Sustainability: a key driver of value creation for real estate owners, investors and operators

September 25, 2023

Sustainable initiatives for real estate — from whole building data collection and energy efficiency to on-site solar — help play a larger role in how building owners and investors operate and improve their portfolios.

The opportunities are real. Reducing greenhouse gas (GHG) emissions and operating expenses can help increase property values, capture tax incentives and open pathways to sustainable investment capital — all undeniable benefits.

The emphasis on sustainable real estate can be driven by several important factors.

  • Compliance with regulatory requirements, such as the SEC’s forthcoming climate disclosure rules and proposed California Senate Bill No. 261 and similar measures already in place in the EU, cities (like New York’s Local Law 97) and other markets around the world.
  • Value creation by attracting tenants at higher rents attributed to greener and healthier buildings.
  • Corporate goals such as decarbonization or net zero.
  • Investor demand for sustainability data.
  • Competitive advantage to attract sustainable investment dollars.

Get ahead on sustainability

30% of CFOs are analyzing how climate change scenarios will impact financial performance

Source: PwC Pulse Survey, August 22, 2023

Taking sustainable actions may seem like a luxury as building owners and investors address any number of post-pandemic challenges like eroding occupancy or lack of industry leading amenities. Yet looking at property through a sustainability lens can be a building owner’s competitive advantage to help deliver value creation.

Even in challenging market conditions, a sustainable perspective for real assets can help provide an edge.

  • Lower operating costs: Improved building ventilation, lighting, electricity usage and design that leads to lower operating costs and positive working environments.
  • Robust brand health: Property owners could benefit from trends that show consumers gravitating towards companies that emphasize sustainability.
  • Increased occupancy rates: By investing in sustainable and energy efficient buildings, real estate owners could help attract new tenants or renew existing ones — both at higher rates — while fostering positive tenant engagement.

To accomplish these goals through environmental, social and governance (ESG) initiatives, real estate owners, operators and investors should develop a strategy that includes tracking sustainability progress and reporting sustainability information.

How can real estate owners develop a sustainability strategy? Start with data

With technology as a powerful tool in the process, companies can generate accurate and complete investor-grade ESG data to ground their business decisions. By leveraging this information, real estate owners have an innovative opportunity to help develop a sustainability strategy that not only benefits the environment but also generates value for investors.

Granular ESG information, subject to proper governance, processes and controls, combined with traditional financial data, can help determine what properties to acquire or how to improve the efficiency of current holdings, leading to higher ROI and increased portfolio values.

Tracking data for the following criteria can help you craft and measure your strategy.

  • Building type, age, location and building systems and their energy efficiency attributes.
  • Technology, enhanced processes, risk and controls procedures for collecting, measuring and managing building sustainability data.
  • Tenant goals, including demands for sustainability transparency and an attractive and healthy working environment for your employees.
  • Voluntary and regulatory reporting requirements.

Additionally, a holistic approach that takes building level operations, portfolio level performance and tenant occupancy into consideration underscores the requirement for a measurable sustainability strategy. By analyzing processes and portfolio level information, building owners, operators and investors can help:

  • Identify ways to decarbonize and reduce emissions.
  • Undertake building upgrades.
  • Transition to renewable energy.
  • Find responsible sourcing strategies.
  • Create sustainable design and wellness opportunities.

Early action on these opportunities may assist in staying ahead of the regulatory curve and meeting corporate sustainability goals.

Looking to drive higher property values and return on investment? It’s called the green premium

A holistic real estate approach to ESG can differentiate your portfolio of real estate or company real assets, and sustainability can be a powerful growth driver. Environmentally conscious development can be attractive to public partners who should meet their own sustainability goals — or invest sustainable capital.

With renewably-outfitted buildings, owners, investors and landlords can better leverage rents and sale prices by factoring in low- or no-cost energy bills. For example, new tenants may pay a premium to lease a building that is optimized for energy efficiency. This green premium for real estate is the extra cost that buyers or renters are willing to pay for properties that are environmentally friendly or sustainable.

Based on the idea that green buildings are more energy-efficient, have lower operating costs and are better for the environment, the green premium can drive value in RE portfolios of any size.

A reduction in energy costs for large portfolios of multifamily, commercial or hospitality properties can result in significant savings. And those tenants — who benefit from healthy housing and lower utility costs — are more likely to renew leases.

How to create value with sustainable solutions for real estate

  • Implement sustainable rehabbing with green financing opportunities and due diligence.
  • Value climate solutions to better position assets in an evolving capital and regulatory environment.
  • Transform processes with a layered approach. For sustainable investing and risk management, sustainable valuation and operations are emerging trends in real estate.
  • Access green capital. Whether public or institutional funds, foreign or domestic investors, some capital is specifically earmarked for sustainable development.

Focus on sustainability could lead to green financing opportunities 

Investors are gravitating toward ESG funds that hold stocks or bonds of companies that meet certain sustainability criteria. Capital markets also offer opportunities to fund sustainability projects.

  1. Demand for sustainable investment products is increasing
  2. RE owners can take advantage of public capital earmarked for sustainable development. Emerging forms of credit include:
  • green bonds
  • green loans
  • sustainability-linked loans (SLL)
  • sustainability-linked bonds (SLB)
  • sustainability bonds
  • social bonds

What can real estate owners, investors and operators be doing now?

Getting started in sustainability for real estate

  1. Be a sustainability opportunist. Increase property value through renewable energy rehabilitation and take advantage of the green premium. Don’t wait for regulation to be the impetus for real estate decarbonization that can produce a return on investment.
  2. Develop a sustainability strategy. A strategy that works should take into consideration all operational and financial moving parts. An experienced team of data analysts and climate scientists with the right tools can move owners and investors through this process, from understanding operations to measuring the financial impact of climate risk on physical asset valuation. And if your strategy needs to be more ambitious, do so in line with global market and regulatory expectations.

  3. Examine data for benefits and address those areas first. Sustainable investing, operations and assessment and valuation are emerging trends in real estate. Address processes by examining ESG strategies for climate impact and ROI and take a layered approach to transformation. Whether you’re a building owner or real estate investor, understanding the areas to address first is crucial to managing your risk profile and staying ahead of the curve.

  4. Adopt a holistic mindset. When working on a sustainability strategy, companies should consider three factors — GHG emissions, health and safety, and social equity, gender and diversity.

An inclusive and global mindset can allow for a better ability to think differently when it comes to sustainable investment strategies and vehicles.

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Randy Hoff

Principal, Financial Markets & Real Estate, PwC US


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