Download - Metrics for Responsible Property Investing: Developing and Maintaining a High Performance Portfolio
-
8/9/2019 Metrics for Responsible Property Investing: Developing and Maintaining a High Performance Portfolio
1/43
November 2009
Metrics or Responsible Property Investing:
Developing and Maintaining A High-Perormance Porto
Paper or Presentation at 2009 ULI Fall Council Forum
ULI
[DRA
FTFOR
COM
MENT
]
-
8/9/2019 Metrics for Responsible Property Investing: Developing and Maintaining a High Performance Portfolio
2/43
Acknowledgements
The authors are indebted to Scott Zengel o Bay Area Council and Nick Stolatis o TIAA-CREF or their
willingness to participate in the case study and to test the RPI metrics in the real world. Their insights were
invaluable. The authors would also like to thank Andrea Fernandez o Arup or her tremendous assistance
in researching indicators, interpretation o data, and editing.
Lisa Michelle Galley
Founder and Managing Director
Galley Eco Capital
Jean Rogers
Principal
Arup
David WoodDirector
Responsible Property Investing Center
Boston College
-
8/9/2019 Metrics for Responsible Property Investing: Developing and Maintaining a High Performance Portfolio
3/43
-
8/9/2019 Metrics for Responsible Property Investing: Developing and Maintaining a High Performance Portfolio
4/43
-
8/9/2019 Metrics for Responsible Property Investing: Developing and Maintaining a High Performance Portfolio
5/43
Responsible Property Investment [RPI] is an
emerging investment strategy and discipline
concerned with integrating environmental,
social, and governance [ESG] data intoinvestment decision-making. Proponents
point to increased regulatory risk, resource
constraints, changing consumer preerences
and demographics all as they relate to the
increased importance o environmental and
social issues -- as drivers o change in the real
estate investment industry.
To date, however, the industry has yet to
develop standards to evaluate ESG data
that compare to its traditional evaluation o
portolio perormance. The emergence othird-party standards oer investors some
guidance especially on environmental issues,
but tend not to cover the range o RPI. In
any case, there has yet to develop a ully
elaborated set o issues, vocabulary, and
measurement that allow investors can use to
evaluate whether their portolios are achieving
their environmental and social goals, or that
enable investors to evaluate the relationship
between ESG data and nancial perormance.
One important step along these lines willlikely be the development o an industry-
standard set o metrics to evaluate ESG
perormance that allows investors to measure
perormance across their own portolios, to
enhance their acquisition and disposition
decisions, and to report their perormance to
investment partners, regulators, civil society
organizations, and other stakeholders.
For ESG analysis to become industry best
practice, some system o measurement will
need to establish rigorous standards that hold
investors accountable or their claims, and
oer investors the capacity to avor higher
perorming buildings and portolios in practice.
1 Introduction
These metrics must be rigorous enough
to allow or substantive analysis, but
fexible enough or investors to tailor them
to their specic needs. They have to becomprehensive enough to capture real
perormance, but simple enough to be usable
in the context o investments in the real world.
These challenges will require collaboration,
and a willingness to test ideal systems in the
day-to-day world o investing
This paper is a preliminary eort to address
these challenges. Ater reviewing the state o
real estate in the wake o the recent nancial
crisis, and the role o RPI in that context, we
oer a set o sample RPI metrics, along with2 case studies with actual investors (TIAA-
CREF and the Bay Area Fund o Funds). Our
hope is to catalyze a discussion on how to
make metrics that are rigorous and useul. We
want to raise the prole o this issue among
industry proessionals, and draw rom their
expertise and experience to develop a system
that helps the industry ace the imperatives o
key environmental and social challenges, and
capitalize on the opportunities that will come
with a transorming economy.
Real estate investment plays a undamental
role in determining how society uses
resources, how the built environment
shapes social lie, how economic activity
can be sustainable over time. As an asset
class, real estate oers especially tangible
demonstrations o the importance o ESG
analysis in creating value or investors and
society alike. We believe that a robust
metrics system can help shape the market
to better create sustainable outcomes or all
stakeholders.
