CREF22: ESG, CRE and Green Lending
(l-r: Warren Friend, Luba Kim-Reynolds, Christina Hill, Lisa Brylowski.)
SAN DIEGO — As climate change intensifies, investors, owners and lenders increasingly demand environmental, social and governance reporting, panelists said here at the Mortgage Bankers Association’s 2022 Commercial/Multifamily Finance Convention and Expo.
“The way the world is going is that if you’re an asset owner or a firm raising capital or seeking loans, you need to be attuned to these trends,” said Lisa Brylowski, Global ESG Coordinator and Vice President with Brookfield Asset Management, Toronto. “Figure out what your company is doing on ESG. Because you don’t want to be at an investor meeting and have a ‘deer in the headlights’ moment when people ask you what you are doing on ESG.”
Brylowski noted ESG reporting does not require an army of a thousand. “You just need one C-suite person plus a few operational people throughout the business to execute,” she said. “So get on it and report out. Then lever that to create value by using ESG to find operational savings.”
For example, Brylowski said a LEED-certified building trades at a seven percent sales price premium to a non-energy-efficient building and has 14 percent rent premiums.
Tenants often use LEED certification as a benchmark, Brylowski said. “Increasingly tenants are looking at LEED and its worldwide equivalents and saying ‘I want to be in those buildings rather than other buildings.’ You’re going to see this more and more,” she said. “It’s a trend you can’t ignore.”
Last fall the MBA Research Institute for Housing America released a report, The Impact of Climate Change on Housing and Housing Finance, that underscored the need for the mortgage industry to better address the growing impacts of climate change and prepare for increased reporting to regulators and investors on the quantitative estimates of climate-related risks.
Warren Friend, Founder of Pemaquid Advisors LLC, Darien, Conn., agreed commercial buildings are more valuable if they are green. “People will give you less money for them if they are not green; there is a direct linkage,” he said. “Look at how real estate investment trusts trade. If you want to see true value creation, look at Hannon Armstrong, the first U.S. public company solely dedicated to investments in climate solutions; it trades at nearly 40 times earnings. Look at Boston Properties. For the last five years its CEO, Owen Thomas, has said his No. 1 objective is to be ESG-compliant and green. Boston Properties hit 60 times earnings as a valuation. As you look at your own portfolio, this tells you what the value of that loan or that property is. People are paying for the green value.”
Christina Hill, Head of Americas Asset Management & Global Head of ESG with PGIM Real Estate, Newark, N.J., said she sees opportunity in repositioning less efficient buildings. “That could provide the same opportunity as putting washers and dryers in your multifamily assets or upgrading buildings,” she said. “Think about it as a value add. It might not be adding a glamourous lobby, but you’ll see the same return. We’re seeing that play out now in the capital markets.”
Hill said investors now demand ESG reporting. “In more than 20 years working in real estate, I’ve never seen any trend intensify as quickly and as deeply as this trend has in the past couple of years. Getting ESG data is something the industry is going to have to solve because investors are absolutely demanding it,” she said. “If you go back just five years ago, investors would ask if a company had an ESG policy and if the answer was yes, they would check that box and forget it. We now have investors asking us for detailed kilowatt-per-hour consumption at the asset level across a $25-plus billion portfolio. This is how big and challenging this is going to get.”
Luba Kim-Reynolds, Head of Multifamily Investor Relations and ESG Initiatives with Freddie Mac, McLean, Va., said investors are raising funds for ESG and green initiatives, “but there are not enough green-certified investment opportunities out there,” she said. “So the money is going to go to someone who can tell the story about how they can make an inefficient property more efficient. If you have some kind of goal and targets that you set internally and you can prove those measurements, that’s where you will get the money and that’s where the spread compression will be happening. That’s what we see.”
Sometime in the near future, investors will demand even more ESG information, because it becomes very important to their internal targets to report how efficient and resilient their portfolio is to climate change, Kim-Reynolds said. “So all this is priced into bonds,” she said. “So if not you’re not catching this on the real estate level, it will be in the spread very soon.”