Part 4: Portfolio Owners’ Top Advice on Greening Existing Buildings
How do you get at the benefits of portfolio-wide energy efficiency within a large real estate organization, with multiple management layers and a number of subsidiaries?
In an existing portfolio, how do you prioritize properties for green retrofit? Most importantly, how do you minimize execution risk, and ensure that this transition is profitable?
In Part 4 of our Special Series on the Green Building Finance & Investment Forum – New York, co-sponsored by Galley Eco Capital, portfolio owners discuss the challenges and opportunities of greening their portfolios.
The panel featured Tatiana Eck of AIG Investments, Edward Glickman, of Pennsylviania Real Estate Investment Trust (PREIT), Kevin Kampschroer of the US General Service Administration (GSA), Paul Morris of Cherokee and Stanley Roualdes of Shorenstein Realty Services. The panel was moderated by Paul D’Arelli of Greenberg Traurig LLP.
You need green champions at multiple levels of your organization
Getting to green means structural changes to many aspects of the investment platform, something we’ve discussed before. During this transition, you need strong, committed leadership. If your c-suite isn’t sending out the message that a shift to green is vital to the firm’s success, the effort may not be successful.
A strong sustainability message from leadership helps motivate business partners to follow suit. Shifting your business strategy towards sustainability affects your partners and vendors. According to Tatiana Eck of AIG Investments, if your partners know these changes are coming from the top, they are more likely to cooperate.
Buy-in from other parts of your organization is also crucial. While its necessary for commitment to come from the top, ownership in the green transition moves from the bottom up. For Paul Morris, that means a buy-in to the green strategy by Cherokee’s underwriters and asset managers- the individuals who are responsible for leveraging value and managing risk for the portfolio.
To execute a successful green portfolio strategy, this group must believe that sustainability will improve their development and investment pro-formas, including lowering vacancy rates, operating costs, and lease-up times. These are the folks who have to get the actual results. This means you have to spend the time to educate them about the financial implications of a green investment strategy.
“If underwriters don’t see sustainability as more than just a value-add attribute, if they don’t see it as essential to how they’re doing their own business, than a lot of what we are talking about today will continue to operate up in the ether” - Paul Morris, Cherokee Funds.
Use sustainability strategies to hedge risks to portfolio cash flows
Going green requires a heavy focus on risk reduction. The panel highlighted a variety of risks that their portfolios and organizations face, and how sustainability provides a hedge against them. Risks that can be mitigated by green include:
Market risk: If your tenants decide to go green, and you can’t provide them with the green space they require, they will go to other properties. Your properties will be deemed obsolete.
This is an important concern for Ed Glickman of PREIT, a retail REIT that operates 35 million square feet of retail space in 58 developments. Offering green space to the market means a reduction in tenant turnover and lease-up time, which helps PREIT preserve the net operating income of their properties and their asset values.
Energy price risk: Simply put, the higher your energy efficiency, the lower your portfolio’s exposure to energy price uncertainty.
Even if your portfolio predominantly features net leases, energy efficiency means lower operating costs and common area maintenance charges to your tenants, lowering their total cost of occupancy for your space. In a tough leasing market, this means a leg-up against competitive properties.
Environmental regulation risk: This is a big concern for portfolio owners, who have millions of SF of real estate that might be subject to environmental criteria in the near future. To ensure the future value of their portfolio, they need to get a jump on compliance now, while costs are relatively low and time is on their side. The concern of future regulation is succinctly expressed by Glickman:
“At some point you will need to be certified, you will need to meet some criteria. At that point the whole industry rushes out and wants to comply-and it becomes much more expensive.” Ed Glickman, PREIT.
Reputation risk: If your organization touts itself as a sustainable leader, but doesn’t walk the talk in all your business lines, this could significantly hurt your corporate reputation and your customer goodwill. This is an incredibly important concern for Eck and AIG, which in addition to its real estate activities, provides environmental insurance, and was a member of the Dow Jones Sustainability Index.
Talent risk: Employees want their potential employers to have an environmental agenda, and they see this agenda as part of their personal commitment to sustainability. For Kevin Kampschroer and the GSA, which has 12,000 employees, this is an incredibly important concern, and one that has grown with importance every year since the late 1990s. The GSA’s commitment to green is a great marketing tool for recruiting talent.
Put these successful strategies to work for your portfolio
Throughout the conversation, the panelists provided valuable lessons from their experience with green transitions within their own portfolios. The key take-aways:
Integrated design reduces costs and increases overall asset value: The integrated design process drives down green construction costs and maximizes reductions in energy usage for both new construction and green retrofit. If you don’t utilize it, you are leaving value on the table.
For green retrofits, target the low-hanging fruit first
In a capital-constrained environment, focus on no-cost building performance improvements first. There are a number of ways to increase building operating efficiencies without deploying capital. Educating building staff and tenants on the proper operation of building systems can improve efficiencies with virtually no payback period.
Select qualified partners: There is a perception that green construction and retrofit costs more. In reality, it’s the poor execution of green that costs more.
Make sure that your partners and vendors are educated about green construction and operating strategies. If they don’t have adequate knowledge, you need to replace them. Stanley Roualdes of Shorenstein Realty Services provides a simple method for vetting potential architects and contractors: If they tell you that green will cost more, you are talking to the wrong people. Move on.
You need third party certification AND third party performance evaluations for your assets: Certification of your properties is important- it enhances their value. But if you want to maximize the efficiency of the buildings in your portfolio, you need to conduct regular performance valuations of each building. It’s the only way to ensure that your building systems continue to operate effectively, ensuring that your operating costs are as low possible, and enhancing net operating income. In the long run, performance evaluation should also lower your capital improvement costs.
Take advantage of incentive programs: Incentive dollars are a key source of financing for both your new construction and green retrofit projects; (and an essential part of an integrated finance strategy). Make sure you use them to your advantage. Additionally, don’t take incentive programs for granted, as incentive dollars are sometimes limited and subject to change at any time.
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