For real estate investors and other investors, profit is the most important consideration when making investment decisions. All other factors must find their place in the investor’s priorities based on their relevance to the profit-making objective. This attitude is completely natural, given that the reason people become investors is to make money.
As a rule, environmental sustainability features low on the list of concerns for real estate investors and often conflicts with their goals. Most property investors treat ecological concerns as a nuisance and only comply when those demands are government regulations. Real estate investors only go green if it makes them money.
But as UpkeepMedia.com points out, current events are forcing real estate investors to change their approach.
The changing realities of the real estate industry
All decisions made by businesses and the people who invest in them revolve around the fulcrum of what consumers want. If people keep buying, companies, real estate investors included, will only keep doing what they have always done. The moment a buyer’s preferences start to shift, companies must also change their behaviors if they want to remain profitable.
This is the case with environmental sustainability in the real estate industry. Until recently, most real estate investors viewed environmentally sustainable buildings as not worth the effort. There were no pressing reasons to go out of their way to make their facilities environmentally clean. But a convergence of events is pushing the issue of building sustainability for real estate investors.
This article examines the events forcing this new way of thinking about sustainability in real estate. It explains the emerging threats and opportunities that property investors must be aware of in this new era. Lastly, it points out a path for property investors who want to stay relevant by learning how to exploit the situation to remain profitable.
Why sustainability matters for the real estate industry
Why do we even need to discuss sustainability concerning real estate? Why the focus on real estate? Should the emphasis not be on another industry, say the transportation industry?
Most people do not realize that the global real estate industry is so massive that it contributes an astounding 40% of global greenhouse gas emissions. This enormous impact is both the result of how buildings are made (the materials used) and how they are managed (the environmental impact of the various systems within the building).
When you consider that many activities performed on the planet are done inside a building, you can start to understand the problem. Real estate is by far the largest asset class in the world. The global real estate industry is estimated to be worth over $270 trillion. To give you perspective on what this means, the entire internet is only worth $1 trillion.
How real estate investors can profit from sustainability
For real estate investors who are willing to change and review the way they approach real estate investing, the issue of unsustainable buildings is an opportunity. One of the indirect consequences of the push for more environmentally sustainable buildings is that climate investing is set to become the largest category of investing there is in the world today.
In the simplest terms, here is what that means:
- A growing number of public/private organizations and governments are setting the dates for decarbonizing buildings for 2050, 2060, and 2070.
- While most stakeholders focus on the deadline dates for the event, they overlook the monumental size of this goal and, therefore, its cost.
- In order to meet the target dates to decarbonize real estate, around $2 trillion to $5 trillion will be needed every year for retrofitting buildings and manufacturing new materials.
- This likely makes this event the largest venture capital opportunity in history.
Additionally, the drive toward decarbonizing buildings is creating an environment where owning a dirty building will hurt investors. This is because environmental sustainability will increasingly become the number one factor influencing the top three factors that real estate investors are most concerned about: tenants, cost of operation, and cost of capital.
Let’s break it down further:
Hundreds of the large corporations that make up the primary tenants for major property investors are signing climate pledges. After conducting energy audits of their operations, these organizations realize the need to make their buildings green.
When a real estate investor is faced with a choice between losing tenants like Siemens, Microsoft, or Coca-Cola or making their building more sustainable, building sustainability becomes a good strategy for keeping their customers.
Cost of capital
The entire real estate industry operates on the interest rate of the mortgage. At present, there is a difference between the cost of capital for a clean building versus the cost of capital for a dirty building. This difference currently stands at 50 basis points, which is half a percent.
This does not seem like much until you calculate the cost implication of a 0.5% difference in interest over 40 years for a dirty building and a clean building, both of which cost one billion dollars each. Owners of green buildings stand to save a lot of money on mortgage costs.
Cost of operation
An example of a regulation that will make the cost of operation for dirty buildings higher than that for clean buildings is Local Law 97. Based on this law, owners of commercial real estate in Manhattan could owe the city an estimated $20 billion/year for failing to decarbonize their buildings. The monetary cost of polluting the environment will get higher as governments impose more stringent regulations and enforce them.
The regulations will also affect residential properties. As it stands, single-family homes, which make up a huge slice of residential real estate, are among the least efficient from a sustainability point of view. Investors in single-family homes often don’t see the point of making their buildings energy-efficient because of the relatively low energy cost.
But with the recent $2 trillion infrastructure package announced by the Biden administration, such owners have an incentive to do differently. This package includes a $200 billion fund billed to go into building efficiency. Owners of single-family homes who choose to improve the energy efficiency of their buildings can get their money back in the form of tax incentives.
These are just a few ways governments and customers are forcing the issue of sustainability on the real estate industry. In the future, we can expect this trend to get stronger until green becomes the only way buildings are made. But before this happens, those real estate investors who are the fastest to respond will be the ones who profit the most from this new situation.
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