When BlackRock CEO Larry Fink called climate change an “existential crisis” earlier this year in an open letter to executives, it was clear that the investment industry was serious about energy efficiency.
For the past 12 months, the focus has been on environmental, social and governance issues, also known as ESG, but not only is investment capital prioritizing sustainability. Apartment tenants prefer environmentally responsible housing. It is a combination that has not only stimulated but also encouraged owners and developers to reduce energy consumption.
Investor in affordable housing Avanath Capital Management is not new to ESG. The firm has had an internal platform since its inception. “We are always looking for ways to optimize energy use and implement sustainable strategies throughout our portfolio,” says John Williams, President and CTO of Avanath Capital Management. “Our goal is to reduce our carbon emissions and environmental impact through proven strategies that we believe will benefit our investors. Our goal is also to provide reliable reporting on progress and set benchmarks for others in the industry. ”
Developer The Procopio Companies also focused on sustainability. The firm provides environmental certification, whether one of the credentials of LEED – which CEO Mike Procopio calls the gold standard – is Fitwell or one of the many other accreditations available to developers for most of its new development projects. The specific certification that a company plans to pursue is based on the location and use of the facility, but the investment strategy also plays a role.
“We are looking at our exit plan. If we think that this is something that will be bought institutionally, then we look at these goals of the ESG, ”says Procapio. “Will the building be purchased by a fund that has a mandate to purchase LEED Silver real estate or higher? Or will it be bought by a fund that uses only zero energy? These things are becoming more common, so it’s an analysis of not only what’s important to us as a developer, but also what’s important to our customers. ”
Cabot, Cabot & Forbes, another market rate developer, complies with local and federal regulations regarding the sustainability of new buildings, which can be a challenge because there is no consensus. “Today the requirements are much stricter than 5-10 years ago, whether you like it or not, you achieve these goals. Every project is different because of local and state building codes, ”explains John Sullivan, EVP at Cabot, Cabot & Forbes.
Technology is playing a major role in the race to reduce energy consumption in apartment buildings. Tools are on the whole map, from built-in features such as LED lighting, to software that helps manage energy use in the portfolio.
Avanath Capital has patented software that uses Amplify, the firm’s ESG platform, to manage. “We’ve created a robust dashboard that can analyze our energy consumption data using multiple KPIs specifically related to ESG,” Williams says. “We’ve also built in internal technologies such as programmable digital thermostats and motion detection systems that optimize energy consumption.”
Avanath also uses property-level energy tracking software to evaluate buildings in real time. This technology is installed at all facilities in the company’s portfolio. “This includes mobile checks, remote monitoring and reporting,” Williams adds. “In this way, we can determine the effectiveness of real estate transactions on the ground and improve inefficiencies as they relate to our sustainability goals.”
Cabot, Cabot & Forbes also uses technology to track energy consumption. As for new developments, Sullivan is collaborating with consultants who use energy modeling software to better understand the future of the building. These models can predict everything from carbon emissions to energy costs of the facility, allowing developers to make advanced changes to reduce the space occupied before the building even takes a step.
Although energy simulation software and dashboards play an important role in managing consumption, most technologies aimed at reducing production are set at the property level where it has a big impact. LED lighting, for example, is a cost-effective improvement that has a major impact. You do [install LED lights] everywhere, in part because it’s cost-effective, but also in line with the energy standards required in building instructions, ”Sullivan says.
To achieve the high standards of LEED and other industry-leading environmental certificates, Procopio establishes a wide range of energy saving measures in its developments. The toolkit ranges from alternative energy sources to hyper-dense automated parking stackers to reduce the impact of on-site parking, solar photovoltaic systems, green roof technology to reduce the thermal island effect, irrigation and control water use and energy-efficient pipelines. “We use a lot of niche features that many times really only fit into one part of the environmental map, but they have an impact,” Procopio says. “We use a lot of technology in buildings and that’s how we get certificates. It’s thanks to technology. “
For Sullivan technology plays a more important role in the design and construction phases, this includes the selection of sustainable materials, the introduction of responsible techniques and the inclusion of efficient instruments and mechanical functions from day one. “Technology in construction is focused on equipment. That’s what will really shift the dial, ”he says. “Architects and engineers use technology to achieve their goals, and that involves a lot of science.”
Similarly, Avanath uses drones to inspect property during due diligence of new acquisitions. This not only provides a thorough check, but also eliminates business travel, helping to indirectly reduce energy consumption on the project.
Although these technologies help owners and developers achieve their goals, they have a high cost. To justify achieving these goals, in many cases investors are willing to take lower returns. “We have start-up capital partners who are our development partners,” says Procopio. “They have ESG mandates and they understand the development profile and they get into the deal by saying that if these ESG goals are really important to us, then it will affect our return.”
As for sales, Procopio adds that investors also expect low returns. “Funds just have mandates, and they can’t even engage in projects that don’t meet certain criteria. Their entire return profile is based on this type of acquisition, ”he explains.
Although Williams agrees that implementing technology to achieve these goals is costly, he still sees a net positive result. “Investment in technology and sustainability is directly correlated with profitability as a result,” he says. “By introducing more technology, we can optimize efficiency and reduce time loss. Sustainable development functions also help reduce real estate costs such as water costs, utilities, etc. This is good both in terms of investment and in terms of residents. It’s also important from an environmental point of view. “
Demand is also growing. Since the beginning of the pandemic, the ESG conversation has gained momentum and is no longer a choice for developers or owners. “The conversation has intensified over the last 12 months. Two years ago we talked about ESG 5% of the time, and now we talk about it in 95% of cases. It really captured the conversation, ”says Procapio. This is especially true for institutional capital, which this year has consistently announced aggressive commitments and goals to reduce energy.
The tenant profile, especially in the luxury A-space where Procopius plays, also requires green features. “These are the questions we are asked,” he says. “If the developer doesn’t focus on that, they will see a negative impact in their proforma and in their ability to get out of the deal.”
This fusion of trends has cemented the future of clean living and technology as a means to achieve these goals. “We believe that the focus on technology will only grow and we see that other homeowners are also investing in technology. We invested in technology very early on, so during the pandemic we were able to adapt and change so easily, ”says Williams. “We believe the pandemic has forced many operators to adopt more technology.”
While this is good news for the industry, Procopio hopes that future talks on the ESG will be silenced – there is now a zeal for environmental responsibility – and the conversation will include other issues, such as incorporating these features into lower quality buildings or without raising rents. “We’re talking about ESG requirements, but we’re not talking about a balance of accessibility for residents,” he explains. “All these things are feet on one stool. As we increase ESG requirements, we increase costs and increase rents. I think we will come to a balanced view on this. “
Balance is the goal. This was a catalyst for developers to integrate energy reduction features, and technology was the method of execution. More and more owners and developers are realizing the importance of ESG and adopting new policies, and this is having an impact. As Williams says: “We are focusing on sustainability and have been able to demonstrate the impact these strategies can have on real estate performance.” Ultimately, this policy and investment in technology contributes to rising costs – and isn’t that always the goal?