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.