NAREIM Portfolio Management meeting

Sustainability discussion key takeaways

June 7, 2024

Real estate investment managers should look to pass through the penalties incurred by building performance standards or the cap-ex required to improve assets to meet emerging BPS requirements.

Nine cities across the US have passed building performance standards, as of December 2023 – with another 11 engaging and proposing to introduce rules and penalties to achieve minimum levels of energy or climate performance in buildings.

During NAREIM’s Portfolio Management meeting, held in NYC this week, members discussed how they were underwriting sustainability measures into deal pro formas and the impact that BPS standards will have on asset management plans and investment strategy.

Pass-through costs:

One strategy however, was to try to pass through the cap-ex associated with the necessary building improvements to tenants – or the fine from the BPS penalty. During room discussions, one member said any time tenants asked for any change to the lease, that was the opportunity to insert green lease language around pass-through costs (particularly relating to penalties and BPS) and data-sharing.

• To see the map of the latest BPS standards across the US, click here to access the IMT’s BPS resource page.

• To read more key takeaways from the NAREIM Portfolio Management meeting – on valuations, emerging opportunities and AI – click here.

• To access the meeting presentations and attendee lists, please email zhughes@nareim.org

How do you underwrite sustainability measures?

The Portfolio Management meeting also discussed the best way to underwrite sustainability measures – whether through market weightings (such as BPS or the EnergyStar Scores) or exit cap rate adjustments.

However, sustainability measures and even BPS could be seen as having upside for the portfolio or deal. One member said BPS would create higher operational costs and increase barriers to entry for a market. Adjusting exit cap rates could also be a blunt tool, not least when considering solar – which could generate six-figure income that goes straight to NOI.

Solar as an NOI driver:

• You need to an in-house or third-party structural and legal review of the roof. Do not rely on the solar developer’s analysis as they will overload your roof.

• You don’t need assets in sunny geographies, it’s more down to where states have incentive programs such as MA, NJ, DC and CA.

• How you structure a solar installation – whether the tenant has first rights on power, or it goes back to the grid or a community, most agree owing the panels was much harder than having a solar developer own the panels. One member, who has done a wholly-owned solar project, said: “It is worthwhile [but] it is taking so much longer than we ever would have thought.”

Other sustainability measures that drive NOI, included:

• Waste monitoring. Setting up sensors and cameras on waste bins to prevent over charging

• Utility bill management

• Providing accurate building characteristic data to bring down insurance premiums

During the meeting, portfolio managers revealed that one of the biggest challenges they face isn’t data collection – although one member said they were “ unpleasantly surprised” at how hard it was – but how PM’s measured sustainability progress against a portfolio that was always changing.

How do you set goals that are measurable and meaningful from one year to another when the assets in a portfolio change, the member asked? Another highlighted the challenge of getting their arms around capital plans when they don’t have the building and project expertise – such as for solar installation – in-house. “Capital projects become very complicated really quickly.”

• To read more key takeaways from the NAREIM Portfolio Management meeting – on valuations, emerging opportunities and AI – click here.

• To access the meeting presentations and attendee lists, please email zhughes@nareim.org