Commentary: When data drives decisions, sustainability shines

What makes an investment portfolio resilient and sustainable? Finding the answer can be surprisingly simple: It's all in the data.

For those of us who invest in real estate, it's increasingly obvious that green buildings drive long-term value. To realize that value, we take the time and effort to fully understand the data related to sustainability strategies. From the hyper-local impact of climate change to the outcomes of energy management programs across a national portfolio, the data combine to tell multiple stories that shape how we evaluate both a real estate investment's potential and a portfolio's long-term resiliency.

One story the data tell us: Sustainable investing is here to stay. The Forum for Sustainable and Responsible Investment reported in 2016 that one out of every $5 under professional management in the United States is now invested in assets using sustainable, responsible and impact strategies. Impressively, total U.S.-domiciled assets under management using such SRI strategies grew to $8.72 trillion at the start of 2016, an increase of 33% in two years.

Likewise, the numbers of signatories to global sustainability benchmarks climb every year. For example, the UN Principles for Responsible Investment welcomed 289 new signatories globally in 2016. Similarly, GRESB, the global sustainability benchmark for real assets, reported participation from 204 North American companies and funds in 2017, which provided energy and sustainability data on properties totaling $2.3 trillion. This is a sharp rise from 2015, when 155 organizations reported data on assets worth $813 billion.

With every passing day, we see more widespread acceptance of the additive value of sustainability strategies in real estate investment and management. And as the data set on green buildings gets bigger and better, the case for sustainable real estate investment gets stronger.

Data come from many sources, from smart-building sensors to old-fashioned utility bills. Human resources departments track employee interest and participation in sustainability programs, and asset managers quantify tenant interest in green building certifications and performance. The rising generation of socially minded millennials is leading a movement for increased commitment to sustainability from corporate tenants — and they want data that show their building, and their employer, is living up to its commitments.

As such, green buildings are highly desirable workplaces because they help employers attract and retain highly prized talent.

Today, a high threshold of evidence backs up what we've intuited for years — sustainable investing pays off. We know that buildings with LEED, BOMA BEST and/or ENERGY STAR certifications tend to outperform similar non-certified buildings in terms of rental rates, occupancy levels and tenant retention. In 2015, a third-party research team conducted an in-depth analysis of Bentall Kennedy's North American office portfolio, encompassing 58 million square feet at the time.

The researchers, Nils Kok and Avis Devine, found:

Net effective rents, including the cost of tenant incentives, average 3.7% higher in LEED-certified properties in the U.S. than in similar non-certified buildings.

Occupancy rates during the period were 18.7% higher in Canadian buildings having both LEED and BOMA BEST certification, and 9.5% higher in U.S. buildings with ENERGY STAR certification, than in buildings without certifications.

Tenant renewal rates were 5.6% higher in Canadian buildings with BOMA BEST Level 3 certification than in buildings with no BOMA BEST certification.

The rising focus on energy and sustainability has given rise to improved systems for capturing and analyzing energy and sustainability data to improve financial performance. For example, we use Eco Tracker, a proprietary system for managing and reporting sustainability data. The system's modeling tool predicts the capital cost of each measure we undertake to improve sustainability performance, as well as the annual cost savings, payback period, and reductions in energy, water and greenhouse gas emissions. This system allows us to make data-driven capital investment decisions, and we can track trends across multiple properties to make future-focused decisions.

We also collect qualitative data such as green-building certifications and tenant engagement programs. The ability to analyze quantitative and qualitative data at both the property and portfolio level allows us to build a strong case for sustainability initiatives that will maximize long-term value.

Sustainable investment doesn't stop at the property line, and neither do the data that support these strategies. There's a strong correlation between cities and communities that pursue green agendas and those that benefit from job growth and high real estate yields. Neighborhoods that are rich with amenities, public transit options and affordable real estate tend to be more cycle resilient.

Half of the world's population lives in cities, and that number is expected to jump to 70% by 2050, according to research published by the Organization for Economic Cooperation and Development. Increasing population density will present significant challenges for urban planning, infrastructure development and the environment. The cities that invest in sustainable development to provide a high quality of life for citizens are more likely to thrive.

Similarly, cities and communities that proactively address climate change threats are more likely to attract investment capital than those that don't. And the unprecedented hurricane season of 2017 has only intensified the focus on climate change and risk mitigation in underwriting conversations. These assessments combine data on climate change threat levels with standard real estate fundamentals like rental rates and net absorption.

Investment advisers and asset managers focus on delivering the best possible yields to clients and maximizing the long-term value of properties. Part of the methodology is ensuring one has market-leading building strategies in place to help drive performance at the asset level, including sustainability.

If real estate investors are interested in data-driven strategies, they should focus their attention toward green buildings, and locations in markets that promote a sustainable lifestyle.

Anna Murray is vice president, sustainability, at Bentall Kennedy (Canada) LP in Toronto. This article represents the views of the author. It was submitted and edited under Pensions & Investments guidelines, but is not a product of P&I's editorial team.