New Poll: How much time do you spend on green finance research and learning?

 

Developing expertise in an emerging niche requires a lot of research time

When I meet clients, the conversation inevitably turns to whether and how they’re applying  a green business case method to  their portfolio. We trade stories about how much time we spend gathering, digesting and sharing insights from other emerging research. Of course, we can never cover everything. So that keeps me curious about researching the blanks between their experiences and the areas that I’m familiar with. In those moments, I don’t think about the time involved, since I am always energized by the cool new things I’ll learn in the process.

I know there are thousands of you doing the exact same thing, which made me curious:

How much time do you spend on learning and staying current on developments in the green and energy efficiency finance space?

Green and energy efficiency finance are so much a part of what I do that I rarely think about all the tasks and time associated with analyzing and synthesizing new data to make sense of the key trends.

There’s the online searching, filtering, collating, studying, annotating, validating and archiving. Then there are the social interactions, like the tweets, LinkedIn updates, email forwards, and group chats with professionals representing particular perspectives. Add to that the face-time for building relationships with key contacts in sub-niches of particular interest. That’s where the conference travel, presentations, speaking and lots of handshaking come in. Oh, and don’t forget about the webinars…

Wouldn’t you like to get a broad picture, too, of how much time others spend building up their green finance know-how?

Please vote in this LinkedIn poll

I’m only keeping this open for a few days. So please share with colleagues and ask them to vote, too.

You can post any other questions and comments about this below or directly on the LinkedIn poll page if you like. I am excited about what we will all learn from this!

Can energy cost increases transform the multifamily business model?

 

@LEEDEBOM tweeted a link to the DB Americas Foundation study on the benefits of retrofitting multifamily properties, which is now on my (fluid) list of 2012 green multifamily milestones. One of the first reasons to read it is to take in the eyebrow-raising update on how hard middle and low-income renters’ wallets have been hit by energy cost increases in recent years:

According to the U.S. Department of Housing and Urban Development (HUD), 88% of households in multifamily buildings are renters and have a nationwide median household income that is approximately half that of homeowners. Energy costs in low-efficiency multifamily housing puts a large financial strain on these households. HUD found that while average rents in multifamily housing increased by 7.5% from 2001 to 2009, energy costs for these renters increased by nearly 23%.

Ouch! If you carry HUD’s growth rate through 2012, renters are paying a 30.5% increase in energy costs over 2001 levels. And they have paid those increases over years when unemployment increased dramatically.

How will multifamily owners address tenants’ energy cost increases?

Those terrible stats highlight a challenge for the multifamily business model and represent a great design opportunity at the same time. To begin examining it, we want to examine whether and how multifamily investors might adapt their business model in the coming years. Right now, well-located apartment assets trade in larger markets at ~5% cap rates, with future returns depending on steady annual rent increases. Current conventional wisdom says that renters energy cost increases are not an Owner’s problem due to split incentives — since many renters apartments might be individually metered, Owners are “disincentivized” from investing in retrofits that might reduce tenants’ unit energy costs, because the owners would not be able to recoup their investment through the savings to the tenants. But is that the only way to understand these issues?

It always helps to start with asking a few ‘naive’ questions, like:

Can multifamily investors earn the returns they expect, if tenants’ utilities costs hurt their ability to pay those rent increases? Do some Owners believe that tenants’ incomes will start to grow at higher rates again — fast enough to catch up with energy costs? That seems hard to believe. And the DB report makes it clear that shrinking housing affordability means that new construction won’t be a viable option for this, either.

Multifamily lenders are in the same boat

Another milestone-worthy mention goes for stretching the multifamily green financing conversation. The paper goes beyond reporting ‘before’ and ‘after’ research metrics on energy, employment, human health and property economics by examining that data for projected benefits that lenders can underwrite. This is particularly good news as the multifamily sector currently lags the commercial building space, when it comes to the developing infrastructure to support more energy efficiency finance.

But the report’s timing, right about the same time as Fannie Mae kicks off their Green Refinance Plus loans, is also an important consideration. The data shows that energy cost increases has weakened renters’ ability to pay rent increases. No matter the lenders’ stance on including energy efficiency within underwriting future engagements, they already have a serious energy cost problem within their mortgage assets. So, Lenders are being engaged about the benefits of energy efficiency retrofits at a point in time when they will have to choose to actively do something about energy cost issues or actively do nothing and when another powerful financier is in the market offering borrowers a product designed to address these issues.

