REITs are starting to target their sustainability investments more strategically to boost energy savings and maximize returns, according to an analysis of sustainability data.
RealFoundations, a real estate management consultancy firm, reviewed data provided as part of the NAREIT Leader in the Light survey by 27 REITs in the period from 2011 to 2013. The firm found that investment in energy efficiency increased 42 percent during that time. Meanwhile, annual savings on energy costs rose 39 percent. The return on investment (ROI) from sustainability projects gained 48 percent between 2011 and 2013.
“As the low-hanging fruit becomes scarce… both the project size and complexity have increased over the last three years,” said Alok Singh, a director at RealFoundations. He noted that investments are now focusing on capturing interactive effects through the facades of buildings - known as the building envelope - or buildings as a whole, both of which result in a more attractive ROI than early sustainability programs and technology.
According to RealFoundations, the total number of projects undertaken by the survey respondents between 2012 and 2013 fell from 99 to 66, but the actual level of investment rose from $75.2 million to $111.6 million.
Investment in whole building and building envelope projects combined accounted for 38 percent of total investment in 2013, up from 16 percent in 2012. Lighting investment increased in 2013 to 38 percent compared with 23 percent in 2012 and comprised the largest single component of overall investment.
Although lighting investment in 2013 was below 2011 levels, the number of projects rose from 15 in 2011 to 29 in 2013. RealFoundations noted that a larger number of lighting projects are now being conducted for an overall lower cost. The firm predicted that the trend will likely continue as advanced lighting technology becomes more cost-effective.
Sustainability Investment Seen Increasing Due to Multiple Factors
Singh said he expects the expansion in sustainability investment to continue for reasons in addition to attractive returns. New disclosure laws are coming into play, and utility rebates and incentives are becoming more prevalent. Furthermore, some investors now view sustainability as a key performance metric, utilizing industry standards such as the Global Real Estate Sustainability Benchmark (GRESB), Singh said.
“It is clear that the participating REITs understand the value proposition behind more sophisticated projects,” Singh noted. “Within the coming few years, I expect most REITs to become fairly aggressive about leveraging the benefits and value of sustainability.”
Another potential driver for REITs to adopt sustainability measures is the large amount of “socially responsible” capital that has yet to invest significantly in REITs, according to Singh.
“Once that comes into play, I am sure most of the REITs will be way more proactive as it would provide them with the opportunity to improve the cost of, and access to, capital,” he said.
Investors Looking for Increased Sustainability Commitment
Sheldon Groner, NAREIT’s executive vice president of finance and operations who oversees NAREIT’s Leader in the Light award program, indicated that in recent years the REIT industry has heard a consistent message from institutional investors that sustainability does matter.
Groner noted that prominent institutional investors participated in NAREIT’s recent Leader in the Light Working Forum in San Francisco. Investors are increasingly “looking to company management to clearly articulate the kinds of sustainability initiatives that are currently in place, the progress that has been made in this area and what steps are being taken to raise the bar,” he said.
NAREIT created the Leader in the Light program in 2005 to recognize member companies that have demonstrated excellence in portfolio-wide sustainability initiatives.