-
8/9/2019 Metrics for Responsible Property Investing: Developing and Maintaining a High Performance Portfolio
6/43
6
Institutional real estate is in the midst o a major downturn, as real estate perormance has
both driven and ollowed the plunge in US and worldwide economic activity. At their peak,
annual real estate returns or tax-exempt property owners (governments, pension unds,
etc), ranged rom 14%-20% rom 2003-2007
1
.
2 Institutional Real Estates Volatile Investment Environment
2008 will be remembered as a year where
property returns or institutional investors
ended at an estimated -6.46%, refecting
the impact o a national credit and housing
crisis, and speculative excess tied to real
estate investment. It is unclear to what extent
real estate investment will track economic
recovery, given the size o the bubbles that
have popped.Most in the economy clearly recognize
that credit and investment capital is highly
constrained and an easy credit environment
will not be back or a long time. Real estate
owners must become experts at economic
sustainability; conserving and organically
growing cash fow though long-term
investment strategies, while becoming more
ecient users o capital the next several years
to come.
Figure 1: Institutional real estates performance, as measured by the NCREIF Property Index as of 12/31/08
Hidden Rise o Un-Sustainability
The current credit crisis has exacerbated
other problems within commercial real estate
hidden during the boom years -- that have
only recently come to light.
During the real estate boom years o 2004
to 2007, low interest rates, easy liquidity and
increased debt leverage had combined to
help infate real estate prices. Many investors
ocused on these speculative returns at the
expense o attention paid to the real rise in
energy and water costs on their properties.
During that period, rising (and fuctuating)
energy costs, particularly within the past 36
months, have been increasing consumer
cost o living and weakening the business
sector through higher costs o operations.
In addition, uel costs or transportation
have also played a key role in the real estate
crisis, impacting with greater orce on thoseproperties in suburban areas or locations with
poor access to public transit.
The potential long-term risks o exposure to
climate-related regulation, changing consumer
sentiment, and even the simple operating
costs o buildings in their portolios have
become more apparent in recent years. As the
short term orientation o real estate markets
has suered, the long term implications o
sustainability have risen in importance.
1 Data rom the National
Council o Real Estate
Investment Fiduciaries as
o 12/31/08 (www.ncrei.
org; accessed on 4/6/09).
The graph shows the
returns or the NCREIF
Property Index (NPI) or
the nation, which includes
over 4,200 properties at
a market value exceeding
$150 billion. The NPI
income graph shows
the return rom the Net
Operating Income (NOI)
or the properties and the
NPI capital graph showsthe return rom gain in
value net o any. Returns
are calculated by NCREIF
quarterly based on
appraised values and are
shown on an unleveraged
basis as i properties were
all purchased on an all
cash basis.
8%
6%
4%
2%
0%
-2%
-4%
-6%
-8%
-10%
-12%
78 82 86 90
NCREIF Property Index Total ReturnIncome Return
Capital Return
QuarterlyReturn
Year
94 98 02 06
-
8/9/2019 Metrics for Responsible Property Investing: Developing and Maintaining a High Performance Portfolio
7/43
The very widespread problem o energy,
water, and uel supply and price risk helpedto propel environmental concerns to the
national agenda and even partially shaped the
outcome o the 2008 American presidential
election. Stakeholders rom regulatory
agencies to consumers have become more
aware o the negative impact o buildings on
the use o natural resources and the related
eects building siting and operations have on
communities.
Widely cited statistics note that 40 percent
o primary energy use, 72 percent o U.S.electricity consumption, 29 percent o
carbon dioxide emissions, and 13.6 percent
o potable water consumption are due to
buildings.
Against this backdrop, buildings constructed
using green building principles are present a
compelling alternative:
Energyuseingreenbuildingis29to50
percent less than non-green counterparts.
Greenbuildingsuseanestimated40percent less water.
Carbondioxideemissionsingreen
buildings are reduced by 33 to 39
percent.
Solidwasteattributabletogreenbuildings
is reduced by 70 percent.
2.1RPI in the Contemporary Real Estate Environment
More comprehensively, the built environment
shapes undamental decisions about whereand how to live, social inequity in the provision
o housing, and access to public and private
services.
Responsible Property Investing (RPI) is a
response to increasing public concerns
about the environmental and social
impacts o buildings, in conjunction with
a growing awareness among investors
that environmental and social analysis can
enhance their ability to assess building and
portolio perormance over the long term.
