What will change everything in 2011 and beyond?

A few 2010 events either changed or reinforced perceptions enough to influence sustainable finance in 2011 and beyond:

1. Positive Green Building Momentum & Performance

Confirming year-end data reinforces the value of building environmental certification.

• LEED-certified buildings have reached a footprint of 1 billion square feet worldwide, with another six billion square feet of registered projects in the pipeline.

• In the The Economics of Green Building, researchers demonstrate that green building economic performance was not affected by recent market volatility, that the economic premiums in the green properties studies remain substantial and energy efficiency does contribute to higher rents and values.

2. Quantified Credit Risk for Environmental Irresponsibility

• If your lender shrugs when you tell them that building environmental certification benefits them, too, send them a copy of Corporate Environmental Management & Credit Risk. Rob Bauer and Daniel Hann’s prize-winning study that demonstrated how US companies engaged in environmentally risky activities paid a premium for their bond debt of up to 64 bps per annum.

3. Innovative Structure Straddles Real Estate & Energy

• We covered Hunt Power’s use of the REIT structure to offer up to $2.1 billion in energy infrastructure finance via joint ventures, purchase and leasing. There are several energy and technology sectors that urgently need better ways to access capital than the market can provide. Look out for more novel, hybrid investment structures that bring commercial solutions to financing sustainability across buildings and other domains.

4. Regulatory Ramp Up Continues

• Carbon cap and trade has arrived in California, joining building energy disclosure requirements and Cal Green. Under new regulations adopted 20 December, greenhouse gas emissions of large industrial plants will be capped from 2012 forward. Given California’s legal requirement to reduce emissions by 15% from today’s levels by 2020, we will continue to see heavy action both within California, as well as California’s experience influencing how these issues are handled in other states and even within the Federal Government.

5. PACE: New Tools Equal New Perceptions

• We dedicated substantial coverage last year to tax-lien financing for energy efficiency. Professionals from diverse sectors joined forces to cheer on property-assessed clean energy’s brave fight…and boo the regulators as they killed most residential programs. New tools equal new perceptions. PACE’s major success has been how it helped build awareness and shape positive perceptions. Now practitioners realize that such structures are possible and urgently needed. That’s kicked off a lot more interest in getting green finance right from now on.  Policy makers are working on various versions of PACE 2.0 or other PACE-like enabling legislation. It’s hard to tell what progress they’ll make, but PACE’s potential helped focus commercial real estate and government on the market need for such structures in a way not seen before.

So, what kind of market do you think you’ll sell into?

With so much momentum already underway, what are the prospects for your building portfolio?  We think successful investors in the coming years will be good at continuously re-imagining and reinventing their businesses, often at highly local levels.

Which of these events carry the most weight for green real estate?

What’s missing from the green finance conversation that you think needs attention?

Photo credit: Muse by Oimax. If you are a fan of urban photography, check out Oimax’s 6,000+ photostream of stunning Tokyo architecture, scenes and objects.

The first real estate and energy investment mashup is here!

The media and web worlds gave us the term ‘mashup’ to describe the combining of different files, songs and other applications into a new piece of work. Now that definition can be extended to a new domain entirely — real estate and energy investing.

Hunt Power has joined forces with TIAA-CREF, John Hancock Insurance and others to create two energy infrastructure companies that are structured as real estate investment trusts.  Initial estimates are that the companies are set to  invest up to $2.1 billion.

Yes, that’s right — electric and gas infrastructure REITS!

The new REITS will provide capital to municipalities, co-ops, utilities and others needing to install electricity and gas infrastructure.  Their initial footprint focuses on Texas, the Great Plains and the desert Southwest regions. In comments to GlobeSt. com, Hunt’s CEO explained how the companies will operate similarly to hospitality REITS:

“they’ll  develop and/or own assets and lease them to regional operators. In some cases, the REITs will acquire distribution and transmission assets from operators, who will then lease back the assets.”

The arrival of these energy infrastructure REITs caught our attention because we’ve been digging into the climate change investment reports being circulated by Goldman Sach’s (GS) and others. We are starting to see early signals of the capital markets trying to assign risk and value based upon a company’s presence in a high-emissions or low-emissions sector.

We are tracking these developments, since our commercial building landlord and lender clients will have to understand whether it makes sense and if so, how to incorporate tenant emissions exposure within their underwriting of major commercial leases.

