REITWorld Special Report: Sustainability as the New Normal

Green energy sources and environmental initiatives have become essential factors in the growth and operation of REIT portfolios, as many large real estate companies now employ teams dedicated to the development and implementation of sustainable practices.

Sustainability directors are focusing their efforts in a number of different channels, from installation of solar panels and energy saving hardware, to tenant interaction and engagement, to big data analysis that supports the environment and their company’s bottom line.

In discussing renewable energy sources, speakers during a sustainability panel at NAREIT’s recent REITWorld conference agreed that solar was the main avenue for sustainable energy creation. Regardless of building type, each panelist referenced the ample space that exists for solar panels, whether on rooftops or parking facilities.

As REITs continue to increase their solar footprint, some by upwards of 30 percent per year, many REITs are also exploring other sustainable projects, such as energy storage using on-site battery facilities, and developing micro grids similar to the concepts of leading tech innovators Google and Apple.

Helping drive today’s age of technological innovation are Millennials, who see environmental stewardship not as an idealistic concept but as a key underpinning of their lives and careers. In order for companies to attract competitive employees, they must demonstrate their focus on the community and local environment. For many firms, that starts with the physical office location. According to Sara Neff, senior vice president of sustainability at Kilroy Realty Corp., tech firms with young workforces will not even consider office space if it is not LEED Platinum certified.

Going beyond the workplace, Millennials are also looking to live in environmentally responsible housing. Growing trends of urbanization and multi-use communities have dominated recent headlines as analysts try to determine the ideal Millennial experience. Developers have also focused on “green” buildings, as younger renters, many of whom do not own cars, prefer to live in sustainability-oriented apartments.

Many people describe today’s economy as driven by big data, and sustainability teams will benefit from the use of data when analyzing and deploying new projects. In real time, property owners can monitor energy generation and usage. Having this information can be critical, as REITs can use energy data to negotiate lease terms and tenant improvements.

REITs are now focusing on the need to collaborate with tenants in order to take full advantage of green initiatives. According to Daniel Egan, vice president of sustainability & utilities at Vornado Realty Trust, as much as 60 percent of a building’s carbon footprint is determined by the tenants, as they are the end user of electricity and water.

Although energy usage differs greatly across real estate sectors, each of the panelists stressed the importance of developing initiatives that their tenants agree with and that have tangible benefits. As the ultimate consumer of energy in buildings, the onus is on tenants to execute many of the sustainability projects, despite the fact that development and installation often falls on the property owner. Close relationships between tenants and landlords and mutual agreement on sustainability is crucial for successful environmental action.

Over the past 10 years sustainability has moved from a pioneering philosophy to standard practice across the real estate industry. As sustainable projects become more commonplace, it is important to have the right people leading the progress. While sustainability is their primary focus, not to be overlooked is the importance of employing leaders experienced in real estate ownership, development and management. When determining the viability of a sustainable initiative, a deep understanding of the asset is imperative.

In order to grow and develop sustainable initiatives, significant resources are needed. Not only do REITs have to allocate capital to fund environmental projects but having dedicated staff members to focus on sustainability is essential to an initiative’s completion. Louis Schotsky, vice president of investments at Equity Residential, explained that productivity and likelihood of a project’s success fall dramatically when you have one person focusing only half their time on sustainability.

To optimize sustainability initiatives, it is imperative to have team members that can fully commit to analyzing and performing due diligence and working with residents to ensure the success of the initiative. As a result of accomplishing sustainable initiatives, buildings and developments not only reduce their carbon footprint but grow and expand their profitability.

The recent expansion in sustainability among REITs has reached a point where not only do new initiatives benefit the environment but also the bottom line. Described as both a top down and bottom up business strategy, many of the REIT sustainability initiatives have garnered widespread support, from C-suite executives down to property managers and tenants. Energy-saving measures, such as the use of solar panels and electricity storage, have reduced expenses while also providing the framework for long-term carbon footprint reductions.

REITs are willing to deploy significant financial resources and personnel dedicated to sustainability and environmental stewardship, a sign that these initiatives will remain relevant well into the future. However, as Schotsky pointed out, the ultimate goal is to have sustainable practices become ingrained in company culture and become part of everyday business. Going forward, projects will not need a separate sustainability plan, as energy saving and revenue generating practices will be naturally intertwined.