2019: Trends in Sustainable Real Assets

2018 was an exciting year for sustainable real assets, as more assets were required to participate in benchmarking or disclosure. As a result, we shifted from talking about regulatory and compliance obligations and costs to sustainability as a value-add driver of cashflow and asset values. The federal government’s retreat only increased the focus on sustainable real assets, allowing investors and owners to realize and utilize a value-add approach.

At Green Generation, we saw four key trends last year.

• Making the Business Case

The Administration decreased focus on sustainability/energy efficiency, but adoption in the state, local, and private sectors continues for two reasons. First, both the US government’s contracting process and an increase in focus at the state and local levels is driving public sector interest. Second, with economic volatility, the private sector is focused on anything that can create cashflow and asset value. Groups like GRESB and their partners have shown that investing in energy efficiency makes bottom-line sense. Business owners are similarly viewing energy efficiency as an important value-add tool to save money and increase asset value while creating significant environmental co-benefits.

• Disruptive Technology

Private and public investment can create innovative solutions to long-held problems for the built environment. Energy data helps us understand where problems lie and how to solve them, allowing us to integrate data in ways that optimizes building operations. A simple wax paraffin valve attached to showers prevents water waste and demonstrates how new technology can save hotels, senior living, college campuses, and apartment building owners significant money on water and heating. Changes in energy efficiency tools and technology are occurring rapidly. Identifying, evaluating, and adopting PropTech saves energy and money, and is increasingly propelling innovation in the built environment that creates a double-bottom line return.

• Growing Focus on Life Cycle

A tension exists between life cycle vs. first costs with regard to design and construction in commercial projects. When faced with tight budgets, the loser is often high-efficiency design and systems, which get cut out of final building plans. What is missing is the value or equity impact of these design decisions. Investing in high-performance products during construction generates long-term equity value. Sometimes saving $1M in construction costs ends with $150,000 in increased operating costs and lost equity that can exceed $2.5M, so that saving money upfront destroys equity value. GRESB provides incentives to developers as they consider the impact and document the results.

• Follow the Money

Buildings that regularly benchmark energy use on average reduce their energy consumption by 2.4 percent per year, saving money, GHG, and increasing asset value, according to Energy Star. That means that over a three-year period, a half million square foot office building can expect cumulative energy cost savings of $120,000 and an increase in asset value of over $1M. Using energy data to follow the money, building owners and managers can understand where energy efficiency measures are falling short. Asset owners are learning to use data to detect their energy gaps, analyze and assess energy usage, and ensure energy efficiency drives financial outcome and portfolio value growth.

A 2017 study conducted by the University California at Berkeley and Lawrence Berkeley National Laboratory and funded by the Department of Energy concludes that there is a connection between energy efficiency for commercial real estate buildings and the likelihood of defaults. Whether this means that the onsite team does a better job or the asset does, this correlation is meaningful when talking about more than $500 billion dollars of CMBS in the US.

What will happen in 2019?

• Business cases will be developed showing ROI for investing in energy and sustainability
• Rating and benchmarking mandates will become even more widespread
• Capital markets will increasingly demand sustainability is incorporated in investment decisions
• Owners and developers will focus more on value than cost in making investment decisions
• Sustainability will increasingly be considered for public sector assets
• Sustainability will be promoted by Funds as a value-add driver and case studies that show how sustainability created value will be commonplace

Conclusion

In 2018, after decades of value-add investors and owners largely ignoring energy as a value driver, enlightened owners are focusing on energy and sustainability as drivers of asset cashflows and value. The increase in GRESB participation is a key indicator of this trend, and its growth suggests that more investors will monetize sustainability in the future. The combination of data and technology makes this easier to defend and support as decision makers can easily see the impact before committing capital. While much remains to be done, the business case is increasingly being made, and the future looks to be very exciting.

Green Generation is a DC-based company that transforms the world’s built environment through innovation and solutions by integrating energy, real estate, technology, and capital markets to Operate in the Green.

Written by Brad Dockser, CEO, Green Generation