RPI acilitates a more comprehensive
engagement between investors, their
properties, and tenants by taking into
account social, ethical and environmental
factors in the selection, retention and
realization of investment, and the responsible
use of rights (.) that are attached to such
investments2. Responsible property investing
has emerged in response to the need or
investors to adopt responsible investing
principles, which are more tailored or propertyinvestments.
2 Mansley, defnition o
Responsible Investing
RPI takes into account the social,
ethical and environmental factors in the
selection, retention and realization of
investment, and the responsible use of
rights attached to such investments
-
8/9/2019 Metrics for Responsible Property Investing: Developing and Maintaining a High Performance Portfolio
8/43
8
The United Nations Environment Programme
Finance Initiative Property Working Group
has dened RPI in terms o social and
environmental dimensions o real estateinvestment, including:
SmartGrowth(e.g.,transit-oriented
development, walkable communities,
mixed-use development
SocialEquityandCommunity
Development (e.g., aordable housing,
community outreach, air labor practices,
workorce development)
UrbanRevitalization(e.g.,goodsand
services provided to underserved
communities, inll development, fexible
interiors, browneld redevelopment)
EnergyConservation(e.g.,energyefcient
buildings, conservation retrotting, green
power generation and purchasing)
EnvironmentalProtection(e.g.,water
conservation, recycling, habitat protection)
WorkerWell-Being(e.g.,plazas,indoor
air quality, childcare on premises,
handicapped access)
HealthandSafety(e.g.,propertysecurity,
avoiding hazards, rst aid readiness)
LocalCitizenship(e.g.,aesthetics,
minimum neighborhood impacts,
considerate construction, stakeholder
engagement, historical preservation)
CorporateCitizenship(e.g.,regulatory
compliance, sustainability disclosure,
independent directors, and adopting
o independent voluntary codes such
as LEED, Energy Star, Green Seal, UNPrinciples or Responsible Investment, and
Global Reporting Initiative)
These principles highlight the range o RPI
issues, and also create a ramework or
applying ESG analysis to the real estate
asset class. In practice, these issues havebeen treated as vital by many investors RPI
oers a means to bring them together into a
coherent ramework.
Industry Practice Today
The application o responsible property
investing principles to institutional real
estate portolios can best be ramed by
understanding the current context or property
investment and investment metrics here in the
United States.The Real Estate Roundtable estimates the
size o the US commercial real estate market
at $5 trillion, with approximately $2.5 trillion
in assets owned by institutional investors.
The balance is owned by corporations.
Institutional investors can be public unds,
union/multi-employers, oundations,
endowments, healthcare, insurance
companies, high net worth individuals or
mutual unds.
Those investors utilize a diverse array onancial structures to achieve their investment
objectives, such as equity, xed income,
non-US equity or xed income, balanced
real estate or alternative investments. Each
o these nancial structures have distinct risk
and return proles.
-
8/9/2019 Metrics for Responsible Property Investing: Developing and Maintaining a High Performance Portfolio
9/43
Proessional real estate investment operates
through the contract between the institutional
investor and the asset manager, also
called the real estate manager. The goal othe management contract is to establish
relationship guidelines, perormance goals,
and regulate investment discretion. The
typical selection criteria that institutional
investors use to select real estate managers
are:
Experienceandstabilitymanagingreal
estate
Competitivenessoffundperformance
Competitivenessoffees
Appropriatefunddiversicationanduseof
leverage
The classic measures o success, which
ultimately determine whether the institutional
investor is receiving satisactory perormance,
appear in portolio characteristics below
and in Figure 2, which are the most direct
measures o und perormance:
Portolio Characteristics
1. Fund strategy: core, value-added,opportunistic, etc.
2. Legal structure and und type: closed-end,
open-end, private REIT, etc.
3. Number o properties
4. Use o leverage
In other words, contemporary institutional real
estate investing happens through a diverse
array o nancial vehicles, managed by real
estate managers. These arrangements are
considered market standard because theyare thought to encompass nearly all o the
most relevant criteria and processes needed
to obtain market or above market rates o
return on an investment o institutional capital
within real estate.
