ESG Settles Into the Multifamily Industry
Renters and capital providers are increasingly focusing on environmental, social and governance issues.
Major multifamily developers and property managers have already factored environmental, social and governance considerations into their plans and projects. ESG can impact financing and insurance costs, as well as how regulators, analysts, prospective tenants and recruits view their firms. It rarely determines which communities get financed or insured at this point, real estate consultancy RCLCO managing director Eric Willett says, but it is factoring into projects where climate risk and resilience are a concern. Take coastal developments, for example.
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“The focus is likely to grow over the next several years, especially as larger capital providers follow-through on their ESG commitments across downstream investments,” he predicted.
Is ESG on your radar yet? Here’s why it should be top of mind for every developer and manager.
ESG-Minded Residents
“The most forward-thinking companies are looking at opportunities to do more than just mitigate risk,” Willet declared. “Rather, ESG can be a way to create value for the full range of stakeholders: capital, community, tenants, and employees.”
Consumer trend research shows ESG’s importance to the industry, observed Alison Johnson, associate vice president of program strategy with the National Multifamily Housing Council.
“We expect multifamily companies will continue to enact policies and practices that align with ESG concepts,” Johnson noted. “A 2019 Accenture report indicates that 53 percent of consumers will stop doing business with a company because of its actions or inactions on social issues, and a 2021 NielsenIQ global health & wellness survey reported that 67 percent of global consumers say that environmental health and how their choices impact the planet is important to them.”
These trends are driven by Millennials and Gen Z, which together comprise nearly half of the U.S. workforce, Johnson points out. “Companies that ignore consumer and employee expectations do so at the risk of reputational and competitive performance,” she warned.
Plants contribute positively to the indoor air quality at The Conservatory at Cirrus and Cascade by Lendlease. Photo courtesy of LendLease
Environmental Considerations
The E facet of ESG isn’t new for multifamily firms, and includes energy efficiency, waste management and water conservation, much of it dictated by code. What’s new is heightened public pressure and new opportunities.
“Every multifamily development we build is at least LEED Gold-certified and obtains Fitwel and ENERGY STAR certifications,” shared Sara Neff, head of sustainability for Lendlease Americas.
While certification processes can be rigorous, there are other ways to be sustainability-minded in the eyes of prospective employees and tenants, she says. “For starters, I would recommend contacting your utility company [for] free utility programs owners can take advantage of,” she said. “We also recommend starting on the low hanging fruit retrofits, such as adding LED lighting, upgrading your boiler and irrigation system, and switching to bi-level lighting in your stairwells. These smaller projects can be undertaken while implementing larger, more impactful measures.”
JLL Managing Director Lela Cirjakovic, managing director of real estate and investment management firm JLL observed: “What started as ‘check the box’ sustainability has pivoted to an intentional commitment to changing the built environment, not just because it is required but because it is the right thing to do,” observed.
It’s also where the market is moving.
With many states and cities banning gas lines to new buildings, there are also opportunities to equip each unit with wellness-friendly induction cooktops and parking facilities with charging stations for tenants’ electric vehicles.
“The tech is definitely ready for tenant garages” said Joel Rosenberg, special projects manager at Rewiring America.
He estimates each charger costing $1,000 per unit to buy and install but suggests there may be government incentives available for communities. With a growing percentage of the population opting for electric vehicles–including a 60 percent increase in the first three months of 2022, according to Car and Driver, convenient charging for tenants becomes an ESG-friendly selling point for a community.
“Health and sustainability are two sides of the same coin. The same qualities that make for green multi-family buildings are also healthier for tenants,” noted Center for Active Design’s president Joanna Frank. “For example, large windows and south-facing skylights in units and common spaces save energy by increasing access to daylight and reducing the use of lights, while also enhancing the mental health of those inside the building. Additionally, integrating bike parking can reduce reliance on cars, cutting greenhouse gas emissions and promoting physical activity.”
CfAD created and runs the popular Fitwel certification.
Social Considerations
The S in ESG covers multiple facets, including tenant health and financial privacy, staffing and training policies, supply chain and community relations. Human resource practices are key, Frank says: “Policies such as paid sick leave can benefit residents because it reduces the risk of on-site employees feeling like they have to go into work even when sick.”
Frank also advocates for optimum communications transparency, whether it’s sharing details on maintenance work or indoor air quality test results.
One area of particular growth for tenants is wellness, particularly since the pandemic. “Covid-19 shifted healthy buildings from a ‘nice to have’ to a ‘need to have.’ Investments are no longer seen as wise but non-negotiable,” said Frank.
The wellness approach pays off for communities, Frank reports: “As found in our recent Investor Survey, 87 percent of respondents experienced increased demand for healthy buildings.”
“Health and Wellness is a focus for all renter cohorts,” JLL’s Cirjakovic said. “Services such as virtual fitness classes, personalized virtual fitness instruction, access to health information and social engagement all play an important role in building community.”
There is also a greater focus on outdoor living, Neff observed. LendLease’s communities have added popular elements like rooftop farms and beehives for local honey.
Governance Considerations
“Diversity, equity, and inclusion is of growing importance for multifamily organizations and most organizations are considering diversity at all levels of the organization: from C-Suite to on-site staff,” Willett remarked.
“Diversity allows for greater thought leadership, understanding and ultimately better business results,” Cirjakovic noted. “A firm with a diverse leadership team will attract diverse recruits who can, in turn, attract diverse tenants reflecting their communities.”
This is crucial as Millennials and Gen Z are also educated, ethnically diverse and inclusion-focused.
“Market preferences, the increasing cost-effectiveness of environmental investments, pressure from capital partners and insurers, and regulatory pressures are all pushing the industry towards more ESG adoption,” RCLCO’s Willett shares.
What does this mean for your community?
It means that ESG can be healthy for your staff, tenants and bottom line with this caveat: “There is still a lot of open space in the ESG-framework for multifamily businesses and industry leadership is necessary to ensuring that whatever fills in that space relates to how multifamily business operate and what they can meaningfully influence.” concluded NMHC’s Johnson.
Jamie Gold, CKD, CAPS, MCCWC is a Forbes.com contributor, wellness design consultant and award-winning author of Wellness by Design (Tiller Press, 2020).
