I was recently talking to several different commercial lenders for multifamily real estate and one comment caught my attention. While we are moving towards green new deals and ESG (environmental, social, and corporate governance) type environments, it could be possible that future real estate funding might have some more green energy strings attached. Studies have shown that 39 percent of global carbon emissions come from buildings and construction.
While currently lending does not require any green attachments, one lender told me that they only do loans of $20,000,000 or more—unless there is an ESG component in which case they would do any loan amount. I believe developing an ESG story or some sort of green initiative in the future will help secure better financing terms.
Look at this graph from CBRE that shows commitment to net-zero carbon emissions by real estate owners/investors:
Within the next 10 years you will probably see more owners and operators jump on this trend and maybe even pushed there by legislation. It may be a good idea to start thinking about ways to pitch an ESG deal moving forward as the regulatory environment begins to tighten. An investor could get more favorable terms like with the Fannie Mae Green Financing, or it could be mandatory in the not-too-distant future.
Green Leases
A green lease is a commercial lease between a tenant and a landlord with the goal of environmental efficiency. This pertains mostly to commercial real estate such as office space where the tenant agrees to certain terms to reduce waste or energy output. They share the burden of lowering emissions by the landlord paying for upgrades and the tenant paying higher rent as an example.
I believe the green leases are coming for apartment renters soon. This may be in the form of higher rent while the apartment owner spends money on green energy capex or an agreement on temperature settings.
Technology
The way many of the ESG or green movement initiatives will be implemented will be with technology. If you can get ahead of the curve on how to track your buildings performance or ideas on how to do this, it will allow you to tell the story about how your building started at X and is now at Y. This could help you get better financing rates, better resale value, or maybe carbon credits. We are at the beginning of this movement but it seems likely to last.
Be on the lookout for new technology as well that tracks ESG performance. Some newer buildings are being built with BMS (building management system) that monitor everything in the building with microprocessors. It gives data on air conditioning, ventilation, lighting, etc. This is the type of data that will help with ESG narratives in the future.
Conclusion
While there currently are no ESG requirements to finance a multifamily purchase, I suspect that it will play a vital role in the future. It is something to at least consider and watch out for when purchasing buildings.
