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by Tom Konrad Ph.D., CFA
Why Green Buildings are Profitable Buildings
Buildings are responsible for approximately a third of greenhouse gas emissions, so making buildings more efficient and switching them to renewable sources of energy is an essential part in addressing climate change.
Fortunately, new technologies such as cold climate heat pumps, heat pump water heaters, induction stoves, as well as the ever falling cost of renewable electricity and improvements to insulation and building envelopes often provide opportunities to improve buildings while achieving extremely attractive investment returns from the energy and maintenance savings alone.
Because of the great financial returns, building owners who recognize and implement these opportunities are likely to be at a competitive advantage to those that continue with business as usual. They will also be better prepared when governments require building owners to reduce greenhouse gas emissions as part of their own environmental efforts.
Real Estate Investment Trusts
Stock market investors can invest in real estate through a large number of publicly traded Real Estate Investment Trusts, or REITs. Due to their special tax status (REIT income is not taxed at the company level if at least 90% of it is distributed to investors), REITs also often have relatively high dividend yields, making them attractive to income investors.
Nearly every REIT on the stock market has a sustainability page touting its green building achievements. Unfortunately, often this is just greenwashing: highlighting a sustainable project or touting efforts to engage with tenants on renewable energy while continuing with business as usual across the rest of the portfolio.
But this is not true for every REIT. There are REITs that have made strong green commitments, and have the track records to back them up.
REIT Industry ESG Report
To help me identify some of these truly green REITs, I started with the REIT Industry ESG Report 2022 published by the REIT advocacy organization, Nareit in July. Since Nareit is an advocacy organization, we can’t expect it to publish an industry green ranking which might upset lower-ranked REITs, but it does contain 15 case studies.
I went through these case studies, searching for convincing action on climate change. I eliminated the ones that focused on single buildings, or on social issues (the “S” in ESG). Of the ones that were left, here are the ones that seemed to be committed to greening their entire property portfolios. I’ve written some short notes on the green efforts highlighted in the case studies, and included the page number in the REIT Industry ESG Report so you can read and decide for yourselves.
- Rexford Industrial Realty (REXR, p.36) While this REIT is short on its list of achievements, it seems to be incorporating the environment in decision making processes.
- American Tower Corp (AMT, p.57) The REIT’s business of sharing space on communication towers has a lot of inherent sustainability. On top of this, they have significant fossil fuel usage reduction achievements and goals.
- Federal Realty Investment Trust (FRT, p 60) I have mixed feelings about this one… It does not build on greenfields (sites which had not been previously built on- a very important step) but makes no mention of energy usage at its properties.
- Iron Mountain (IRM, p.62) – Has a very strict hour by hour clean energy sourcing goal which will likely drive innovation, plus a company wide process of energy use analysis and reduction.
- Prologis (PLD, p.66) – company wide commitment to green certifications on all new and redevelopment projects.Uses low carbon building products, and adopts energy reducing tech and renewable energy on its buildings.
There Are More
Note that this list is far from comprehensive… it’s just the five most convincing examples highlighted in the Nareit report. Many other green REITs exist… my personal favorite being Hannon Armstrong Sustainable Infrastructure (HASI).
Note: This post was first published on my Patreon page. You can gain an early look at drafts of my articles and other benefits by becoming a patron.
DISCLOSURE: Long HASI. A family member owns PLD.
DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results. This article contains the current opinions of the author and such opinions are subject to change without notice. This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.
