Cliffhanger: Which of these investors will earn a green value premium?

Do you believe that achieving a value premium on green properties is possible? Even in the currently tough market?

Well, Jamestown and the State of California have both recently been in the press talking about how they expect to realize extra value from their commercial real estate via green and energy efficiency strategies.

Check out the articles and tell us if you think their projects should earn them greater returns than non-green market peers.

Jamestown: $3-$10 Million Portfolio-wide Retrofit Commitment

Jamestown has committed to greening its entire $4 billion commercial real estate portfolio. In the recent New York Times article about their efforts, they point to their European sensibilities as being the reason why they moved ahead with a portfolio-wide commitment to greening existing buildings.

When  you read through the savings and quick paybacks that they report achieving, it seems clear that their focus is on low-hanging fruit. After all, $3mm-$10mm in retrofit costs are peanuts on a $4 billion portfolio. The good news is that they report realizing immediate savings — meaning permanent increases to property net operating income.

Nonetheless, or perhaps because of that, they focus on the green/energy efficient building’s ability to attract the right kinds of tenants and assure the asset’s sale to a broader pool of buyers. The article showcases several recent efforts, including 999 Peachtree Street in Atlanta, GA, which recently earned LEED-Gold status.

We actively follow how German and other European investors are moving quickly to incorporate comprehensive acquisition and portfolio management sustainability programs. You can read previous posts about these investors’ enhanced criteria and due diligence here. More good stuff –> If you receive Pacesetter, our newsletter, you recently read and downloaded the new EECE study ranking global property funds according to reported and implemented energy efficiency practices.

State of California: Will Green Buildings Net Higher Sales Prices?

The State of California recently put a portfolio of 11 properties, totaling 7.3 million square feet, on the market for sale-leaseback transactions. The State is reporting that these properties, most of them being, in their words, “some of California’s most energy efficient and environmentally friendly properties” could sell for $2 billion, and would be “attractive to a market that is seeking sustainable, green designs.”

What makes this an item worth tracking is that the state official making that quote is also reported as saying that the sale will allow the State of California to “lock-in the lowest rental rates seen in years“.  Bids on the sale are due 14 April. It will be interesting to see the extent to which a green premium can be realized when market or transaction conditions stipulate particularly low rents.  The beauty of real estate is that it is not rocket science — there is no free lunch, and all trade offs come with their price. We are seeing and hearing that, in tough markets, green strategies help to hold back some amount of value deterioration, but are not necessarily rewarded with immediate upside.

That being said, there are multiple angles to watch here.  For instance, the concerns expressed recently by some investors about the mixed-use Boston property that attracted 27 bidders and might close at a “crazy” 6% cap rate.

Why the concern? That cap rate, indicating a valuation far higher than typical for the current point in the real estate cycle (even for Boston), reflects the current shortage of high quality properties combined with a lot of capital on the sidelines. This kind of activity raises fears of a liquidity bubble, even in these tough times, as investors pay up to win what few good deals are available.

That could be a strategy that helps Schwarzenegger shrink the state’s debt woes by more than they would typically recover from the assets.

Yes, the excitement continues!

Norwegian fund putting $16 billion into socially-responsible real estate

The juggernaut Norwegian Global Pension Fund has just announced that it intends to significantly expand its real estate holdings globally.

According to the report in Responsible Investor, “Environmental, social and governance (ESG) factors including energy efficiency and water consumption are to be key planks“ within the criteria for new property investments.

The $16 billion investment amount represents 5% of the fund’s overall value and its manager, Norges Bank Investment Management (NBIM), indicates that the fund will need a few years to actually invest in ESG-screened real estate to achieve that level, as the allocation comes from portfolio shift created by cutting the fund’s bond portfolio.

How will they actually invest responsibly?

This is interesting, as there is no real consensus about reporting standards and measurements that constitute responsible investing in the institutional real estate field (see our previous posts and papers about Metrics for Responsible Property Investing, for more details).

NBIM will be required by the government to produce an annual report of the portfolio, including an “assessment of how it conforms to responsible management and the exercise of ownership rights. The bank will be allowed to hire external managers and outsource operational functions, with returns benchmarked against a customised version of the Investment Property Databank’s Global Property Benchmark.”

Overall, we are noticing increasing interest by foreign investors in US markets, as they believe that property values have nearly bottomed out. That, plus the growing requirement for green and socially-responsible properties can possibly spur a near to mid-term shortage in green real estate, even as property markets generally are expected to be in a slow recovery.

As we have seen in previous cycles, lots of capital seeking an asset in short supply can always create some interesting market action. From my point of view, the Norwegian Global Pension Fund is not alone in the direction they are taking. Expect to hear more on this point in the near future, as others get in on the action.

LIIF green fund launches and Bond Co’s gets pulled

Two green funds have made the news recently, due to movements in opposite directions.

The Low Income Investment Fund announced a $50 million green community fund, to fund green buildings in underserved communities over the next three years. Per their press info, the funds will be used to invest in LEED certified building development, transit oriented development (TOD) projects and greener child care centers in underserved communities across California and the New York area.

