bottom line.
For building owners or builders: Cost savings and tenant retention
Adopting sustainable real estate business practices to lower energy and water use, reduce waste, and create a healthier environment could help improve the property’s value as well as attract tenants, says Kimberly Ryan, Senior Portfolio Manager, Social Impact Investing team at Wells Fargo Private Bank. Both can improve the bottom line for commercial real estate owners, though in cases of upgrading existing real estate, it may require an evaluation of the long-term benefits and savings versus the initial costs.
That said, Ryan points out that sustainable real estate practices may add the future-proofing benefit of potentially offsetting more expensive environmental mandates and regulations that could arise. There may even be some tax benefits.
For building owners: The plan to get there
“When investors look at evaluating their existing portfolio or consider adding new properties, they also should be thinking about how they are approaching climate risk mitigation,” says Ryan. “Are their portfolios resilient against the potential impacts of climate change?”
Commercial real estate owners may want to consider setting sustainability goals, including focusing on increasing energy efficiency in each building. These improvements might involve upgrading—or retrofitting—lighting and energy-intensive equipment and using sensors, smart meters, and building management systems to limit unnecessary power use. Other measures could involve enhancing waste management systems, which might include more comprehensive recycling programs, for example, and reducing carbon emissions.
According to Ryan, owners stand to receive long-term dividends as climate-related infrastructure risks increase in frequency and severity. Depending on the system used, they can also reduce reliance on grid electricity—which could serve as protection in areas susceptible to brownouts and blackouts.
Sustainability is not just about conserving electricity, of course. Ryan recommends being holistic. Then, once goals are set, they should be tracked against science-based targets so that there is a clear path toward success.
Wondering what other goals might be worth pursuing? One resource for establishing a framework could be the United Nations’ 17 Sustainable Development Goals. “It gives corporations a way to think about how they impact society in addition to their shareholders,” Ryan says. “I think several of the 17 goals apply to the real estate space – affordable and clean energy, industry innovation and infrastructure, sustainable cities and communities, and responsible consumption and production.”
For investors: Consider Real Estate Investment Trusts (REITs)
You don’t need to own a specific piece of commercial property to invest in sustainable real estate. Instead, you may want to spread your investment dollars among a number of sustainable properties—which is where REITs may be beneficial.
REITs are large, professionally managed trusts that own (and sometimes operate) a collection of income-producing real estate. Because they feature a portfolio of properties, Ryan says, “REITs can be an option for investors interested in eco-friendly real estate investments, applicable both to those who don’t want to invest in just one property and to those who are looking for diversification by investing in multiple markets and potentially multiple property types.”
“If considering REITs, investors should research managers whose philosophies align with their own,” says Ryan, “and sustainability is a key theme with many management teams.” That sentiment is echoed by the industry’s trade organization, the National Association of Real Estate Investment Trusts (Nareit), which can be a good source for researching managers.
All investing involves risk, including the possible loss of principal. Past performance is not indicative of future results, and there is no assurance that any investment strategy will be successful.
Social impact investing focuses on companies that demonstrate adherence to environmental, social and corporate governance principles, among other values. There is no assurance that social impact investing can be an effective strategy under all market conditions. Different investment styles tend to shift in and out of favor. In addition, a fund’s social policy could cause it to forgo opportunities to gain exposure to certain industries, companies, sectors or regions of the economy which could cause it to underperform similar portfolios that do not have a social policy. In addition, there is no guarantee that the company invested in by a fund will exhibit positive or favorable environmental, social, and governance (ESG) characteristics.
Real estate investments carry special risks, including credit risk, interest rate fluctuations, and the impact of varied economic conditions, and may not be suitable for all investors.
Commercial Mortgage REITs (mREITs) invest in real estate securities that are not backed by the U.S. government. Commercial mREITS invest in Commercial Mortgage-backed Securities (CMBS), commercial mortgage loans and other investments backed by underlying commercial real estate property. CMBS are subject to the risks associated with the underlying pool of assets in which the CMBS represents an interest; fluctuations in interest rates and to the spread between short-term and long-term bond rates; securities market risks; credit/default; declines in rental or occupancy rates, weakness in the real estate market, among others.