RPI Metrics as Enhanced InvestmentAnalysis
The endgame o using metrics is to
provide real estate market participants with
transparency, benchmarking, risk assessment,
perormance evaluation, and an unbiased
way to compare asset managers investment
eorts.
The likelihood or reaching that endgame,
however, relies on one undamental, largely
unspoken, assumption, which drives many
o the explicit agreements and assessment
parameters that the current set o
inormation used by institutional real estate
investors is complete, and delivers predictable
orecasts o uture perormance. In other
words, the key assumption within the system
o perormance criteria and measurement
outlined above is that there are no new issues
or actors beyond that highlighted above,
which would aect the business system o
real estate including the results (returns) o the
investment process.
In the next section, we examine why that is no
longer the case.
FundDiversifcation
Lie CycleDiversifcation
PerormanceSummary
Figure 2: Market standard fund performance characteristics
Year
Quarter
Income
AppreciationGross total return
Net total return
Dividend paid out
Existing buildings
Redevelopment
Development
Land
Property type
Geographic
Property size
-
8/9/2019 Metrics for Responsible Property Investing: Developing and Maintaining a High Performance Portfolio
10/43
10
Many experts have written extensively about
global sustainability challenges and theimpacts are now being observed in many
kinds o systems. The increased global and
2.2Impacts o Sustainability on Institutional Real Estate
Table 1: Sustainability Impacts on Real Estate
social awareness about sustainability in
general has sharply impacted institutional realestate in several interrelated ways, as shown
in the table below.
Sustainability-related Drivers Impacts on Institutional Real Estate
Opportunities Challenges
Global natural resource depletion in particularossil uels and water.
Green or resource-ecient buildings
Sustainable mixed use developments
Commissioning and retrotting green
Potential obsolescence o non-green buildings
Unreliable energy supply and pricing
Unreliable water supply and pricing
Increased building construction and costs
Increased regulation
Increased global atmospheric carbon levels Zero-carbon eco districts. Meeting zero carbon targets at building scale
Financing renewable on-site energy generation
Negative impacts o suburban land developmentpatterns
TOD, urban-inll properties
Adaptive reuse
Land use restrictions
Dearth o clean, economical public transportation Increased value o TOD sites Cost o public transit
Demographic trends toward urban environments TOD, urban-inll properties Increased competition or prime urban locations
Growth constraints due to municipal util ities Sel suciency:getting o the grid or powerand water
New nancing tools through ESCOs
Increased operating costs or power and water
Increased risk o business interruption due topower ailures
Limitations on development OR requirement tound adequate water and power supply acing
limits on supplyFinancing investment in sustainable water andenergy inrastructure
Bui ld ing energy label ing requirements Competit ive posit ioning or owners o EnergyStar rated buildings
Heightened legal compliance associated withdisclosure
Market leasing and sales risk, i disclosures areunavorable
Impending carbon legislation Monetization o carbon reductions rom energyeciency measures
Carbon tax on properties in the near to mid-term
Utilities acing renewable portolio standards On-site generation can be win-win(33% in Caliornia)
Contract risks
Space requirements or on-site generation
Insurers overexposed to climate chvange risks Green building policies oered through someinsurers (Firemans Fund, Travelers) Increasedattention on indoor environmental health
Lower insurance premiums or implementinggreen and/or energy ecient approaches
Higher insurance costs or a host o businessliability issues
Withdrawal o insurers rom some real estatemarkets
Some green building techniques perceived asrisky
Increased attention on indoor environmentalhealth
Green buildings with healthy materials,and good access to daylight and views
Decrease in tenant satisaction
Legal risks o poor indoor air quality
-
8/9/2019 Metrics for Responsible Property Investing: Developing and Maintaining a High Performance Portfolio
11/43
The above are sustainability-related orces
which constitute risks and opportunities
or institutional real estate investors. At the
portolio level, these risks and opportunities
will express themselves in the ollowing
property perormance eatures:
Increasedorreducedrevenueandoverall
cash fow
Rentgrowth,occupancyratesand
ongoing investment cost management
Assetoperatingexpenseefciencyand
cost escalation management
Depreciationandobsolescence
Riskproleoftargetproperties
Discountandcapratesappliedto
properties
To the extent that a real estate portoliomay benet due to the presence o these
impacts, they constitute portolio perormance
opportunities. Nonetheless, most o todays
market standard portolio perormance
metrics do not directly account or any o
these orces, meaning that sustainability-
related opportunities and risks that may be
present within these portolios currently lie
outside the real estate business system,
unmeasured.