The Bond Companies and Abraham Group, on the other hand, seemed to have pulled the plug on their planned $350 million fund, which would have targeted green real estate opportunities. This comes per Real Estate Alert (no link, subscription based only).

The fund originally focused on developing and redeveloping urban market properties, but switched gears to repositioning existing buildings when the market downturn worsened. With a return goal of 13.5%, it is fair to say that equity return expectations have shifted significantly upwards since the fund was announced. That, plus the overall investor pullback from real estate could make it tough to achieve the original fund-raising targets.

In our view, this shouldn’t be seen as any negative comment against green funds generally.  The shift in real estate valuation and the capital markets downturn have stalled any vehicle that is development and/or sub-20% targeted return.

Expect to see a similar fate hit other green funds announced over the past 24 months. It’s all part of the economy and current real estate cycle.

The upside (if you can call it that) can be seen in green funds, which are announced right about now: the market is widely expected to be at or near bottom by mid-2010, and so those vehicles will be in a better position to purchase real estate more cheaply and, other factors being acceptable, generate the kinds of returns investors expect. Having said that, it is our view that it will be quite a while before new development  returns to the forefront of anyone’s focus.

And that, of course, keeps things very interesting for the retrofitting of existing buildings.

German funds step up sustainability screening for decision making

If you only read about US real estate investors, you might have the opinion that the real estate community is still undecided on the topic of embracing green building.

One stack of articles will quote investors talking up their green building programs.

In an equally thick stack of quotes, they complain about green building or energy efficiency costs.

In Germany, however, investors are more outspoken — favoring increased green and energy efficiency screening and investment criteria.

According to Germany’s Handelsblatt, European real estate investors are quoted as increasing their screening procedures and criteria for green buildings and energy efficiency. Per the Handelsblatt (our translation):

German open-end real estate funds are increasingly applying social and environmental criteria to their investment decision making. These criteria are also playing a growing role in portfolio management procedures.

Five funds are quoted as discussing their use of green and energy efficient criteria within their investment decision making: Pramerica, UBS, Union Investment Real Estate, Axa Real Estate and Commerz Real.

What are the funds reported activities?

• Union Real Estate utilizes a sustainability screen at acquisition. Existing buildings which do not meet their minimum energy efficiency criteria are rejected.
• UBS uses different checklists for suppliers, tenants, project acquisition, leases and building performance to monitor and enforce sustainability standards.
• Pramerica Real Estate’s investment policy within its TMW World Funds has been adjusted so that sustainability screening is conducted for all new investments as well as on the existing portfolio. Due to the fact that there really aren’t enough green buildings in existence for investment, they also check non-green investments at acquisition to make sure that they can be greened once they are in ownership.
• Axa Real Estate had its own sustainability ratings system developed and is currently testing its portfolio.
• Commerz Real reports that sustainability criteria has an increasing influence on investment decisions, since they notice that more tenants desire renting within green buildings.

While you might encounter US investors without a firm sustainability policy, it appears that if you wish to do business with German investors, you had better have your (or their) green investment checklist ready.

This is particularly interesting because several of these funds have had successful capital raises. With US real estate (and the dollar) getting cheaper, it will be interesting to see what happens when these foreign investors start looking to the US for good deals — with their sustainability criteria in hand.

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$1 billion in retrofit financing from Community Preservation Corporation

People always ask ‘where’s the beef’? when it comes to green finance.

Of course, they’re asking who’s making money available to develop or retrofit buildings to sustainable standards.

You should pay attention to the recent announcement from the Community Preservation Corporation (CPC), to bring $1 billion in energy efficiency retrofit financing to multifamily property owners in New York. This should provide a great energy efficiency financing model for others to duplicate.

The newly formed CPC Green Initiative aims to be an industry pacesetter by proving that seemingly disparate public and private entities can foster new and creative green finance solutions. According to Michael Lappin, CPC President:

“We anticipate financing retrofits for up to 15,000 apartments over the next few years. But to change the urban landscape we will also need to adjust the financing landscape.”

This program is notable because it includes participation by the great range of potential sustainable finance partners — an affordable housing lender, a GSE, pension funds, private lenders and utility companies.

Key financing components:

• $150MM in construction funds will be provided by the New York Building Revolving Fund for properties needing extensive renovation. That fund is backed by proceeds from Deutsche Bank, HSBC and other lenders.
• $300MM will come from New York pension funds.
• Freddie Mac will fund permanent loans for buildings not requiring the above construction loans.
• Freddie Mac has also committed to buy $500 million of loans from this program.

By directly incorporating efficiency retrofits into the loan process as well as requiring ongoing monitoring regimes through the loan life-cycle, we feel the CPC and its funding partners are taking the long-term holistic perspective that we believe is essential.

With a sizable partners including Freddie Mac, Deutsche Bank and the NY State Pension Fund, the CPC will need to fill a role that we find essential – being a strategic hub were investors and key stakeholders can find expertise and guidance.

This kind of pooled investment and lending commitment that relies on multiple layers of funding solutions is one that we are seeing on current projects. We think these kinds of well-designed and sufficiently capitalized partnerships will compliment local government funding.

We’re sure that we’ll see more structures like the CPC Green Initiative emerging on the market. Let us know if you are aware of any similar programs for commercial properties in your area.

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