I’ll follow this story with these questions in mind:

How will Lenders address these issues without energy efficiency underwriting approaches? Do they plan to simply cut their LTV’s to lower energy risk in their portfolios?

For now, it is good to see that the authors positioned Lender underwriting solidly within the study’s umbrella of issues. We’ll have to wait for the next episodes in their subsequent work to learn how they engage owners and lenders further about incorporating energy efficiency finance opportunities.

Owners and Tenants: “We decide based on the numbers, except when…”

 

Let’s start with a quiz…

Answer each statement below with ‘true’ or ‘false’:

#1: When real estate Owners and Tenants approve green building and energy efficiency investments, they base their decisions strictly on the economics of the proposed measure.

#2: People always do what they say.

Simon Sinek says…

Now check out Simon Sinek’s TedTalk. He calls it How Great Leaders Inspire Action. I call it “why people buy [what you're selling]“.

Spoiler alert: Simon contradicts conventional wisdom about how property owners decide on energy efficiency or green building investments. As he explains using his ‘golden circle’, people don’t buy what you’re selling. They buy from you because they agree with the ‘why ‘ driving your product or service — “the reason your company exists”.  And he advises companies to focus on the smaller percentage of customers who agree with the ‘why’ behind their offerings.

Applying that message to the energy efficiency and green building sectors, you might translate that to mean that paybacks and return on investment (ROI) thresholds are the ‘what‘ that most companies talk to Owners about, but not the ‘why‘ driving their existence.

Simon’s advice presents a fascinating conundrum for green building and energy efficiency service providers. Many of us work in these sectors because we are passionate about improving building impacts on the environment and society. Yet, Owners and Tenants have expressed great concern about ‘touchy, feely environmentalism’ leading to poor financial decisions. So many of us now include lots of financial metrics in our conversations with Owners and Tenants, to hopefully make us seem more like the kinds of professionals with whom they will entrust their business.

But, focusing on financial metrics hasn’t addressed all of the issues with how Owners and Tenants make green investment decisions. We hear about Owners and Tenants who refuse to invest in measures that clearly met their financial criteria. We also know that they do invest in building projects, which cannot demonstrate directly quantifiable financial results. That is why I spend just as much time studying the influence of perceptions and expectations on green investment decisions as I do working on the technical aspects of designing green financial products and services.

Subjectivity in financial decisions is often seen, but not heard

A leasing colleague and I talked about how Simon’s message plays out in green investment decisions over lunch a few days ago. Both of us have had lots of experience with intangible factors influencing Owner and Tenant financial decision making.

Lobby renovations are a perfect example. It is impossible to quantify the exact financial benefits from investing in a new lobby. No one can predict an ROI on the marble and new plant costs. Yet, Owners and Lenders fund this kind of work without batting an eye. They know the lobby’s appearance will affect Broker and Tenant perceptions about the building’s quality. Their (subjective) experience tells them that the uncertain financial results from this investment is a better risk than the potential negative impact on the property’s marketability, and final value, if they did nothing.

Similarly, corporate tenants might lease green space in a building that they believe best reflects their company brand.

My leasing colleague and I agreed that Simon’s message could explain a client’s stated focus on ‘the numbers’ as well as unspoken ‘why’s‘ they wish to satisfy in order to spend money on green building strategies. In my qualitative research on retrofit decision making, Owners told me many times that they feel more positively about potential projects when they hear that other Owners they know have done similar work and achieved the intended results. Making decisions according to the perceived opinions and pressures of our social circle, or social proof, is as much a force in complex green building decisions as it is in our mundane choices about what we’ll eat for dinner. Social proof can make us publicly cite financial metrics as being the only valid criteria for green investment decisions and then keep us quiet as other qualitative factors influence our final decisions.

Social proof is just one example of the many kinds of qualitative influences on financial decisions that I observed in my research. There are many others that I can cover in future posts.

What do you think?

So, if we know that Owners and Tenants approve investments in green building and energy efficiency, at least in part, based on qualitative criteria, what can we do differently?

That question brings us back to Simon Sinek. I’ll let him explain how and why people make buying decisions, since he does it so well. Plus, his points about how companies should think and act differently in light of all this could be icing on the cake. Tell me what you think about his point of view:

• Have you ever had to deal with qualitative factors influencing and Owner’s or Tenant’s capital decision? How did you handle the situation?