The presence o these new orces within the
real estate universe means that institutional
investors and their managers will have to
expand their measurement and denition o
perormance to include an assessment o
these sustainability-related actors. By doing
so, they gain an understanding o portolio
perormance which refects important newtrends and comes closer to what they always
strive or: transparency, objectivity, and
credibility within the new context o investing.
In order to create measurements that are
meaningul across regions, sectors, and
investors, there is a need or a relatively
uniorm set o additional metrics which are
better suited or the new issues acing real
estate investing.
In 2008, the Global Reporting Initiative undertook a review o major
sustainability reporting eorts in the construction and real estate
sector. It aimed to understand the relative requency o which key
sustainability indicators were measured and reported by leaders
in the eld. Among those already producing detailed sustainability
reports, the review shows that portolio-level perormance is under-
reported and that no standard exists or metrics at this level. The
reporting requency o identied indicators varies widely across
the sample o investors, making valuable cross-industry analysis
impossible. Even many o the leaders in the industry report much
more on CSR and philanthropic issues than those o portolioperormance. We hope that the GRI Sector Supplement or
construction and real estate, now in development in coordination
with a quorum o participating industry leaders, will address these
concerns beore its anticipated release in 2011.
-
8/9/2019 Metrics for Responsible Property Investing: Developing and Maintaining a High Performance Portfolio
12/43
12
A number o initiatives, both industry-wide and
investor-specic, have attempted to quantiyand report on sustainability metrics outside
the traditional scope o portolio analysis.
These include the Global Reporting Initiative
and Principles or Responsible Investing at the
industry scale, and, or instance, the Investa
Sustainability Indicators and CBRE Standards
o Sustainability at the individual company
scale.
To varying degrees, these eorts track (or
aid in tracking) data on natural resource use,
building perormance, environmental andcommunity impact, and other key indicators.
Many o them ocus on (or are derived rom)
an understanding o building perormance,
conducting analysis at an asset level rather
than a portolio level. In the meantime,
gaps at the portolio level are present to the
extent that sustainability data may be both
inconsistent and misrepresented, keeping
this valuable inormation rom reaching its
ull potential or investors, asset managers,
stakeholders, and industry analysts alike.The eld o RPI lacks a powerul, standardized
set o portolio-level metrics which is
recognized and used by investors and
managers across the real estate industry,
thereby dening and giving credibility to the
practice o RPI. Such a system would not
only create improvements in building and
portolio perormance, but would also allow
or benchmarking and development o a
database o comps. Currently, reporters
are selective about which metrics to includeor exclude, and data is not comprehensive
or comparable rom one portolio to
another. Even those rms leading the eld
o responsible investing and sustainable
asset management may report only one-o
examples o buildings or initiatives which
cannot be extrapolated to obtain a view o
portolio level perormance.
3 New Metrics or a New Era
3.1Gaps in current reporting eorts
Showcasing exemplary projects can be
helpul to outside parties and a great methodo generating positive eedback, but should
not be done without providing relative
perormance with respect to both the rest
o the portolio and the industry as a whole
(where possible). For example, two pages
o discussion in a report o a single LEED-
Certied building may mask the act that the
majority o the portolio consists o business-
as-usual properties. A unied system o
RPI metrics to measure perormance at
the portolio level would prevent thesediscontinuities and help establish standards
and best practices or high-perormance
portolios sector-wide.
In 2004, Paul Hawken studied the makeup o socially responsible
investment (SRI) unds against traditional unds and determined
that an SRI portolio had almost identical characteristics and
holdings as non-SRI investments. Furthermore, he ound that
there were no standards, denitions, or ormal codes o practice
or SRI. To continue to remain relevant, portolios aiming or RPI
achievement should have a markedly dierent, more sustainablemix o assets than non-RPI portolios. This dierence should be
quantitatively demonstrable, an aim which this system o metrics
can help to achieve.
