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“Tidal wave” of Net Zero cap-ex is coming, but lack of transactions makes upgrades a hard sell

NAREIM Sustainability meeting key takeaways

March 9, 2023

One of the biggest challenges facing ESG leaders in real estate investment management is how to demonstrate the ROI on Net Zero cap-ex, particularly in a market without comps and transactions and very little historical data.

During NAREIM’s Sustainability meeting in New York this week, members walked each other through case studies in multifamily and office to understand potential action plans for soon-to-be stranded assets. In one case, a 2003-built fully-electric office building in Boston was presented which was expected to become stranded in 2024.

However, members said it was difficult to commit to big ticket upgrades when there was little data or current comps to prove Net Zero upgrades can increase rents. “The value in the future will be there but until valuations and appraisals come in and transactions occur, I cannot go to my team and ask them to do this,” said one member.

“I run up against a hard wall asking the team to adjust rents or assumptions [for decarbonization cap-ex”, said another member. It meant most members were focused on the “low-hanging fruit” of Net Zero.

Yet, given the focus in the US on ESG, climate risk and recent SEC draft proposals on building emissions, the meeting heard that a “tidal wave” of Net Zero cap-ex was going to hit the market in the short-term as buildings were required to improve emissions.

“This will hit the pricing of assets,” said one member.

Other highlights from the Net Zero discussion also included:

  • Electrification projects were typically non-starters given the costs involved

  • Getting deal teams on board: One member provided the best practice underway at their firm, with transaction teams now asked to provide detailed exhibits on the risks and opportunities of either taking or not taking ESG action, versus previously having one paragraph in the IC memo

  • Use city emission thresholds to guide your Net Zero programs and strategies. More than 30 cities and municipalities are phasing in stricter emission rules for CRE and NAREIM members were urged to start with those rules and thresholds first, not least to guide thinking on penalties and where to prioritize action

  • Retrofit Commissions – combine it with ASHRA Audit II and Net Zero pathway. As you start to plan a decarbonization strategy, make sure to combine a retrofit commission (a studying of existing building systems and structures and when replacements are needed) with the ASHRAE Audit II and your Net Zero roadmap sessions to save you time

Solar in Net Zero: What works and what doesn’t?

  • During the Net Zero discussion, members shared how that translates for solar installations. Two takeaways included:

  • Keep solar to a minimum, as the time commitment of installing solar on buildings was significant. It was a case of “go big or go home”. One member said to “draw a line” at the minimum requirements you needed for smaller projects.

  • Solar on car park canopies was seen as the best way to embrace solar as part of a Net Zero plan.

Other highlights from the meeting included:

  • Insurance hikes: Extreme weather and climate risk is impacting insurance premiums, with one member saying their premiums increased almost 40% YoY, thanks to a 30% increase in the total insurance value required by the insurer.

  • Wildfire insurance: Other members suggested wildfire coverage in California may also change in the next few years moving from a fixed deductible rate, to a percentage of total insurance value, a move that would significantly impact premiums and shift insurance in underwriting models from an operating expense to a cap-ex.

  • Greenhushing. The industry understands the dangers of greenwashing, whereby firms oversell their ESG credentials and corresponding actions, but members challenged themselves in relation to greenhousing and whether they were understating their ESG work to balance different regulatory approaches by the US and EU.

  • How are you tracking the S in ESG? One member used GRESB’s Social KPIs as a guide to starting their work on tracking S metrics, while others focused on the employee, tenant and surrounding community. One member focused on single-family rentals said they tracked success by helping renters improve educational literacy, credit scores, home down payments and residential assistance

  • VHE HVAC. Members were advised to check out very high efficiency HVAC systems, which can help reduce HVAC energy use by 65% to 75%. Go to the Institute for Market Transformation’s website for more information.

The most outsourced ESG roles – and the most retained in-house

During the NAREIM Sustainability meeting, members discussed staffing and resources – and which ESG functions they typically outsource and retain in-house.

The key work outsourced by members focused on data collection and management as well as reporting to benchmarks such as GRESB and PRI. In comparison, almost all members agreed they retained ESG strategy in-house along with client reporting and answer investor DDQs.

NAREIM members can see the full ranking of in-house and outsourced work here. Below are the top 4 functions:

ESG outsourced functions: The top 4 ESG functions outsourced among NAREIM members included:

  • Reporting to benchmarks, such as GRESB, PRI

  • Data collection, management & assurance, particularly in relation to utility data collection

  • Decarbonization/energy audits and planning

  • Green building certifications

ESG internal functions: The top 4 ESG functions that are retained internally among NAREIM members included:

  • ESG & Corporate Social Responsibility strategy and governance – including policies and procedures

  • Client reporting & DDQs

  • Reporting to benchmarks, such as GRESB, PRI

  • Corporate engagement and education

The attendee list and presentations can be accessed by emailing IvyLee Rosario at

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