As U.S. apartment REITs play sweetheart to the investment world, sustainability has officially joined the party with its own benchmarking for apartment portfolios. The Global Real Estate Sustainability Benchmark (GRESB, now a sister organization with the entity that certifies LEED buildings1) is now used by institutional investors to assess sustainability policies of real estate portfolios. Here are 7 things you must know about GRESB.
The results are in(teresting)
The 2015 GRESB survey results include data from existing buildings, in a field of over 700 real estate portfolios, providing guidance on their sustainability performance. Among the highlights: greater numbers of building owners are implementing comprehensive environmental, social and corporate governance (ESG) programs. ESG is also a catchall term for socially responsible investing.
Most of those landlords have recently shifted their focus to ESG programs, and of this sampling, the majority have achieved GRESB Green Star status for the first time.
Other trends: the growth of green leases among participants (60 percent of portfolios especially office and retail, include some form of green clause in their standard lease contract) and greater attention on the wellbeing of building occupants (employee health and safety checks were up by 11 percent year-over-year and nearly all participants in the GRESB report have specific employee policies related to health and safety). The majority (88 percent) actively monitors specific aspects of employee health, safety and wellbeing .
A green lease—including simple things like setting temperature targets in a fashion that provides sustainable cost savings without negatively impacting building performance or occupant comfort—delivers benefits to both resident and landlord. It’s a simple way to reduce utility consumption and save money, support sustainability, and demonstrate leadership at your communities.
Investors seek it
“Institutional investors seek ESG portfolios when investing in apartments,” according to those at a recent CBRE event in Asia.
Institutional investors seek ESG performance credentials because they believe it elevates properties’ long-term value. Recent research has found a correlation between the integration of ESG and stock market performance, lower cost of capital, and better risk-adjusted returns for investors.
Lenders value it
Apartment properties not acquired by private equity, generally finance through a mortgage lender. Lenders believe that ESG reduces its exposure to borrowers unable to repay their mortgage.
Here’s how it works. To mitigate risk, lenders want properties to generate steady, positive cash flow over the term of the loan. As we all know too well, this means traversing economic fluctuations, market competition, and aging product.
A new study from the University of Arizona mapped the relationship between ESG properties and commercial mortgage default risk.
They found that ENERGY STAR buildings have a lower likelihood of loan default when compared to non-ENERGY STAR buildings. Where the collateral is LEED-certified, default risk is significantly lower than non-LEED-rated buildings. This and other research is one reason Fannie Mae gives a 10-basis-point discount on ENERGY STAR and LEED properties.
It pencils operationally
Capital is important, but what can one more line of record keeping possibly do to elevate a property’s cash flow, asset value or performance? When it comes to tracking utility use, the answer is, a lot.
Sustainability has long been the talk and it’s not hard to understand the moral correlation to being smart about our resources. The challenge remains: business has had a harder time distilling sustainability into a monetized return.
At the core, portfolios of all types must align with regulations and benchmarking guidelines in order to satisfy regulators, and attract lenders and stakeholders. But even beyond compliance, you can’t manage what you don’t measure.
Measuring may be the first step in controlling these costs as it closes the control gap between resident consumption and the landlord’s financial culpability.
Residents who pay their own utilities are far more likely to conserve, and generally consume 21 percent less water, and 32 percent less electricity, on average.
It protects your equity value
Non-ESG or “brown” buildings are now penalized by the National Appraisal Foundation. The volatility of energy and water costs, consumption and green house legislation are just a few of the stated risks specified in the Appraisal Foundation’s Practices Guide published in June. Such conditions are not hedged by ESG performance rated properties, at a cost to owners when assessing the value and risk of sustainable practices on their properties. The final effect is a lower-valued property.
GRESB: a show of progress
The U.S. Green Buildings Council (USGBC), a private organization based in Washington, D.C., most known for its LEED certification (Leadership in Energy and Environmental Design) for new construction, is driving the GRESB certification for existing buildings.
Owners report their properties’ building data on an annual basis. One thing to remember: there is no difference to your overall GRESB score whether you include a lot of data on a few buildings or minimal data on many buildings. Scores focus on the amount of overall data provided.
Half of your total score is derived from stakeholder engagement and performance. Any stakeholder engagement (that is, by residents, investors, or community) or key performance indicators (such as energy and water consumption, GHG emissions and waste) data that you can provide will lift your score. The other half of total scoring is based on management, policy and disclosure, risk and opportunities, monitoring and building certification.
Be precise. Your data will be validated and checked for long-term consistency. If you are already reporting through the EPA’s ENERGY STAR Portfolio Manager, the hard part is done.
Don’t set blue-sky goals. The policy that you launch and record with GRESB is binding, now and forever. You will be expected to provide verifiable data showing progress against the goals you have established.
How it really works
Being green doesn’t necessarily mean that you own the most efficient buildings. You just need to demonstrate improvement going forward. It’s never too early. Deadline for the next GRESB survey submissions is June 30, 2016. If you are looking to participate, now is a good time to start planning for next year’s submission.
- Joint Center for Housing Studies of Harvard University, “America’s Rental Housing” study, December 2013.