When BlackRock CEO Larry Fink called climate change an “existential crisis” in an open letter to CEOs at the beginning of the year, it was clear that the investment industry was taking a serious approach to energy efficiency.
In the last 12 months, there has been a spotlight on environmental, social and governance, also known as ESG, but it isn’t only investment capital that is prioritizing sustainability. Apartment renters are showing a clear preference for environmentally responsible housing. It is a combination that has not only incentivized but pushed owners and developers to reduce energy consumption.
Affordable housing investor Avanath Capital Management is not new to ESG. The firm has had an internal platform since its inception. “We are always looking for ways to optimize energy use and incorporate sustainable strategies throughout our portfolio,” says John Williams, president and CIO, Avanath Capital Management. “Our goal is to lessen our carbon footprint and environmental impact through proven strategies that we believe will accrete value to our investors. Our goal is to also deliver robust reporting on progress and set benchmarks for others in the industry to follow.”
Market-rate developer The Procopio Companies has also focused on sustainability. The firm secures an environmental certification, whether one of the LEED credentials—which the company’s CEO Mike Procopio calls the gold standard—Fitwell or one of the other many accreditations available to developers, for most of its new development projects. The specific certification the firm plans to pursue is based on the property’s location and use—but the investment strategy also plays a role.
“We look at our exit plan. If we think that this is something that is going to be bought institutionally, then we look at those ESG goals,” Procopio says. “Is the building going to be purchased by a fund that has a mandate to purchase LEED Silver or higher properties? Or is it going to be bought by a fund that is net-zero energy only? These things are becoming more common, so it is an analysis of not only what is important to us as a developer but also what is important to our buyers.”
Cabot, Cabot & Forbes, another market-rate developer, is meeting local and federal regulations related to the sustainability of new buildings, which can be a challenge because there is little consensus. “Today, the requirements are so much stricter than they were five-to-10 years ago that you are meeting these goals whether you want to or not. Every project is different because of local and state building codes,” John Sullivan, EVP at Cabot, Cabot & Forbes, explains.
Technology is playing a starring role in the race to reduce energy consumption in apartment buildings. The tools are all over the map, from in-unit features, like LED lighting, to software that helps to manage energy usage across a portfolio.
Avanath Capital has proprietary software that it uses to manage Amplify, the firm’s ESG platform. “We created a robust reporting dashboard that can analyze our energy consumption data utilizing a multiple number of KPIs specifically related to ESG metrics,” says Williams. “We have also integrated in-unit technologies such as programmable, digital thermostats and motion detection systems that optimize energy consumption.”
Avanath is also using energy tracking software at the property level to assess a building in real-time. This technology is installed at all of the properties in the company’s portfolio. “This includes mobile inspections, remote monitoring, and reporting,” adds Williams. “In doing so, we can determine the efficacy of onsite property operations and improve inefficiencies as they pertain to our sustainability goals.”
Cabot, Cabot & Forbes also leverages technology to track energy consumption. On new developments, Sullivan partners with consultants that use energy modeling software to better understand the future footprint of the building. These models can forecast everything from carbon emissions to the energy costs of the property, allowing developers to make advanced changes to help reduce the footprint before the building even takes a step.
While energy modeling and dashboard software play an important role in managing consumption, most of the technology aimed at reducing output is installed at the property level, where it has a major impact. LED lighting, for example, is a cost-effective improvement that has a major impact. You do [install LED lights] everywhere, partly because it is cost-effective to do it but also to meet energy standards that are required in the building code,” says Sullivan.
To achieve the high standard of LEED and other industry-leading environmental certifications, Procopio installs a wide variety of energy-saving measures at his developments. The suite of tools ranges from alternative energy sources to hyperdense automated parking stackers to reduce the parking impact in the building, solar PV systems, green roof technology to reduce the heat island effect and irrigation and water usage controls and efficient piping to reduce energy loss. “We use a lot of niche features that a lot of times really only speak to one piece of the environmental scorecard, but they are impactful,” says Procopio. “We use a lot of technologies in the buildings, and that is how we achieve certifications. It is through the technology.”
For Sullivan, technology plays a more important role during the design and construction phases of development, this includes selecting sustainable materials, implementing responsible practices and incorporating efficient appliances and mechanical features from day one. “Technology is focused on the equipment during construction. That is what is really going to move the dial,” he says. “The architects and engineers use technology to achieve the goals, and there is a lot of science that goes into it.”
Likewise, Avanath uses drones to inspect properties during due diligence on new acquisitions. This not only provides a thorough inspection, but it also eliminates business travel, helping to indirectly cut energy consumption on a project.
While these technologies are helping owners and developers meet targets, they come with a cost—a high cost. To justify meeting these goals, in many cases, investors are willing to take a reduced return. “We have the initial capital partners that are our development partners,” says Procopio. “They have ESG mandates, and they understand the development profile, and they come into the deal saying that if these ESG goals are really important to us, this is how it is going to impact our returns.”
On the sale side, Procopio adds that investors are expecting a narrow return as well. “Funds simply have mandates and they can’t even pursue projects that don’t meet certain criteria. Their entire return profile is built around that type of acquisition,” he explains.
While Williams agrees that incorporating technology to meet these goals comes with a cost, he still sees a net positive on his bottom line. “Investments in technology and sustainability correlate directly to bottom-line profitability,” he says. “By incorporating more technology, we can optimize efficiency and reduce time waste. Sustainability features also aid in reducing costs at a property such as water costs, utility costs, etc. This is good from both an investment and a resident perspective. It is also important from an environmental perspective.”
Demand is also growing. Since the start of the pandemic, the ESG conversation has gained momentum, and it is no longer a choice for developers or owners. “The conversation has intensified significantly in the last 12 months. Two years ago, we were talking about ESG 5% of the time, and now we are talking about it 95% of the time. It has really taken over the conversation,” says Procopio. This is especially true for institutional capital, which has consistently announced aggressive commitments and energy reduction targets this year.
The tenant profile, particularly in the luxury class-A space where Procopio plays, is also demanding green features. “These are questions that we are getting asked,” he says. “If a developer is not focused on this, they are going to see a negative impact in their pro forma and in their ability to exit a deal.”
This confluence of trends is cementing the future of green living, and for technology as a vehicle to achieve these goals. “We believe that the focus on technology will only continue to grow and are seeing other apartment owners investing in technology as well. We made investments in technology very early on, which is why during the pandemic we were able to adapt and shift so seamlessly,” says Williams. “We believe that the pandemic has forced many operators to adopt more technology.”
While this is good news for the industry, Procopio is hoping that future conversations about ESG will be tempered—right now, there is a zealousness around environmental responsibility—and the conversation will include other challenges, like incorporating these features in lower-quality buildings or without increasing rents. “We are talking about ESG requirements, but we are not talking about the balance of affordability for residents,” he explains. “These things are all legs on the same stool. As we are increasing ESG requirements, we are increasing costs and increasing rents. I do think that we will come into a balanced view of this.”
Balance is the goal. It has been the catalyst for developers to integrate energy-cutting features, and technology has been the method of execution. More owners and developers are realizing the importance of ESG and adopting new policies, and it is having an impact. As Williams says, “We place an emphasis on sustainability and have been able to demonstrate the impact these strategies can have on property performance.” Ultimately, these policies and technology investments drive value—and isn’t that always the goal?