Recession diminishes climate change's effect on real estate development

October 19, 2009 |

The ongoing downturn in the commercial real estate industry has temporarily diminished the importance of climate change and alternative energy sources as a factor in real estate investment decisions, but interest is likely to pick up when the market rallies, according to a survey of U.S. financial industry leaders conducted by the Urban Land Institute (ULI). The survey also found that lenders tend to view energy efficiency -- rather than climate change -- as an important bottom-line issue, and are more apt to reshape their business strategies around reducing energy costs rather than reducing greenhouse gas emissions.


ULI, with nearly 34,000 members worldwide, is a global, interdisciplinary, nonprofit research and education organization dedicated to responsible land use. The institute’s survey, conducted through ULI The Americas in May 2009, drew responses from more than 200 top executives of some of the leading financial institutions in the United States, including investment funds, institutional investors, real estate investment trusts, and banks, as well as individual investors. The survey findings, all anonymous, are summarized in a ULI report, Investment Niche or Necessity? Climate Change, Land Use and Energy 2009, which shows that most respondents are adopting a “wait-and-see” attitude regarding business strategies related to climate change legislation.


“For now, the global downturn has trumped emerging attempts to realize benefits from green development,” the report states. “For investors, thinking green today refers to dollars. Environmental issues play a factor only when they produce an immediate return or mitigate an investment risk.”


The report notes that the federal government’s emphasis on “greening” America, reflected in the economic stimulus funds aimed at reducing the carbon footprint of both new and existing buildings, “hasn’t prompted many (investors) to leap on the bandwagon…They are waiting to see how they’ll be hit by regulation yet to come, on the federal, state and local levels.”   


Still, while interest rates and job growth dominated investment concerns among the survey respondents, the majority said that issues related to climate change will be increasingly important in the years ahead. In the interim, “many are doing what they can on a few fronts, such as conducting energy-efficiency analyses and increasing their internal expertise…What investors do today, and what they anticipate having to do in the future are two separate matters,” the report says.


Some survey highlights:

Forty percent of the respondents said the economic downturn had somewhat weakened the business significance of climate change and energy issues; an additional 17 percent said it had significantly weakened the significance of those issues.Nearly 80 percent said they have not yet altered their business models or approach to deal structures due to climate change and energy issues.Nearly half said climate change and energy issues would be at least somewhat important over both the next year and the next five years. About 15 percent rated climate change and energy issues as important over the next year; over the next five years, about 26 percent.Nearly 50 percent said their companies have developed significant expertise in energy or energy-efficiency issues, and one-third have developed professional expertise in sustainable community development.Eighty percent said their due diligence reviews include explicit energy efficiency analyses, and nearly that many include transit accessibility and location efficiency in the reviews. Conversely, only about 10 percent factor in carbon footprints.

The fact that most respondents are waiting on the outcome of legislative and regulatory activity illustrates the paralyzing effect of unknowns in the real estate investment sector, pointed out ULI Chairman Jeremy Newsum, executive trustee of The Grosvenor Estate, based in the U.K. The Grosvenor Estate includes Grosvenor, an international property group of privately-owned property development, investment and fund management businesses with interests in Central London, other areas of the U.K., continental Europe, Southeast Asia, North America and Australia. Compared to the U.S., climate change is a more pressing business issue for lenders in Europe, because green and sustainable development has a much longer history there, in terms of both public policy and development patterns, Newsum noted.


“In the U.S., with so much still unknown about the impact of government policies related to climate change, the cautious approach by the lending community is to be expected,” Newsum said. “However, the fact that investment decisions are not currently based on climate change does not mean that this will continue to be the case in the years ahead.  The pause necessitated by the downturn is offering an opportunity for real estate investors and developers to get smarter about what they need to do in an industry in which being green will mean being competitive.”


The report was prepared as part of ULI’s ongoing work to promote green and sustainable development, and to underscore the importance of responsible land use practices in mitigating climate change. The institute maintains that real estate development that conserves both land and energy has a key role to play in the environmental and economic viability of urban areas, and represents a key strategy in reducing carbon emissions in not only the buildings sector, but the associated transportation sector. 


ULI Chief Executive Officer Patrick L. Phillips predicted that while green investing has taken a back seat during the downturn, it will gain relevance and importance as the market rallies. As more information is gathered about the performance of the green projects that entered the market prior to the recession, it will be
easier to determine impacts on value for both lenders and equity investors
, he said.


In addition, rising market demand – which was not addressed in the survey – is likely to influence lending decisions in the future as much or more than legislative and regulatory issues, Phillips noted. For instance, there is mounting research suggesting that Generation Y, or the “echo boomers,” will want to live and work in more compact urban environments with integrated land uses that minimize the need to drive, and, as a result, have a lower carbon footprint than traditional suburbs. “We will see a greater response resulting from the pressure to meet consumer demand and offer a competitive product than from the industry being forced to
respond to still-emerging public policies
,” Phillips said. “By investing in and developing communities that conserve land and energy, land use   professionals are helping to mitigate climate change. Whether or not that is the target goal, it’s an impressive end result.”


The report was supported by Cherokee, a national real estate investment firm based in Raleigh, N.C., and Akerman Senterfitt, a national law firm headquartered in Miami. “With this report, ULI continues to demonstrate its leadership and to fill a gap in the market by communicating the critical role that transportation, land use and the built environment play in addressing key global economic and environmental challenges such as climate change,” said Cherokee Chief Executive Officer Thomas F. Darden.


“The report points to important findings regarding attitudes and initiatives about the continued changes in our natural environment,” said Akerman Senterfitt Chairman and Chief Executive Officer Andrew Smulian. “It gives us real insights on how the industry and other opinion leaders are approaching the broader issues surrounding climate change and energy costs, and how such issues will impact business decisions moving forward.”

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