Tony Liou

During this pandemic-induced recession, many investors are pausing to reflect on their business strategy and taking time to invest in overhead projects and strategies to optimize assets in their portfolio.  Three of the key areas investors are targeting for improvements are energy, sustainability and resiliency, often as part of a broader commitment to an ESG (environmental, social, governance) mission.  All three of these areas can provide significant returns, improve asset value and tenant experience, and provide risk mitigation against changing long-term conditions.  Equally as important, fund managers with established ESG missions are better able to attract capital from institutional investors such as pension funds and life insurance companies.

But to get the most value, good ESG really should begin pre-acquisition, during due diligence, and then transition into asset management.  Considering ESG as part of an acquisition strategy hasn’t been done broadly until recently, but more and more investors are developing protocols to incorporate it into standard acquisition due diligence.  When done right, ESG due diligence can play a key role in your pricing strategy and projected returns, give you a kick start in meeting corporate goals, and improve asset value in the short and long term.

Here’s why and how you should incorporate energy, sustainability, and resiliency considerations right alongside traditional due diligence.

Let an Energy Audit Inform Your Underwriting and Pricing

An Energy Audit will help you better understand the energy spend associated with the property, and identify accretive energy saving opportunities, estimated install costs, simple payback period, and any applicable rebates and incentive programs.  The potential cost savings can be underwritten as part of due diligence and give you an advantage during negotiations.  For example, if you know a building is operating poorly but there’s an investment opportunity (say, a lighting project) with a good payback via reduced operating costs, you may be able to be more aggressive with the price.

Fasttrack Your Sustainability Performance

A pre-acquisition Sustainability Review can give you a leg up in meeting your corporate ESG goals, instead of trying to figure it out after you buy an asset.  Make it part of your investment criteria – for example, look for properties that already have an Energy Star certification or LEED certification; have LED lights, or working solar; have been through commissioning and have good manuals or well-trained building support staff.  Buildings that have certain green building certifications or sustainability features in place are generally better operated and maintained and require fewer operating costs or future cap-ex improvements.

Real Estate Resilience – A Necessary Risk Management Tool

The necessity of evaluating a building’s resilience against potential disruptive events and long-term changing conditions is becoming more and more obvious.  Building codes and traditional due diligence base risk on historical patterns in weather, flooding, and temperature, but climate change reduces the coloration between past events as a predictor for future events.  For example, FEMA flood data is no longer accurate in many areas.  You need to understand what your specific asset’s risk factors are in order to take measures to preserve its value.  To date, there has been no industry standard for how investors, or their consultants, should evaluate a building’s resiliency or the resiliency of an entire portfolio.  That is now changing.  We’ve been working side by side with investors to create a protocol for a Real Estate Resilience Study that can be added onto traditional due diligence like a Property Condition Report and transition into an asset management tool.

Don’t Waste Your Due Diligence

Be mindful that some ESG consultants are not familiar with the pace and scope of commercial real due diligence, so in order to make sure that your underwriting timeframe is not significantly altered, work with a team that is familiar with the due diligence process.  When done right, incorporating ESG considerations into due diligence will be well worth the spend.  You’ll also kick start a high-performing asset management strategy that will improve asset value.