From the CIO
Putting the “Real” in Real Estate
North Berkeley Wealth is committed to diversification in our client portfolios, and one key diversifier is exposure to real estate stocks. They have some characteristics of bonds and some characteristics of stocks in other industries, but usually behave differently than either of those asset types. Real estate is typically resilient during periods of persistent inflation as rental income and property values tend to rise with inflation.
Real estate investments also have a role to play in addressing social and environmental issues. Buildings are durable goods, and building or upgrading their features can have an impact on efforts to reduce emissions – and can pay off financially as well. This quarter’s Impact in Action report discusses the role that investors can play in promoting sustainability in real estate, and provides examples of specific companies and their progress.
-Kate King, CFP®, Chief Investment Officer
Impact in Action
Moving Towards Sustainability in Real Estate
Incorporating environmental and social concerns into investment decisions is intended to push commercial activity toward equity and sustainability, while also improving financial outcomes. In real estate, construction, and subsequent upgrades have historically proceeded based only on what building codes and local regulations required, aiming for the lowest cost.
Building and operating greener buildings that positively impact social equity, health, and environmental stability has been tricky to accomplish. Despite broad acknowledgment that sustainability was an important goal, gaining traction was difficult due to a lack of agreement on what could be done and how to measure the impact. That is rapidly changing today.
Energy & Emissions Reduction
Globally, the construction and operation of buildings
- 30% of global emissions
- 40% of waste
- and consume 12% of our water
The Financial Payoffs
Buildings that can positively address these issues…
- Have higher cash flows based on higher occupancy, longer leases, and premium rents
- Can get better financing with lower interest rates and based on higher valuations
- Have lower operating costs, and less energy price risk
Initiative from Investors
Despite the potential for financial benefits from greener building practices, many real estate owners resist the change. Vert Asset Management has been in dialogue with hundreds of real estate companies to accelerate commitments to measurement and transparency across the real estate industry as a whole. In terms of transitioning to a low-carbon economy, their work is supported by partnership with two different advocacy groups.
GREEN (Global Real Estate Engagement Network) encourages owners to reduce their carbon emissions. In partnership with GREEN, Vert currently has ongoing engagement with 30 of the 60 largest real estate companies on net-zero pathways.
CDP (Carbon Disclosure Project) asks companies to both monitor and disclose material climate metrics. In 2020, Vert led conversations with 42 large real estate companies on disclosure, and 15 of them began reporting for the first time that year.
* The Vert Global Sustainable Real Estate Fund is included in some client portfolios.
Vert’s Sustainability Stories: Going in the Right Direction
Based in San Francisco, Prologis owns warehouse space in urban areas where land is scarce, helping to radically reduce distribution distances. In 2022, Prologis also began providing solar power, generators and EV charging infrastructure, and other logistical services.
Hannon Armstrong Is the first public REIT dedicated to investments in climate solutions. They invest heavily in solar energy, including community, residential and utility-scale installations. They also invest in wind energy and green building and infrastructure.
SF’s Salesforce Tower is owned by the largest office REIT in the world, Boston Properties. Construction was completed on this LEED Platinum building in 2018, and its sustainability features have prevented over 7,000 metric tons of CO2 emissions and saved 7.8 million gallons of water annually.
Empire State Realty owns office space in New York City. Installing double-pane windows and reflective insulation behind radiators at the Empire State Building reduced energy consumption by 38% – the equivalent of taking 20,000 cars off the road. The retrofit cost was recovered in just three years.
Initiative from Regulators
The European trade organization EPRA (European Public Real Estate Association) developed “Best Practice Recommendations” for sustainability reporting, and nearly all European companies report to their standards. In the US in 2017 only 60 of the 100 largest publicly-traded real estate companies reported on at least some sustainability measures; as of 2021 all of them do. The SEC has also recently proposed rules requiring all public companies – including real estate companies – to disclose certain climate risk-related data. These rules are controversial and are not yet in place, but if approved, will accelerate sustainability changes in infrastructure.
This commentary on this website reflects the personal opinions, viewpoints, and analyses of the North Berkeley Wealth Management (“North Berkeley”) employees providing such comments, and should not be regarded as a description of advisory services provided by North Berkeley or performance returns of any North Berkeley client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data, or any recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. North Berkeley manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.