Efforts to create green building REITs, brought to a grinding halt by the credit crisis and recession, are unlikely to resume until late in the economic recovery when new construction rebounds, but a number of existing REITs are already going a lot greener.
"These estimates are rough, but I would estimate that about 20% of the new space being acquired or built by US REITs is green-rated and probably about 40% of REITs hold some type of green property," says Gary Pivo, a professor at the University of Arizona and co-director of the Responsible Property Investing Center (RPIC).
No comprehensive list of socially responsible REITs currently exists. Pivo is developing a prototype Responsible Property Investment Index through the RPIC, which he hopes to have up and ready by the end of next year. "There are some REITS doing a good job by some accounts. Examples would be Liberty Property Trust and ProLogis," he says.
Liberty, a major developer of high-performance green office and industrial buildings, received The US Green Building Council's 2006 National LEED (Leadership in Energy and Environmental Design) Corporate Leadership Award. It currently has 41 LEED or green projects completed or under development in the US and the UK. These projects, representing $1.3 billion in investments, total nearly 7.8 million square feet, says chairman, president and CEO Bill Hankowsky.
Green initiatives "are a long-term key component of our strategy," says Hankowsky. "We believe it is the right thing to do; it is beneficial to our customers; and it is a good thing for our shareholders." Greener buildings and more attractive assets have lower operating costs and can increase worker's productivity.
Since last year, Liberty has been aiming its green efforts at its existing portfolio through energy audits, lighting retrofits and installation of building-wide area network (BWAN) energy monitoring systems to track tenants' real-time energy use. "Our goal is to get our whole portfolio 20% to 30% more efficient than a year ago within three years," he says.
ProLogis, a leading global provider of distribution facilities, was recently ranked the 21st (out of 100) most sustainable company in the world in a list published by Forbes.com. Like Liberty, it is building just LEED-certified buildings. It is also committed to reducing its carbon footprint and generating renewable energy.
Last month, ProLogis announced a second rooftop solar project with Portland General Electric which will generate energy for the utility's customer grid in exchange for rental income. Worldwide, ProLogis's 27 rooftop installations will total 13.5 megawatts of solar energy.
Other publicly traded REITs and real estate companies with the largest number of LEED registered or certified buildings include AMB Property, Boston Properties, Brookfield Properties, Corporate Office Properties Trust, Forest City Enterprises, Regency Centers, Thomas Properties Group and Vornado Realty Trust, says USGBC director of commercial real estate Marc Heisterkamp.
Corporate Office Properties Trust, whose clients are largely federal government contractors, is the top pick of Chris Lucas, a senior real estate analyst covering retail, office and industrial REITs for Robert W Baird & Co in Washington, DC. He anticipates very solid earnings growth over the next five years since many of its properties are located near military installations expanding as a result of the Base Realignment and Closure Act.
Its 53 LEED-certified projects and 20 LEED-dedicated employees also give Corporate Office Properties, the winner of a prominent industry customer service award for excellence five years running, foresight to understand what clients want and ability to meet tenant demands, says Lucas.
Shopping centre developer Regency Centers Corporation is also a leader in the sustainability process, says Lucas. He currently has a neutral rating on it because of occupancy concerns. Getting buy-in for green initiatives from retail tenants can also be difficult. "Shopping centres are driven by anchors. If (green) is part of their culture, the landlord will make it part of their culture and the little stores will have to adapt," he says.
Paula Poskon, a Baird senior real estate analyst who covers residential and self-storage REITs, is not seeing major green initiatives in this economy. Still, a couple of REITs she tracks are marketing green-friendly elements which she says make good business sense with this very environmentally conscious next generation of renters.
New student housing in Arizona from American Campus Communities has outdoor furniture made from recycled materials and captures water run-off for landscaping. A new Northern Virginia apartment development from Camden Property Trust is using low-wattage lighting in its carpet-free hallways and low-VOC paint.
Looking ahead, wealth manager Jordan Heller, who helped bring much of the REIT industry public during his 15 years as a Wall Street real estate analyst, expects to see the green theme emerge first in areas closest to full recovery. More specifically, he points to multi-family and office properties in metro market infill locations. "Rents will have to rise enough to justify new development; then green will come into play," says Heller, president of Heller Wealth Advisors LLC in Roseland, NJ.
"For the next five years, public REITs are probably in the best position to take advantage of the depressed fundamentals in the real estate economy," since they have the strongest balance sheets, the best access to large amounts of capital, and tax advantages, he adds.
Greening older real estate is also expected to become more prevalent. David Wood, director of the Initiative for Responsible Investment at Harvard University and co-director of the RPIC, says he has been hearing a lot of, "What do I do with existing building stock? How deep do we retrofit? How do we finance it?"
Heisterkamp says REITs are well-structured for green initiatives since most are run by owner/operators rather than third-party property managers. "One less potential disconnect can make a large difference in seeing these changes implemented across the portfolio" he says.
"I fully expect a rise in the number of existing REITs that commit to green initiatives in their portfolios in the future, says Pivo, who notes that environmental performance indicators – including energy efficiency, carbon footprints, water usage and recycling – are just part of the SRI picture.
"You also have to consider their effect on land use and transportation issues including walkability, urban sprawl, natural hazards, auto dependence and wildlife habitat. Then there are important social considerations, such as whether they provide fair wages and benefits to their corporate and building staff, including janitors, security and other service personnel, whether the property is handicapped accessible, security and safety," says Pivo.
This article first appeared in the April 2010 issue of FA Green. For more related articles, please go to www.fa-mag.com.
