The Story
Last week, we saw big news from real estate data analytics firm RealPage, which announced a strategic partnership with Measurabl, a leading ESG technology firm. This partnership includes technology integration and analytics to support commercial and residential real estate owners to meet ESG goals.
There’s no doubt that the growing trend and necessity of ESG will only become stronger in the coming years. Indeed, according to Bloomberg, ESG assets may hit a valuation of $53 trillion by 2025, and real estate owners are under increased pressure to adopt ESG policies and practices.
ESG Factors and Multifamily
According to Informa Connect, “GRESB (formerly the Global Real Estate Sustainability Benchmark) is one of the best examples of G3 [third generation] reporting in ESG. It requires outcome-focused, quantitative reporting on year-over-year improvement in two critical building performance metrics: energy use and greenhouse gas emissions.”
In their latest report, GRESB found that participation in its Real Estate Benchmark grew by 24% in 2021, the highest increase since 2012 and the highest ever increase in total numbers.
ESG = ROI
A new report from JLL also highlights key ROI features of ESG policies and practices among real estate companies. Here are the key quotes from their January 2022 findings:
- Companies with strong ESG propositions are usually associated with higher long-term sustainable growth and credit ratings, along with lower volatility.
- There is a positive relationship between the ESG disclosure score and P/B ratios. When the ESG disclosure score increases by 20 units, P/B [price-to-book valuation] ratios approximately rise 0.13 accordingly, within the Hong Kong-listed real estate developer sector as of October 2021.
- Material ESG factors directly impact companies’ free cash flow adjustments, influencing the operating revenues, capital expenditures, taxes, etc.
- ESG performance is closely intertwined with the discount rate, which a risk premium is applied when companies score poorly in ESG metrics, resulting in a lower present value.
JLL also recently announced a new Head of Sustainability, for Europe, the Middle East, and Africa. But the S in ESG is playing a larger role as well, according to JLL, who cites outside research showing “the savings and productivity gains from improved indoor environments are between $25 billion to $150 billion a year.”
According to Propmodo there are still significant challenges as most ESG efforts are aimed at the building level, not occupants, whose behaviors have a far more substantial impact on ESG priorities.
Expert Take
“The role of buildings in creating a more sustainable future is now in the spotlight…Stakeholder pressure is rising where regulators, occupiers, lenders and investors are expecting more [ESG] from the built sector.” — Lori Mabardi, ESG research director at JLL.
“Pressure is mounting on developers, project sponsors, and owners to demonstrate high-sustainability and low-carbon attributes. That is coming both from above—with institutions and Wall Street requiring responsiveness to Environmental, Social and Governance (ESG) and climate change goals, but it’s also coming from below—as tenants, users, and city leaders demand ‘green buildings’ with carbon reduction strategies.” — Lindsey Maclise, principal and head of ESG/Net-Zero Initiatives for Forell.
So What?
ESG is not only good for valuations and your bottom line, it will likely be a mandated requirement in the not-so-distant future. Owners and investors should be considering the above ESG factors in all aspects of their business, starting with acquisition through to the management cycle. Thinking about this now will help future-proof your portfolio.
This Week’s Top Headlines
- In January, the average U.S. asking rents rose $8 to a record $1,604 — Yardi Matrix
- The value of the apartment sector jumped 23% year-over-year in 2021, the highest increase on record — WMRE
- Forecasts show that the 2022 commercial/multifamily lending market will hit a record $1 trillion in 2022 — MBA
- Despite significant increases in multifamily loan volume, HUD is having trouble increasing staff count — Commercial Observer
- Livly, a resident experience platform for apartments, announced that it acquired Circuit Living (previously TFLiving), an amenities company — CRETech
- Foreign investors bought $70.8 billion of U.S. commercial real estate in 2021, the highest volume since 2018 — Realtor Magazine
- 96% of builders cite material prices as the most significant issue in 2021, and 91% expect that to continue being a problem in 2022 — NAHB
Weekly Chart
Yardi Matrix released its Matrix Multifamily National Report for January 2022, and their year-over-year rent growth forecast is as follows:
