Q&A: Andrew J. Nelson, head of sustainability research, RREEF
Conventional thinking might tell you that in times of economic crisis, the last thing on institutional investors’ minds is sustainability and green initiatives. But a new report from San Francisco-based RREEF, “How Green a Recession? — Sustainability Prospects in the U.S. Real Estate Industry,” makes the case that in spite of this recession, sustainability should be a fundamental part of any long-term investor’s strategy.
Andrew Nelson, the author of the report, leads RREEF’s sustainability research and relies on more than 20 years of experience working in private and public real estate investment and development. With more than $67 billion in assets under management, RREEF is the alternative investment management division of Deutsche Asset Management, a member of the Deutsche Bank Group.
“There is little evidence to suggest that property owners and investors are backing down from their long-term sustainability efforts,” notes Nelson. NREI asked Nelson to explain the findings of his recent research.
NREI: Are you seeing more appetite for green buildings among institutional investors?
Nelson: I do think there has been a fundamental shift in the way institutional investors and many investors look at green, and it’s not just a frill or a transitory thing that will pass. It is actually fundamental to the way that we do business. The markets have changed in terms of what tenants want, in terms of what governments are requiring and in terms of the volatility of energy prices. Investors don’t want to be caught on the wrong side of these issues.
When institutional investors buy core properties they are going to hold them for seven to 10 years, so they have to be looking out at what the markets will be like a decade from now and not just what they think the immediate short-term market conditions are going to be. You have to look down the road to see what the standards for buildings are going to be then. When you sell these properties, what is the value going to be. The biggest risk is buying and developing properties now that become substandard or obsolete because they don’t have the right energy standards or the right features that tenants want and that other investors want to acquire.
NREI: In your report, you say the demise of green building is “greatly exaggerated, and certainly premature.” Why is the green initiative still viable given the economic turmoil?
Nelson: First, if you are in extreme distress you are going to focus on your most immediate concern, which is stopping the bleeding. But you are always going to be looking out at the longer term. It’s probably not the right time for many investors to be thinking about making major new investments in order to green their portfolio, but it is still something that as an owner and a manager you need to be cognizant of in terms of addressing the volatility in energy prices and what tenants want. Corporations have not backed down in their energy commitments for wanting to occupy green buildings because it’s part of their image and business plan to have more sustainable business practices.
NREI: Why will property owners feel continued pressure on sustainability? Are tenants demanding it?
Nelson: Using Deutsche Bank as an example, last November it made a commitment to work toward being carbon neutral by 2012 both through occupying more sustainable facilities and other initiatives. We are not alone in that. Many other corporations are doing that, setting worldwide standards for the types of facilities they occupy with specific reference to sustainability.
NREI: Does this thinking run parallel to the Obama administration’s policy to push energy efficiency as a national issue?
Nelson: It’s easy to get caught up in the market conditions of the right here and now. But looking forward, energy security and energy prices are still a big issue for our country and prudent investors are going to be cognizant that government is not pulling back at all. Now the federal government is actually catching up to where a lot of local governments have been.
Real estate is ultimately a local business, and in city after city, government regulation is swinging from what had been incentives to go green to mandates. So anyone who wants to develop space and make major renovations is going to have to be going green anyway. This happening in all of the major money centers of both North America as well as Europe and Asia.
NREI: Coming out of this recession, will green buildings be better investments, and why?
Nelson: We’re speeding to the point in many markets where green buildings are becoming the standard for Class-A buildings, the ones that are demanded by major corporate tenants and institutional investors. One of the real issues that has held back institutional investors is the supply has been so limited. If you wanted to buy green buildings, there just wasn’t very much. So much of the green building stock was built by government agencies, corporate owner/users and universities — and it wasn’t available for the investor market.
That is changing. Many of the corporations that built green buildings are going to be stressed during this recession and they’re looking for ways to deleverage, to lighten their balance sheet and raise some additional cash, so you see companies considering sale-leasebacks and inevitably some of those are going to be green buildings.
NREI: What is the key takeaway for investors from your report?
Nelson: The recession might slow some of the sustainability issues in the industry but they will not derail them. There is a deep and multifaceted set of reasons as to why sustainability is moving forward and will continue to move forward having to do with the investor side, the tenant demand side, the government regulation, and frankly just good business sense. All of the forces are moving in the same direction and I don’t see that changing. There has been little to suggest otherwise.