If you’ve been following that particular strand, then you’ll be able to stay with my ’roundabout’ chain of explanations, which will tie into the significant market opportunity for firms such as the new energy infrastructure REITS.

In a 2009 report titled , “Change is Coming: A framework for climate change - a defining issue for the 21st century”, GS laid out their analysis of how competitive dynamics in several market sectors could change significantly, along the lines of those sectors’ higher or lower emissions exposure.

In a scenario assigning a US$60/t carbon price, they estimate that 15% of the total cash flows generated within the sectors might be transferred from less carbon efficient to more carbon efficient sectors.

90% of those outgoing cash flows transferred would come from the most carbon intensive industries, which includes electric and non-electric utilities. You can click on the graphic below from their report to see their breakdown of the estimated cash flows that could be lost by the utilities and a few other industries, due to emissions costs.

While there is no information available on how Hunt Power evaluates carbon emissions opportunity within its business model, and I’m not suggesting that you should buy into GS’ carbon pricing specifically, but if their  market views are even halfway true, there’s a ripe market for creative investment vehicles like these new infrastructure REITs, since their conventional utility sector brethren will not be in any position to deliver the kind of capital investment needed for the energy infrastructure so badly needed throughout the US.

The REITs arrival on the market also opens up the field of direct green finance and investments to more creative investment mashups that span multiple industries, but I will have to cover that in a future post. For now, we’ll be tracking Hunt’s developments with great interest as we are sure that more investors will be paying !

How failed US climate legislation hurts commercial property investors

“Absent very unlikely changes in federal law, this task will fall to fifty state legislatures, governors, and utility commissions,”

Yikes.

If you know any nationally-active real estate investor who’s leery of climate legislation, tell them that now -  even with climate legislation dead for 2010 - is definitely not the time to relax. Then pass along this story from Monday’s New York Times, laying out how the lack of a unified national climate and energy policy is only expected to make the US’s already feudalistic energy policy patchwork even more complex for building owners. After they read it, give them a Tylenol for their headache.

In a nutshell, US energy policy has always been driven regionally by ideology, state self-interests and political winds of the moment. In former times, readily available, cheap fossil fuel meant that buildings and businesses felt no impact. In current times, fragmented policies can make already costly energy more expensive because it will push the job of coordinating for the highest energy efficiency directly onto the real estate industry.

The Times doesn’t mention any detriment to commercial real estate by name, but you can figure with buildings being responsible for 76% of US electricity use, that these forces can be particularly brutal on a nationally-active investor with assets “in the wrong place at the wrong time”.

Not only does the current retreat from climate legislation point to sharpened regionalist state energy policies, experts fully expect those states with traction on renewables and energy efficiency, to march ahead with various regional carbon cap-and-trade regimes.

So, in addition to managing building efficiency without adequate public support in some regions, investors will have stay abreast of regional cap-and-trade programs that other states do belong to.

Real estate investors are must be vigilant in monitoring regional energy policy developments

Today, with national climate legislation off the table for 2010, the risks associated with the currently fragmented patchwork of energy policies are becoming even more fragmented against a more volatile national and global energy market. Commercial real estate investors need to remain vigilant over the evolution of regional energy policy within the areas where they are active to avoid ‘risk creep’ within their portfolios.

They should not rely on arguments such as “energy is cheap during a recession”, “energy futures are currently flat” or think of energy costs in historic terms. The Times story lays out how US regions have already set on very different paths to manage their energy needs, and the current regulatory, ideological and economic winds can provoke radically different policy responses in the different regions - which can mean differing cash flow results for the investors’ efforts.

Future-proof your portfolio with this SB 375 update

A few weeks ago, we blogged about how real estate practitioners may inadvertently “penalize’ the green business case through understating the true costs and risks associated with continuing business as usual.

And the latest happenings related to California’s SB 375 underscore that message.

Here’s some specific download,  courtesy of an excellent write-up by Jonathon Redding of Wendel Rosen (below ->details on getting the write-up), on how land use changes related to California’s landmark AB32 can increase the risks of doing business as usual for developers and investors in California who do not incorporate the new ways in which regional authorities are regulating environmental compliance, in fulfillment of their responsibilities under SB 375.

SB 375 is one of the keystones of California’s regulation of greenhouse gas emissions. From its mandate, regional authorities are required to adopt plans to limit greenhouse gas emissions by forcing projects through an “enhanced” environmental review process (read: tortuous) if the projected greenhouse gas emissions of their proposed projects exceed determined thresholds.

