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This is how ‘green’ real estate investing can generate superior returns while doing a social good

Discover: The “E” and “S” in ESG are most important for real estate development projects because they help create a foundation for potentially superior risk-adjusted returns and a chance to “do well by doing good.” 

Inspire: “Green” real estate is also a social good because it’s more inclusive and affordable.

Invest: Consider allocating part of your portfolio in private, energy-efficient development projects.

Equities’ view: Much is made of polluting cars, trucks and factories — we see the results every day. But commercial and multifamily buildings are a large source of emissions.

The rise in environmentally sustainable real estate, often certified by the Leadership in Energy and Environmental Design (LEED), has marked a big step toward reducing emissions in buildings across the U.S. There has been a 15% increase in the number of LEED-certified buildings in the last two years.

Just as important, that type of real estate also serves as a means to foster social inclusivity and affordability.

Remarkably, these buildings are playing a crucial role in combating climate change. LEED buildings are estimated to have prevented over 80 million metric tons of CO2 emissions in the past year alone, equivalent to removing 17 million cars off the roads for a year. This significant decrease in emissions is a direct result of energy-efficient designs and the use of renewable resources in construction.

LEED-certified buildings are pioneering a new era of social good. These structures are increasingly seen in economically diverse neighborhoods, providing high-quality, energy-efficient housing options that are often more affordable over the long term due to lower utility costs. Residents in LEED-certified buildings enjoy a reduction in energy bills by up to 20%.

Take a deeper dive, below, as Soren Godbersen argues for a higher proportion of investor assets in private real estate distinguished by “green” credentials. His company, EquityMultiple, maintains a resource center for self-directed investors.

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The real estate investment landscape is undergoing a tectonic shift.

Investors are reevaluating portfolio construction at a moment when the classic 60/40 strategy faces structural challenges. They’re revisiting asset allocation strategy and considering an infusion of alternatives including private-market real estate to supplement or replace public allocations. 

At the same time, investors are looking for new ways to partake in ESG investing (investments that are evaluated not only by financial performance, but also by environmental, social and governance factors).  While ESG factors have been considered mostly with respect to public equities, alternatives — including real estate assets and projects — should be looked at through a similar lens.

While governance may come into play in real estate investments, environmental and social factors are most relevant: Both provide a blueprint for investments that may offer superior risk-adjusted returns and a chance to “do well by doing good.” 

This article takes a closer look at two key drivers: The imperative to build and operate more efficient buildings, and more inclusive, affordable housing.

Strategies for ‘green’ real estate investment

Advances in property technology (PropTech), wrinkles in the tax code and macroeconomic factors create conditions for real estate investing that can nail the “E” in ESG while potentially delivering strong returns.

Here are strategies that forward-looking real estate investors and developers may pursue:

Focus on energy efficiency: Energy-efficient developments are key in real estate socially responsible investments (SRIs). This involves investing in properties with high-efficiency HVAC systems, smart energy management systems and sustainable construction materials. Those features reduce operational costs and attract environmentally conscious tenants. 

Invest in renewable energy integration: Properties with integrated renewable energy sources, such as solar panels or wind turbines, represent the future of real estate. These investments contribute to a cleaner environment and offer financial incentives in the form of tax credits and reduced utility costs. The integration of green utilities in real estate is perhaps the most accessible form of ESG real estate investing. Investments in renewable energy sources are becoming vital. Energy-efficient utilities not only reduce the carbon footprint but also lead to significant cost savings in the long term.

Leverage green building certifications: Properties that meet green building standards, such as LEED or BREEAM, are increasingly favored in the market. Investing in properties that aim for those certifications can enhance asset value and appeal to a broader market.

Adapt to a changing interest rate environment: In light of fluctuating interest rates, focusing on green utilities can offer a hedge against rising costs. Energy-efficient properties typically have lower operational costs, providing a buffer against economic volatility. 

Technology as a catalyst for efficiency: Embracing PropTech in real estate, such as IoT-based energy management systems, can drive efficiency and sustainability. Investments in technology not only improve building operations but also contribute to a building’s overall green profile.

Long-term value and sustainability: The focus should be on creating long-term sustainable value rather than short-term gains. This involves considering the life cycle impact of investments, from construction to operation, and their environmental footprint.

Infill area development and brownfield sites: In some cases, urban or suburban areas that were previously contaminated or polluted can be repaired and rehabilitated, creating a buildable area for new development. City or local governments often provide tax incentives for developers who have the skill to successfully carry out such environmental remediation. As such, this can be a profitable investment strategy that adds housing stock while removing environmental pollutants.

Repurposing and conversion: New development can create environmental harm. So can the disposal or decay of existing buildings. Across the country, structures have become obsolete or miscast that can potentially be converted to better uses. Namely, old malls and office buildings can be converted into affordable housing. These projects are complicated and nuanced. For developers that can carry them out, however, this may be both an environmentally and socially responsible strategy.  

All of these strategies are environmentally or socially responsible. However, they are all potentially profitable investment strategies. Real estate investing fundamentally comes down to adding value while streamlining cost. The main strategies that emerge in terms of improving the bottom line while adding positively to the build environment:

  • Leveraging local and federal tax incentives to secure attractive financing.
  • Acquiring land or property at an attractive basis and repurposing or remediating the land or property: a resource-efficient strategy.
  • Using energy-efficient building practices, technology, or appliances to reduce operating cost.

Soren Godbersen is responsible for the growth of EquityMultiple‘s real estate investing platform. He and his team maintain the company’s resource center, a resource for self-directed investors.