Real estate managers reaping rewards from going green

Green investing not only helps the climate, but lowers costs and improves returns

(updated with correction)

Real estate managers are going green for environmental reasons, and are reaping the benefits through lower costs and higher returns.

Much of the funding for measures to make real estate portfolios more environmentally friendly withered during the economic crisis, as real estate managers needed money to help cover their debt and maintain their properties. But that changed when they saw the financial rewards of reduced operating expenses and higher returns from energy conservation.

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Challenging: Nick Stolatis said TIAA-CREF set up an energy reduction target that was reachable but not ‘a slam dunk.’

Now a number of real estate managers are working to reduce their energy footprints. Some are also including decreasing waste and reducing water usage.

And it's not just office portfolios that are turning green. Industrial and self-storage portfolios are becoming more environmentally friendly with installation of solar panels, which are a source of alternative energy as well as income from selling back to utilities the excess power.

At the same time, the Green Building Council, developers of a rating system known as Leadership in Energy and Environmental Design, is in the process of creating a portfolio-wide rating system. This would make it easier and cheaper for real estate managers to go green.

TIAA-CREF Global Real Estate increased its target to shrink energy use by 15% by the end of the year for its $8.1 billion office and $1.2 billion multifamily portfolios, up from its original target of 10%. Officials there also pledge to save 10% of those portfolios' water usage by 2013, and a waste target is in the works.

“We set up 15% (as the energy reduction target) as a goal that was achievable, but not a slam dunk,” said Nick Stolatis, director, global sustainability and enterprise initiative, TIAA-CREF Global Real Estate, New York.

TIAA-CREF in 2007 started evaluating the energy use of its portfolio of 43 million square feet of office buildings, 10,500 multifamily units and other properties. The manager fell short of its original goal of a 10% reduction by 2009. “That was a bit of a stretch,” Mr. Stolatis acknowledged, so higher target was set along with more time to achieve it.

By the end of last year, the firm reduced its energy consumption by 11.5% in its office portfolio and by 10.8% in its multifamily portfolio, he said. “Before year-end 2010, we realized an annual energy savings of $12.5 million from operations in the office portfolio and the multifamily properties” valued at less than $500,000, Mr. Stolatis said.

Late to the game

Real estate investment managers came late to the green game, said Peter Belisle, president of energy and sustainability services in the Los Angeles office of Jones Lang LaSalle. Demand — particularly from high-profile institutional investors such as the $230.1 billion California Public Employees' Retirement System and the $152.9 billion California State Teachers' Retirement System — pushed real estate managers into considering sustainability projects.

CalPERS is setting up a new environmental program for real estate, with a proposal expected to come before the system's investment committee later this year. The Sacramento-based system is also working on a plan to integrate environmental, social and governance strategies for all asset classes. That report will be going before the board in August, Clark McKinley, system spokesman, wrote in an e-mailed response to questions. An earlier energy efficiency initiative cut energy use in its core real estate portfolio by 20% as of last February, he stated.

Interest in energy reduction has “picked up a lot of speed” begun to grow among real estate investment managers, especially since one of the biggest operating expenses for properties is energy, Mr. Belisle said. Plus, reducing operating expense increases return, he said, and there could be federal subsidies or other assistance that could make turning portfolios green even more attractive.

Overall, Jones Lang LaSalle saved a total of $128 million in savings last year, and $30 million to $40 million so far this year.

Denise Stake, co-chair of the Pension Real Estate Association's Green Building and Sustainability Affinity Group, said real estate managers are interested in green building both to cut costs and as an investment strategy.

Within the working group, which she co-chairs with Vance Voss, managing director of Principal Real Estate Investors, are real estate managers who invest capital in sustainable real estate, said Ms. Stake, who is vice president at Cornerstone Real Estate Advisers LLC.

While Principal has a fund, the Principal Green Property Fund I LP, she noted that Cornerstone doesn't have a green fund, but has had a sustainable real estate program in place for four years to cut costs and increase income by making properties in its $31 billion portfolio more sustainable.

She said the new LEED portfolio-wide certification, which would sample portfolios, would boost the number of investment managers that go green. The Green Building Council is expected to unveil the certification by year end.

Although real estate managers were slower than corporate property owners in focusing on cost-effective energy, they've discovered “there is a strong financial component to it,” he said. Still, they want to know that any energy-related projects will pay for themselves within 18 months, Mr. Belisle said.

“It's not uncommon to save 10% to 15% and sometimes in the 20% range,” he said. This could amount to $30 million to $40 million in savings.

Prudential Real Estate Investors is undertaking a massive effort to survey the energy usage of its real estate holdings, said David DeVos, global sustainability officer based in Parsippany, N. J. He was hired in August to oversee the company's strategy to reduce its worldwide environmental footprint,

Once company executives get a sense of what the portfolios' energy consumption is, they will then establish targets for making energy reductions, Mr. DeVos said. In the meantime, they are taking steps to reduce consumption. “Properly applied sustainable initiatives are always cost effective,” Mr. DeVos said.

There have been early successes. Last summer, Prudential Real Estate completed a $20,000 lighting retrofit project to reduce energy use at a parking garage adjacent to an Arlington, Va., office building known as Ballston Point, owned by the PRISA II fund. The retrofit will pay for itself in two years and save the fund $11,664 per year.

With the Greenprint Foundation, an alliance of real estate investors, Prudential executives have evaluated 26 buildings in 10 countries last year for carbon, and is working on about 200 this year, Mr. DeVos said. The company oversees $44.6 billion in real estate.

Principal has targeted reducing by 10% over the next three to five years the energy usage of a $36.4 billion portfolio of 673 properties, said Jennifer McConkey, assistant director of equity operations and head of the Des Moines, Iowa, company's green initiatives.

Last year, Principal reduced energy consumption by about 3%, amounting to a $1.2 million annual savings. Company officials predict a total savings of $12 million with “minimal capital expenditures, maximizing efficient operations,” Ms. McConkey said. Efforts are generally focused on energy and water in the U.S. and on carbon emissions in Europe.

In addition to providing cost savings, Ms McConkey said, these energy-efficient properties have become more attractive to buyers.

“Some of the best success stories sold at a healthy profit,” Ms. McConkey said.

One example was a Houston office complex that Principal Real Estate Investors developed with Trammell Crow Co. that was designed to obtain LEED Gold certification. To conserve energy and water, the buildings include non-chemical, pulsed-power water treatment system; reduced-flow water faucets, toilets and urinals; recycled and regional building materials to reduce waste; and high-performance glazing to reduce heat from the sun while maximizing daylight.

The buildings, completed in January 2009, had an Energy Star score of 95 in 2009 as well as the LEED certification. When the building sold to Wells Real Estate Funds last June, it generated a 19.4% return.