In Part 2 of our series, The Henley Group (THG) unpacks what Owners, Developers, and Investors should expect in the near and longer term. If you missed Part 1, read here.
The ESG Factor
ESG–Environmental, Social, and Governance–is a framework for evaluating sustainable developments, ethical business practices, and investment opportunity based on a set of metrics. While standardization is still in its infancy (especially in CMBS), specific definitions and certifications for ESG metrics are rapidly evolving.
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ESG > CRE: It's all about access to funding |
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ESG’s primary impact on CRE will be access to funding, including CMBS. Leading national lenders, such as Citibank and Deutsche Bank, and mortgage companies like CBRE and JLL, are applying ESG metrics to their underwriting, requiring borrowers to follow suit. Furthermore, CMBS rating agencies like Fitch and DBRS Morningstar have also instituted ESG metrics for underwriting, affecting credit ratings of CMBS loans.
Recently, a leading broker in the Chicago office sector at Cushman & Wakefield commented on seeing many tenants move from B/C class to LEED certified buildings. This new "shiny penny" down the street means B/C properties will have a hard time competing as ESG metrics become the norm across all facets of Lending.
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Investors & Owners: Focus on what you can change |
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E is for Environmental
Environmental is the clearest to define and dominates current impact on the CRE community.
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Did you know that CRE accounts for almost 39% of global carbon emissions?2 Building operations is not the sole contributor.
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While operational carbon accounts for 28% of global emissions, the building materials for construction—known as embodied carbon—accounts for 11%.3
There is a groundswell of interest across the board to find solutions to reduce carbon emissions from government and regulatory agencies to planners, architects, investors, developers, construction, and utility companies.2
>> For our Investor/Owner clients this means a concerted effort to pay close attention to the specific materials used in the design and construction of your commercial and residential buildings, focusing on energy efficient approaches that reduce carbon emissions and drive down the costs to operate buildings—from ENERGY STAR rated equipment and water conservation to environmentally safe building materials and outdoor design spaces to protect local ecosystems.
Better technology also plays a key role in collecting and reporting ESG data, providing enhanced data quality for ESG compliance and understanding investment risks and opportunities.
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Playing the long game in your community |
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S is for Social
Social describes the overall social relationship and impact CRE has on the community—from the health and welfare of employees and tenants to your neighbors in the surrounding community. CRE social strategy and impact could include a fitness center, organizing community events to give back, and instituting robust diversity and inclusion programs, to name a few.
>> How landlords treat tenants and what they build into the CRE experience contribute to an Owner/Investors reputation and standing in the community. Tackling social concerns, whether a company or an investor, means recognizing your CRE can play a significant and long-term role in the lives of the community you serve.
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G is for Governance
Governance focuses on a range of criteria to evaluate a company's management systems and its ability to manage long-term risk and opportunity. It goes well beyond values, ethics, and “doing the right thing," and takes a comprehensive view of practices and policies, including management diversity and structure, executive compensation, policies to prevent corruption, tax strategy, and political donations.4
>> Owner/Investors who embrace the structure and guidance of good governance manage risk and make effective decisions that directly impact performance. For the CRE community, it represents a way to build trust and create real value for tenants, investors, and the wider community.
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ESG and Commercial Real Estate Roundup |
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- Energy-saving/net-zero are the new normal.
- The gap between green rental premium and brown rental discount is widening.
- Green construction materials are available and viable.
- Regulatory requirements will continue to tighten.
- Effective risk and cost management can enhance resilience (such as a pandemic and extreme weather events).
- Affordable housing offers attractive “impact investing” opportunities.
- Health & wellness is influencing building design and operation.
- Corporate social responsibility is key to good governance.
- Benchmarking and reporting will be essential.
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Technology is critical to achieving ESG goals.4
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[1] Bloomberg. Feb 23, 2021. ESG assets may hit $53 trillion by 2025, a third of global AUM.
[2] IEA. 2018 Global Status Report | World Green Building Council. Towards a Zero-Emission, Efficient and Resilient Buildings and Construction Sector.
[3] IEA. Global Status Report 2017 | World Green Building Council. Towards a Zero-Emission, Efficient and Resilient Buildings and Construction Sector.
[4] CBRE. Jan 03, 2022. ESG and Real Estate: The Top 10 Things Investors Need to Know - A Turning Point for ESG.
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ABOUT THE HENLEY GROUP
We are expert CMBS Borrower Advocates with extensive experience partnering with clients to catalyze loan resolutions. Dedicated to service excellence and outstanding outcomes, we have worked out over $10 billion in CMBS deals to date. We are proud of the deep relationships The Henley Group has forged with Special Servicers for nearly 15 years. Our unique skill set, patient negotiating style, and understanding of Special Servicing allow us to get results that may not be available to you.
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Call David Goldfisher (617) 320-0284
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Call David Arthur (617) 719-1087
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