• Do you think Simon’s message is applicable to energy efficiency or green building capital decisions?

Please share your thoughts about this. Feel free to comment on it here and share this with your network.

114 million ways the AI is helping green building

 

“What’s the use of investing in a green building if you won’t get the benefit of any added value from the green features?”

That question presumes two things: 1) that green features always cost more, which is not true and a topic for another day, and 2) that the market does not accurately differentiate the financial benefits that green buildings add to the owner’s bottom line. At the present time, this is very true.

I don’t know anyone who hasn’t pointed out how hard it is for investments in green building and energy efficiency retrofits to scale up without the appraisal community providing that crucial feedback loop — property valuations that consider green strategies in place. Without this, banks and other capital providers have a hard time deciding how (much) to lend on and invest in sustainably built real estate.  That perpetuates the status quo — wasting resources, capital not flowing towards green real estate and continued community decline.

Here’s a first step towards addressing that problem on the residential side with potentially huge impact. The Appraisal Institute has just released a Residential Green and Energy Efficient Addendum, to help structure the way that appraisers can consider many typical green and energy efficiency features within their valuation of residential properties. While this is probably a first step in the AI addressing green residential valuation issues, when you think about the fact that we have 114 million residential structures in the US, this “little” form can help the trillions of dollars of US housing and mortgage market investors actually see the impact of their decisions (or non-decisions) about energy efficiency and green design features.

I know that similar efforts have been underway for commercial real estate valuation, too, for quite some time. We’ll keep sharing the word on that, but in the meantime, let’s appreciate the progress the AI has made with this closely linked milestone.

P.S.–> Go to the EIA’s Residential Energy Use Explained (the source for today’s image) for good download on energy use in the residential sector. 114 M residential structure estimate taken from 2009 RECS data tables.

What’s the right way to grow energy efficiency finance?

 

In the last issue of Pacesetter, I talked about how we need to identify the right underwriting behaviors that need to accompany our evaluation of green properties.  Pacesetter Nancy Anderson, Executive Director of the Sallan Foundation, replied with a link to a panel session she’d moderated that focused on the same issue, but from a variety of perspectives.

Called Reimagining the Metropolis — No Joke, the session featured three panelists with different areas of energy efficiency finance expertise sharing their perspective on the approaches they saw as being critical for growing a liquid market for energy efficiency financial products and services.

Which idea will have the most impact?

The three big ideas boiled down to:

More data and best practices for lenders - Sam Marks, from Deutsche Bank Americas Foundation, talked about how their Living Cities project was in the process of studying and aggregating  benchmarking data on housing energy efficiency performance. That benchmarking data, should cover 12,000 multifamily units. It will eventually identify best practices for lenders.

More data, particularly for the multifamily market is desperately needed. I have to add, though, that any such project should ultimately focus on satisfying the needs of appraisers, since any regulated financial institution ultimately relies on an appraisal in order to estimate how much they will lend on the property.

Teach lenders how to incorporate energy efficiency within underwriting - The Community Preservation Corporation’s Sadie McKeown showed how underwriting for energy efficiency finance is not as hard as it seems, plus pointed how how scarce incentives really are. Their approach included training their own staff in the benchmarking process.

Both of these comments are very close to what we cover in our Competitive Edge Green Finance Workshops, where we teach how to develop a green building business case. I also think that, given the level of  inefficiency “trapped” in so many of our buildings, the upside in energy efficiency is actually in retrofitting the building and obtaining better performance and higher value, as opposed to cashing in incentives.

Tougher regulations - Attorney Lawrence Schnapf talked about a pathway of tougher policy and regulation, such as tougher building codes and ordinances, which will simply force investors and financiers to deal with lower energy assets, “like it or not”.

This scenario has already been presumed by so many green building advocates, that you might be tempted to skip it, but don’t. It’s still significant because you cannot simply assume one particular market action in isolation. My investment and lending experience has shown me that most surprises come in two’s or three’s. That is, you have to be able to think about the impact of tougher building energy regulations happening at the same time as other tough scenarios, such as a long-term lack of credit and/or even greater water shortages.

Or, all of the above

Actually, the above approaches should not be viewed as an “either / or” type of choice. Based upon our view of the market, all of the above will have to be interacting together for a sufficient duration, in order for us to see a liquid, fairly-priced market for energy efficiency financial products supporting U.S. real estate.

Your thoughts?

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