Investors looking for opportunities to potentially increase returns by integrating sustainability in real estate investment and management are the focus of Morgan Stanley’s newest Institute for Sustainable Investing report, “Bricks, Mortar and Carbon: How Sustainable Buildings Drive Real Estate Value.”
Key to the report’s findings is the fact that a typical office building that integrates sustainable practices — mainly energy, water and waste savings — could help reduce building expenses by 3 percent to 30 percent, creating $3.5 billion to $34.9 billion of asset value in the top 10 U.S. markets in the process, according to the Morgan Stanley Investment Management team using Building Owners and Managers Association’s (BOMA) experience exchange reports, CBRE market inventory data and Real Capital Analytics market valuations.
“The scale of the opportunity is noteworthy,” said Josh Myerberg, managing director in the Morgan Stanley Real Estate Investing group. “This is a topic that many landlords ignore as individual project sizes tend to be small, but when judged across a portfolio, it can add significantly to the bottom line.”
“We believe this report outlines a notable opportunity for investors. In our view, office landlords in the top 10 markets in the U.S. have a liability of more than $128.4 billion embedded in their property operations. The opportunity set is to reduce this liability wherever it is economically feasible.”
Some highlights from the report include:
- Global trends toward building efficiency and building performance optimization are spurred by these three sustainability drivers: standards and policy, technology and stakeholder expectations. And the 10 sustainability drivers for impacting investor return are occupancy rate, insurance, rent premium, water expense, waste expense, financing cost, energy expense, maintenance and repair, leasing expense and property value.
- As tenants demand better sustainability performance from the buildings they occupy, real estate portfolios that integrate sustainability may be better positioned to attract and retain reliable, long-term occupants. Comparisons of buildings with similar quality have shown that green buildings achieved a persistent rent premium of around 3 percent.
- According to a Carbon War Room study, a 1 percent improvement in a real estate investment trust’s (REIT) Global Real Estate Sustainability Benchmark score was associated with a 3.4 percent increase in return on equity.
- A Cushman & Wakefield report says that many real estate investors lack the tools and insights needed to consistently integrate sustainability considerations into real estate investments. In the C&W survey of property owners and investment managers, more than half of respondents self-reported that their sustainability evaluations were inconsistent and their policies were not comprehensive. Eighty percent of respondents did not evaluate sustainability metrics for already owned assets.
- Voluntary sustainability and resource efficiency standards — such as BREEAM (a leading sustainability assessment method for master planning projects, infrastructure and buildings), EnergyStar and LEED have emerged globally as accepted standards for buildings to optimize resource use, reduce expenses and make the related sustainability benefits viable to the market. (The American Council for an Energy Efficient Economy released a city scorecard last year for cities that have the most LEED and EnergyStar buildings and San Francisco and Seattle ranked fourth and fifth, respectively.)
- The International Energy Agency said that annual energy efficiency investments total roughly $130 billion and are projected to grow to $385 billion by 2030. Technological advances have made a huge impact on global energy efficiency. Lighting is one of the largest sources of electricity use and energy expense in commercial buildings and is just one example of how this investment has paid off. The cost of ultra-efficient LED light bulbs, for example, fell almost 84 percent in the three years since 2010 as efficiency soared.