RPI metrics, therefore, must use
vocabulary that is flexible enough to
allow for a variety of financial, social and
environmental advantages, and still be
able to differentiate responsible propertyinvesting from more conventional real
estate projects
-
8/9/2019 Metrics for Responsible Property Investing: Developing and Maintaining a High Performance Portfolio
13/43
The scope o RPI is broad. It includes, or
example, deep green projects that ocus
on poor communities or environmentally
ragile areas, energy ecient buildings that
oer clear nancial advantages through
reduced operating costs, aordable housing
projects that draw upon local tax credits,
and now carbon reduction projects that
hedge risk and result in renewable energy
certicates. RPI metrics, thereore, must use
vocabulary that is fexible enough to allow or
a variety o nancial, social and environmental
advantages, and still be able to dierentiateresponsible property investing rom more
conventional real estate projects.
3.2Proposed metrics or RPI evaluation
Building o o the ten elements o social and
environmental impact and opportunity in real
estate as dened by the UNEP FI Property
Working Group, we have developed a set
o 26 quantitative metrics that can help
investors to nd, create and articulate value
through improving the economic, social, and
environmental prole o their investments. We
recognize, o course, that individual investors
will tailor their adoption and use according to
their specic investment strategies. These
metrics were selected or their ability to allow
real estate proessionals to better addressrisks and identiy opportunities or long-term
value creation. The metrics take two orms
to support dierent use cases: acquisition and
portolio management, as described below.
We envision three primary uses or RPI
metrics in practice: inorming acquisition
decisions, enhancing portolio management,
and reporting perormance. Metrics can be
used to guide investors across the lie cycle
o responsible property investment, rom
existing buildings to new development, rom
acquisition to disposition.
Because o their dierent purposes -- at the
acquisition stage (evaluation o one property)
or at the level o portolio management
(evaluation o the portolio o assets in its
entirety), RPI metrics take dierent orms
depending upon the use case.
3.3Use cases or RPI metrics
Reporting can happen in both instances:
characterizing the nature o an RPI
opportunity, or demonstrating or stakeholders
how investment values have been put into
practice in an RPI portolio, and how a
particular investment strategy can create value
over time.
Our case studies (see Appendices A and
B) test the validity o these use cases, and
establish links to value, where possible.
-
8/9/2019 Metrics for Responsible Property Investing: Developing and Maintaining a High Performance Portfolio
14/43
14
RPI Metric Acquisition Portolio Management
Energy Conservation and Carbon Management
Energy Use Intensity For property, BTU/s Average across portolio, BTU/s
Total Annual Energy Use For property, BTU/yr Total across portolio, BTU/yr
Renewable Energy On-site generation at property location, % o totaldemand
On-site generation across portolio, % totaldemand
CO2 Emissions Intensity From energy use, or property, pounds/s/yr Average across portolio, pounds/s/year
Energy Star Rating Energy Star Score or Property Average Energy Star Score across Portolio
Retrocommissioning Perormed last 24 months, yes/no Properties on regular commissioning schedule,across portolio, %
Environmental Protection
Water Use Intensity For property, gal/occupant/day Averaged across portolio properties, gal/ occupant/day
Total Annual Water Use For property, MG/yr Total or portolio, MG/year
Recycled Water Use On property, % o total water use Average across portolio, %
Water Management Fees For property, combined water and wastewatercharges, $/yr
Total or portolio, $/yr
Solid Waste Generation For property, tons/yr Total or portolio, Million tons/year
Diversion Rate For property, % diverted rom landlls throughrecycling programs
Average across portolio, %
Green Leases In place on property, yes or no Properties in portolio operating under green leasestructures, %
Urban Revitalization and Adaptability
Browneld Yes or no % browneld properties in portolio
Inll Yes or no % properties in CBD in portolio
Smart Growth and Transit Oriented Development
Walkscore Rating Rating or property Average rating across portolio
Health and SaetyRisk Management Plans Prepared or property, yes or no % properties in portolio with risk management
plans in place
Vulnerable Location Yes or no % properties in coastal areas and/or earthquakezones
Worker and Tenant Well Being
Tenant Satisaction Survey Score on Kingsley survey Average score across portolio on Kingsley Survey
Social Equity and Community Development
Benets to CRA area Property located i n a CRA census tract, yes or no % o properties in census tracts designated by theCommunity Reinvestment Act (CRA)
Essential services Project brings essential services to an underservedarea, yes or no
% o properties in the portolio bringing essentialservices to underserved areas
Local Citizenship
Community Engagement Community Engagement Plan in place or property,yes or no
% properties in portolio with communityengagement plans in place
Public space Amount o public space maintained by the project,sq t
Amount o public space maintained, as % o totalarea in the portolio.