Redding lays out the landscape for practitioners planning projects in Northern California, where the Bay Area Air Quality Management District (BAAQMD) has just proposed the threshold of 1,100 metric tons per year of maximum greenhouse gas emissions for any project in its jurisdiction. This proposal, which will be finally reviewed for approval on 21 October 2009, is also the most sensitive threshold for GHG emissions proposed.

If the above thresholds are adopted by the BAAQMD in the next month or so, any projects which have not undergone environmental review will be subject to these thresholds.

You have four main options if your project exceeds the new GHG annual emissions thresholds:

(1) perform an expensive analysis to establish the project is below the adopted thresholds;

(2) apply technologies or best management practices to mitigate GHG emissions below significance thresholds;

(3) purchase verifiable offsets or reduction credits to the extent allowed by law; or,

(4) provide information to support the lead agency finding that it is impossible to mitigate the project’s impacts and adoption of a Statement of Overriding Considerations. In the fourth scenario, they will need to explain why the public benefits of the project outweigh the significant and unavoidable adverse impacts associated with the project.

The gist is this, if you have wholly overlooked this new regulation, or have designed a new project in BAAMQD’s jurisdiction that does not quite meet the threshold, compliance “after the fact” will cost you big: dollars and headaches.

Of course, you can spend time isolating SB 375-related costs and adding them to your cost of doing business as usual, to determine the “value-add” of sustainability via avoiding them with good green design that complies with the thresholds.

From our experience, the value of avoiding an unduly long, messy “enhanced” environmental review by itself is — to paraphrase a famous advertiser — priceless.

(Note: we couldn’t get a direct link to Jonathon Redding’s write-up for you, but will happily forward this great information if you request it.

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Avoid the threat behind lower emissions

You might hear that 2009 carbon emissions are down over 2008 and think that means you have more time to get started with your portfolio’s sustainability initiatives.

In reality, you should do just the opposite– because there is a real estate story buried here that isn’t as benign.

The DOE Energy Information Administration (EIA) projects that 2009 U.S. carbon emissions are projected to be 6.5% lower than in 2008, due to

weak economic conditions and declines in the consumption of most fossil fuels.

The EIA also projects 2010 emissions growth at +0.9% over 2009. For reference, the EIA’s 2009 Annual Energy Outlook, projects U.S. emissions growth of 0.3% p.a. through 2030.

We became curious about the level of economic activity accompanying these projected changes in emissions, looking particularly at economic indicators most closely tied to real estate fundamentals.

So we dug in to the EIA’s super handy table of of macroeconomic indicators, where you can derive a snapshot of the “economy-buildings-sustainability-finance” trends that shape green finance:

2009 vs 2010 Macroeconomic Snippets

According to EIA projections, in 2010:

• real GDP growth will be be +1.07%
• real personal income, non-farm and commercial employment will shrink 0.31%-0.6%
• the number of housing units will remain flat with nearly no new construction
• vehicle miles traveled will increase .4%
• the change in the producer price index for petroleum reflects 20% year-over-year growth (ouch!).

Essentially, the 2010 picture picture is one of continued high unemployment and shrinking incomes, even as the economy begins to recover. And at the same time, petroleum prices are projected to grow at nearly 19 times the rate of GDP growth.

This basically lays out the risk of a continuing deterioration of real estate market fundamentals and investment portfolios even while the official news may be reporting an economic recovery.

Moreover, these projections highlight the immediate value of energy efficiency retrofit programs on property portfolios, as a real defense against escalating petroleum-driven operating expenses. It also highlights the benefits of  sustainable district-level and regional strategies for communities.

The threat of increased petroleum prices against shrinking incomes also supports the need for green finance programs, since these enable powerful, immediate responses to portfolio-wide and regional sustainability problems.

So don’t let stories of low carbon emissions slow down your firm’s energy efficiency and sustainability initiatives. Your efforts will help you to avoid some the other risks buried in the same story.

How are you moving sustainability forward in a weak economy?

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Things you might want to know:

• Do you like this post? We’d love to hear your comments and suggestions.
• You can contact us to discuss or initiate a project here.
• You can get Our Green Journey by email or via RSS.
• Sometimes you can see what we’re doing on Twitter.
• Photo credit: U.S. Department of Energy, Energy Information Agency

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