09/13/2022 | by
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RET Ventures, an early-stage venture fund specializing in cutting edge real estate tech companies, officially launched its new ESG innovation-focused Housing Impact Fund in April. Targeting an $80 million capital raise, the fund is backed by two main investors, UDR, Inc. (NYSE: UDR) and Essex Property Trust, Inc. (NYSE: ESS)—two REITs that agree the time is ripe for investing in ESG solutions for the residential sector.

Primarily, the Housing Impact Fund will invest in technologies that mitigate the environmental impact of new and existing residential real estate, address social issues among residents, and help investors and institutions abide by evolving regulatory guidelines. The plan is to invest in 12 to 14 startup companies over the next two to three years.

Over the past few years, RET Ventures was spending more and more time in the broader ESG space, particularly “trying to ask and answer the question of what does ESG mean for some of our strategic investors, the public REITs, these large owner-operators,” says Christoper Yip, partner at RET Ventures.

It became clear, he adds, “that ESG is at the forefront for many of these owner-operators. And we saw the opportunity, together with UDR and Essex, to launch a new effort focused on bringing ESG solutions to the multifamily and single family rental space.”

Indeed, when investors in RET Ventures met at their annual summit recently to discuss investment priorities for the Housing Impact and other funds, “there was a clear consensus that the focus should be on environmental efficiency, specifically relating to reducing greenhouse gas and carbon footprints consistent with IPCC, Paris Accord, and other science-based targets,” says Michael Schall, president and CEO of Essex Property Trust.

Moving the Dial

Scott Wesson, senior vice president and chief digital officer at UDR, says he and his team have “just begun to see complementary technologies coming to market that can move the dial, and capital is needed to move these initiatives forward. We also believe these efforts are becoming more important to our residents, and the new technologies borne out of the Housing Impact Fund should help improve the customer experience.”

In addition to creating operating efficiencies at companies, Schall says they also expect attractive paybacks in the form of successful prop-tech investments and lower utility usage as solutions are rolled out across portfolios. “The deal flow for ESG-related opportunities is growing rapidly, making this an ideal time to create and invest in the Housing Impact Fund,” he says.

RET Ventures observed an increasing focus and awareness at all levels of the institutional real estate ecosystem on ESG issues, which includes regulators, investors and capital allocators in real estate, as well as the residents, who are important stakeholders, and employees, Yip adds.

One important trend has been the growing number of climate-oriented regulations: from local regulations, like New York City Local law 97, which imposes penalties for not meeting energy intensity guidelines, to national commitments to reduce the carbon footprint on the regulatory front, to the SEC’s proposed climate-related disclosure rules, and the Paris Climate Accord.

Yip says that what’s new in the last few years is an increasing ESG focus from institutional asset allocators like BlackRock, Ivanhoe, and Cambridge. In Canada, Blackstone is setting very specific greenhouse and carbon reduction targets in their portfolio. Ivanhoe, meanwhile, wants a carbon neutral global real estate portfolio by 2040 and all new developments to be carbon net zero from 2025.

Yip believes that many are eager to participate in the new Housing Impact Fund, pointing out that RET Ventures’ group of strategic investors and owner-operators need help from innovative technology startups to meet both reporting requirements, as well as carbon and energy emissions reduction targets. UDR, for example, has stated that by 2025, it hopes to achieve a 25% reduction in greenhouse gas emissions and a 20% reduction in its energy footprint by 2025.

Overcoming Challenges

Some of the biggest issues that the fund’s two main investors and RET Ventures agree on are the reduction of building energy consumption, water conservation, and the rising demand for electric vehicle charging stations.

Wesson says that creating better transparency about the whole residential building, most importantly the residents’ energy consumption, can help in improving the building’s environmental footprint.

One of the challenges that the fund hopes to alleviate with its support of tech firms is the collection of data on energy consumption, which is needed to be able to set energy reduction targets.

The deal flow for ESG-related opportunities is growing rapidly, making this an ideal time to create and invest in the Housing Impact Fund

Scott Wesson, senior vice president and chief digital office at UDR

“There are many challenges ahead, including the collection of accurate information, especially with respect to Scope 3 emissions, evolving mandates by the SEC for ESG data, the alphabet soup of reporting standards and frameworks, lack of standards and principles of reporting, and the limited availability of qualified people with the knowledge and skills to thoughtfully deploy ESG solutions. As with any rapidly changing industry, these challenges will be costly and will be time-consuming to overcome,” Schall says.

A majority of the targeted tech solutions supported by the new fund center around reducing carbon emissions, water usage, and waste. These solutions range from electricity usage and sensor technology—like building management, demand response, and reducing resident consumption—to reductions in natural resources intensity, including leak detection, smart irrigation, and new construction materials and methods.

A few examples of services and solutions provided by companies that have been invested in so far by RET Ventures, including via the Housing Impact Fund, include:

  • Leak detection services for individual appliances and more broadly to monitor and manage water consumption and protect against water disasters
  • Helping low income residents establish credit and banking relationships
  • A data management solution to help companies manage and disclose ESG performance and assess physical climate risk
  • An end-to-end multifamily design and development platform that offers a net zero embodied carbon solution and efficiencies in apartment construction
  • A solution to meaningfully reduce energy consumption in rooftop HVAC units, while delivering a “pretty attractive financial return to the building owner as well,” Yip says.

Next Big Evolution

As for the social aspect, part of the mandate of the new fund is to consider housing affordability by offering solutions for residents and market rate apartments and bringing solutions to underserved populations.

Some of the possibilities that the fund is exploring include ways to remove barriers around rental housing: security deposit alternatives, non-traditional screening and underwriting tools, better lease guarantees, greater financial security and transparency to both renters and owners, and programs that provide renter cashback as a way to incentivize good behavior such as on-time payments.

The governance side of the new ESG-targeted fund is aimed largely at stakeholder reporting and green building certifications.

Looking to the future, Wesson points out that increased investment in sensor technologies could have wide-ranging benefits. “The medical and manufacturing industries have had a long lead on this front, and the real estate sector needs more research and development in this area. We believe sensors are the next big evolution in how to better run real estate by leveraging data and technology.