Voluntary Certifcation
Third Party Certication Property is certied under USGBC LEED, EnergyStar, or other green building rating system, yesor no
% o properties in the portolio with third partycertication underway or in place
Governance
Reporting Perormance Perormance o the property is reported againsttriple bottom line metrics, yes or no
Is the perormance o the portolio reported againsttriple bottom line metrics?
Alignment o Incentives Property manager is evaluated on triple bottomline perormance, and it is tied to compensation,yes or no
% o property managers evaluated andcompensated on the basis o triple bottom lineperormance
Table 2: Proposed RPI Metrics
-
8/9/2019 Metrics for Responsible Property Investing: Developing and Maintaining a High Performance Portfolio
15/43
3.4.1 Energy Conservation and Carbon
Management
Metrics relating to energy conservation
and renewable energy generation have
the advantage o being tied directly to
reduced operating costs. Thereore, it is no
coincidence that the metrics surrounding
building energy use and associated
greenhouse gas emissions have been the
ocus o many green building initiatives
to date. However, these are generally
communicated as gross totals across
investments rather than in normalized orpercentage terms which allow comparisons
between properties and between portolios.
When evaluating a portolio, it is most useul
to set targets and interpret perormance by
building types and climate zone. Recently
enacted EPA GHG reporting requirements
and legislative initiatives promoting net zero
buildings (Caliornia Energy Commission) will
drive adoption o metrics such as these or
portolio management.
3.4Discussions o proposed RPI metrics
An Energy Star rating o 75 is needed to get
an Energy Star certication and or LEED-
EB. 85+ is good, and 90+ is very good. The
score is essentially the percentile compared to
the rest o the EPA database, so 95% would
mean only 5% o buildings perorm better.
For an oce building (based on Commercial
Building Energy Consumption Survey, or CBECS
data) typical energy use (energy and gas) is in
the range o 90 kBtu/s/year (electricity use o
17 kWh/s/yr = 59 kBtu/s/yr plus gas use o
32 kBtu/s/yr). O course, energy use is climate
specic, but a well designed low energy oce
building might achieve 30 to 50 kBtu/s/yr total.
A net zero energy building might beat code
baseline by 60% and then make up the rest with
renewable and osets. While energy intensity
is a metric that can identiy underperorming
buildings, total energy use or the portolio is
also important. This indicates the magnitude o
the value opportunity or even small increases in
energy perormance.
RPI metrics take different forms
depending upon the use case:
acquisition or portfolio management
-
8/9/2019 Metrics for Responsible Property Investing: Developing and Maintaining a High Performance Portfolio
16/43
16
3.4.2 Environmental Protection
The management o other resources used
or generated by properties, namely water
and waste, is also a key issue or investors to
consider or their portolio. These parameters
have direct links to value, with reduced water
potable use, reduced wastewater and solid
waste volumes resulting in reduced operating
costs.
According to the DOE, commercial buildings
consume 88% o the potable water in the US4.
A typical oce building can use up to 60 gals/s/year, or 70 gals/person/day or indoor use,
cooling, and irrigation5. This is compared to
a highly water ecient building, which can
achieve up to 10 to 15 gals/s/year or gals/
person/day through water ecient xtures,
xeriscaping, and use o recycled water. While
potable water savings represent signicant cost
savings, wastewater charges can be double
to quadruple water charges in some areas
with limited capacity and aging inrastructure,
or communities with new wastewater plants
that must be amortized. Thereore, reducing
wastewater volumes is even more important to
the bottom line that reducing potable water use.
