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 !

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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• Photo credit: U.S. Department of Energy, Energy Information Agency

Our (2007-2008) Green Journey - 9 Ways Green Building is Revolutionizing Commercial Real Estate

Happy New Year from Berlin’s Prenzlberg! The former East Germany is a great place to reflect on transformation and my usual year end questions are “how is my life different now than a year ago?”, and “where should I focus my attention in the coming year?”. The Green Journey approach to understanding green real estate finance and investment trends is not much different:

• What changes in real estate and green building are making us talk and act differently now as opposed to a year ago?
  

• What issues will shape what we say and do about green real estate  in 2008

2007 - The Sustainability Revolution

9 Building green is now a requirement, not an option.
At the end of 2006, green building was a futuristic concept - not a critical component of value creation. Now that is over:

• Studies from Davis, Langdon and United Technologies show the cost of building green can be comparable to non-green buildings, making the benefits of green building accessible to every real estate owner.
• We also covered industry pacesetters, such as Digital Realty Trust and GE Real Estate, who are already out of the gate with investment strategies centered on building, acquiring and greening their assets.
• Going green became a cool investment move recommended by mainstream economists by the end of 2007, making it clear that green is also competitive and profitable.

8 Uncontrolled and undisclosed carbon emissions are a legal and economic risk.
Aggressive legal and regulatory action kicked up some dust in 2007, showing that cities and states are regulating Corporate America’s carbon emissions, regardless of the political winds at the federal level. As one fund manager put it, “[carbon emissions regulation] is not a question of if, but when“.

• Real estate investors should check out Post Carbon Cities and pay special attention to the advice being given to municipalities on aligning local zoning and land use policy with sustainability and climate change goals.
• We posted before about the evolving requirement of disclosure of material risks associated with climate change and greenhouse gas emissions to shareholders.

7 Green financial pilot projects make first spflutters
While the credit markets went sideways on us, that didn’t stop some forward thinking groups from taking on the challenge of accelerating capital flows to green real estate. Nothing tangible is out of the gate, yet, but they still deserve our praise and attention.

• We posted about Sustainable Capital’s green residential mortgage backed securities platform, Green Bonds as well as the Clinton Climate Exchange’s $5 billion kick start of the building retrofit finance market. Expect a vigilant birddogging of these initiatives, since increased capital flows to green building is the critical validation needed for further expansion of sustainability.

6 National credit crunch =  Has anybody seen my lender?
Unfortunately, for a lot of the banks, “the beatings will continue until morale improves”. The latest post from The Real Estate Bloggers says it all. The silver lining for green building? Capital markets volatility forced us to hit the ‘pause’ button on business as usual dealmaking. Survival in ‘08 requires excellence at old school fundamentals: operations, tenant retention, and value creation. We posted about whether “subprime was good for green real estate?” with the answer that ‘cash is king’, meaning that green real estate is in a better position to generate more cash flow.

2008 - ‘The [Sustainability] Revolution Will Be Standardized’

5 Institutional Investors: Insufficient green product & at what price?
Constrained Debt has a cousin named Lotta Equity and she has a couple of frustrating problems — there’s not enough green projects out there to buy and no one has figured out how much to pay for it. A colleague forwarded a great article from the San Jose Mercury News, where a RREEF’s Andrew Nelson outlined the dilemmas:

“There just isn’t much green real estate to buy, making it tough to determine the value of green… “All the initial construction was owned and built for governments and you can’t turn around and sell that, so there has been very few - almost no transactions of green buildings,” he said. “When investors think about the business case for green buildings, they want to know: How do they sell? The answer is we don’t know.”

4 The Rise of Sustainable Markets: Know your city’s climate change, resource and energy agenda

With our post on San Jose, we considered cities that use sustainability to compete for talent, investment and to maintain long term viability. They have become sustainability’s cowboys, driving their own resource, energy and climate change policies, since the federal government can not deliver a comprehensive enough solution that preserves their viability. Since real estate has been outed as the big consumer of city resources and energy services and the big contributer to regional carbon output, it is fair to say that investors will have to think about investment markets in terms of resource and energy sustainability in addition to classic real estate fundamentals so that they can remain relevant to their municipal partners. Check out the U.S. Conference of Mayors website where you’ll see the cities strut their stuff on resource, energy and climate change.

3 Real Estate Innovations: Compete using adaptive reuse and explore overlooked construction methods

We posted here about moving beyond simply building brand new LEED-certified buildings. Eeking out profits from existing real estate and focusing on other construction methods must since the cost side of new construction is not expected to decrease ever. Check out these two posts as food for thought:

• Dave Stejkowski, aka The Dirt Attorney, blogged about a compelling Economist story on lifestyle centers. Nothing for me to add here. Read the post and the article for the full picture.
• Howard Liggett posted about ‘The Myths of Modular Housing’ - a lower cost building method long in use in Germany and other countries, but still stigmatized and misunderstood in the United States.

2 LEED & Beyond: We need transparent performance assessment of building performance

We stay abreast of the EU’s moves on greenhouse gas and energy policy to understand the various ways green buildings are being adopted. And we concluded that ‘transparency makes a market’. No particular rating system in and of itself completely informs an investor about the true performance of a green building. In addition to increasing the certification of green buildings, there will have to be a focus on establishing transparent disclosure of the actual performance being achieved by green buildings, to remove the risk of investors and tenants overpaying for substandard green buildings in the coming years.

1 Land use policy is the new civil rights movement.

I was at a recent function where an executive said “Land use is what will change our children’s future”. His position was that we overfocus on individual green projects, forgetting that the greatest impact on a development happens within zoning and land use planning forums, since this is where decisions on use, infrastructure, transit, density, energy and resource use are made. And these decisions determine the quality of life and livelihood of ordinary citizens and businesses for generations. Sustainability as a movement is changing our individual assumptions about fairness, rights and responsibilities at every level of society. Local officials and citizens are now more vocal about the fair allocation and continued provision of resources and energy as a part of their basic rights  — and are becoming increasingly active in shaping land use decisions to defend those interests. Real estate investors are already very familiar with land use and environmental issues in general, but the growing notion of citizens perceiving resources and energy access as part of their moral rights is an additional level of complexity that sustainability brings to the land use planning. Read ULI’s The Ground Floor to keep abreast of the (r)evolution of sustainability within land use policy.

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I think a nine point countdown is enough for a year - plus we can never be sure what else is around the corner. If you have any more burning issues that you think we should be covering, please drop us a line! We would love to hear your thoughts and perhaps share your contributions the rest of the Green Journey crowd.

So much success in in 2008 and we hope for an exciting year in green real estate!

Photo credit: flickr/inky Bob - Compass and Map Mono