Bankers Call for More Green Banks

 

Even with all the excitement about the greening of commercial real estate, investors often ask

“why aren’t the big banks offering financial products tailored to the specific needs of sustainable investment property?”

In our workshops, we put it this way: there are effectively “two kinds of green debt” — banks that offer green loans and others that offer loans on green property. Most banks fit the latter description.

I have also met with bankers to understand how their firms’ well-publicized commitments to sustainability excludes products for greening commercial real estate. Usually, they explain that they cannot allow discounted loan pricing on green buildings, because  they don’t have sufficient data available to quantify the risk differential. Although that point makes sense to me, it’s an incomplete answer.

They never talk about how their institution is addressing energy price and operating risk within its existing collateral portfolio of conventional property. Or how they’re dealing with the market risk from their collateral properties falling out of favor with tenants.  Finally, bankers could pay closer attention to the Appraisal Institute’s new education classes for appraisers on valuing green features on real estate. Think about it: wouldn’t they benefit from funding the greening of existing buildings, if only to mitigate energy price and appraisal risk within their conventionally built collateral?

Is the conventional mortgage lending model really the best way to finance green buildings?

Others within the financial community are speaking out on the same question.  Joel Freehling, of industry pacesetter ShoreBank, back from an international confab on green finance, wrote a post calling for commercial lending pure play — new banks, which would be dedicated to green financing. Think lots more, larger New Resource Banks. He points to ShoreBank’s pioneering lending within low income communities as proof that similar forces could organize and grow the green real estate finance space.

I know that among the Green Journey subscribers, there are a couple of groups working on such projects. But today’s capital markets make it tough to establish any kind of bank, pure green or otherwise:

• Banking is contracting, with an estimated 70,000 jobs lost on Wall Street alone .  There are fewer institutions alive with money to lend.  When you shake your head about less capital, don’t overlook the loss of bright minds within these institutions who could have catalyzed capital markets innovations we need to create intentional, large scale capital flows to green real estate.
• Most major commercial real estate banks and insurance companies have already announced that they expect to originate significantly less new business in 2009 than 2008. This is mainly because of continued weakness in many real estate markets and sponsors.
• Valuation upside comes from strong real estate markets, which depend on healthy employment trends. Unemployment is helping to soften market fundamentals, which is bad for any kind of real estate, green or not.
• In the workout of prior real estate downturns, banks were subjected to more regulation. I expect to see our real estate capital markets undergo heavier regulation this time around, too. Regulation, even when it is desperately justified, is generally not the friend of innovation.

Hang on, it’s not all bad. My other, related perspective is that the above circumstances actually create one of the best opportunities for private market platforms, which could be better positioned to finance sustainable real estate, in the right way and at the right price:

• There is no shortage of capital in the market. It’s just sitting on the sidelines, waiting for the markets to calm down. We’re tracking several new debt funds that are currently raising equity to address the current bridge loan and gap funding needs of investors, taking advantage of the pullback in other sources of capital.
• Real estate assets are being repriced downward, so time to think like Warren Buffet — its a buying/funding opportunity for those who know how to underwrite. Any platform getting into the market now could be acquiring and greening assets at the bottom of the market. And green real estate is expected to outperform conventional real estate as the market rises again.  So I see great upside for those debt players who are smart enough to figure out how to incorporate underwriting green within the overall platform.
• There are also expectations of significant federal financial stimulus, which would promote energy efficiency of existing buildings.  Capital markets investors (both debt and equity)  who have done their homework on green buildings practices, are best positioned to create an advantage for themselves by incorporating those funds within an overall investment strategy.