The US commercial real estate debt markets, in the early stages of creating and implementing green principles into their lending processes, are looking to their UK and European counterparts – as well as domestic equity investors – for guidance on how to write sustainable loans.
The move is being spurred in part by two factors, market participants tell affiliate title Real Estate Capital USA. First, the Securities and Exchange Commission in April published new governance that would mandate public companies to report the climate-related risks of their businesses. More limited partners also see green lending, and more broadly ESG-orientated investment policies, as a must-have for managers.
While most lenders are still working to formulate their lending policies around green loans, borrowers are already starting to go down this path. A case in point is Taurus Investment Management, which in April launched an approximately $500 million joint venture with Aegon USA Realty Investors to acquire value-added multifamily properties.
The partners have a bigger-picture plan to renovate and reduce the energy consumption of those assets and will work with Taurus subsidiary RENU Communities to improve energy efficiency, increase onsite energy production via solar panels and provide better air quality for tenants. It appears lenders want to know more about what they are doing.
“The interest is evolving week by week, month by month on the lending side,” Peter Merrigan, chief executive officer and managing partner of Taurus, says. “We just closed on a couple of assets that are also falling under this retrofit bucket and we are finding lenders are very attracted to it. I can’t put a number on it, whether it is 20 basis points better, for example, but we are able to get very attractive terms for what we have been doing that is energy-focused. We feel as if we are helping to educate the lenders as we work on deals with them.”
Taurus found from the start that its energy initiatives benefited the profitability of its projects. “When we did our initial project, we didn’t believe it would have a net drag on returns – we were looking to increase the returns and we have been successfully able to prove that thesis in a few cases,” Merrigan says.
This kind of collaboration is common among managers in the ESG space, notes Abigail Dean, the global head of strategic insights for Nuveen Real Estate. The firm, which has had a strong ESG programme for more than 10 years and a zero net carbon goal in 2040 for its real estate portfolio, has found the push toward a greener commercial real estate market to be an effort where firms are willing to talk about what works and what does not.
“It is one of those parts of the market that is more open to collaboration and the sharing of best practices,” Dean says. “We recognise as an industry that we are all together, that we are buying and selling buildings together. It’s something that is happening as an industry effort.”
For CBRE Investment Management, thinking about the impact of ESG-related issues on the future of a property is critical and something the firm is constantly considering.
“We think focusing on high-quality, future-proof assets is the right thing for our investors and for the future valuation of these assets,” says Sabina Reeves, chief economist at the New-York based real estate investment management firm. “One of the conversations we have about properties is what the capex assumptions for today’s standards versus what tomorrow’s standards will be.”