4 http://www.buildings.
com/ArticleDetails/
tabid/3321/ArticleID/6461/
Deault.aspx
5 http://www.seco.
cpa.state.tx.us/
waterconservation.pd
6 SFPUC 2009-2013
proposed water and
wastewater rate package
7 Caliornia Integrated
Waste Management
Board, Estimated Solid
Waste Generation
Rates or Commercial
Establishments,http://www.ciwmb.
ca.gov/WasteChar/
WasteGenRates/
Commercial.htm
In San Francisco, commercial rates or potable
water and wastewater are escalating, with rates
proposed at approximately $10.00 per cc
(hundred cubic eet = 748 gals)6 or provision o
water and wastewater services by 2012. So,
a 30 storey oce building with a foor plate o
30,000 s could save over $50,000 per month
by investing in conservation and eciency
measures.
Solid waste generation can be 0.08 lb/s/day
or 1.24 lb/ employee/day7 or a typical oce
building. However, diversion rates o 75 % or
more can be achieved or an oce building
with robust sorting, recycling, and composting
programs in place. With solid waste collection
and disposal rates approaching $150/ton, the
magnitude o the value opportunity or even
50% diversion signicant (or our hypothetical
30 storey oce building it could be over
$1M per year). Green lease arrangements tie
tenant eorts to conserve resources directly
to the savings realized by such eorts, so that
investors, managers, and tenants alike eachhave motivation to maximize reductions.
3.4.3 Urban Revitalization and
Adaptability
Focusing investments on sites and propertieswhich return browneld sites to productive
use or which take advantage o under-
utilized urban space reduces the need or
greeneld development and encourages land
conservation. Additionally, government and
market incentives are increasingly directed
toward investments which make ecient use
o space as opposed to conventional sprawl.Some real estate unds invest exclusively
in browneld properties (e.g. Cherokee).
However, most unds do not report the scale
o these types o investments at the portolio
level either as a percentage o properties or a
total square eet in the portolio.
-
8/9/2019 Metrics for Responsible Property Investing: Developing and Maintaining a High Performance Portfolio
17/43
3.4.4 Smart Growth and Transit
Oriented Development
Compact, walkable communities are the
solution to some o our biggest shared
challenges, rom childhood obesity to social
isolation, rom crash deaths to disappearing
armland, rom the high price o gas and GHG
emissions, to the architectural blight o strip
malls.
Investing in areas with existing density and
access to essential services and public transit
is one o the principal ways that RPI can
support smart growth. Walkscore ratings can
serve as a proxy measure or smart growth
and transit orientation, since with density
comes public services and walkability.
Measuring the walkscore or a property is
a simple as putting in the address into the
walkscore calculator (www.walkscore.com).
The property walkscore is a number between
0 and 100. General guidelines or interpreting
the score are as ollows:
90-100=WalkersParadise:Mosterrandscan be accomplished on oot and many
people get by without owning a car
70-89=VeryWalkable:Itspossibletoget
by without owning a car
50-69=SomewhatWalkable:Some
stores and amenities are within walking
distance, but many everyday trips still
require a bike, public transportation, or car
25-49=Car-Dependent:Onlyafew
destinations are within easy walking
range. For most errands, driving or public
transportation is a must
0-24=Car-Dependent(DrivingOnly):
Virtually no neighborhood destinations
within walking range. You can walk rom
your house to your car!
Similar to the manner in which some portolio
managers aggregate EnergyStar ratings and
establish a portolio wide target, walkscore
ratings can also be aggregated across a
portolio, providing a useul view into the
character o the properties in the portolio.
The eect o walkability on property value
was the subject o a study by Dr. Gary Pivo,
proessor o planning and natural resources
and senior ellow at the University o Arizona,
and Dr. Jerey Fisher, proessor o real estate
and director o the Benecki Center or Real
Estate Studies at Indiana University8.
Dr. Pivo and Dr. Fisher pulled real estate
data going back a decade rom the Nation
Council o Real Estate Investment Fiduciaries
(NCREIF) and obtained walkability ratings or
nearly 11,000 buildings using a Walk Score.
For each o the property types analyzed
oce, retail, multi-amily and industrial higher
walkability scores equated to higher overallproperty values and net operating incomes.
Comparing properties with a Walk Score o
80, dened as very walkable, to properties
with a score o 20 (car-dependent), the
study ound that the walkable properties were
29 percent to 49 percent more valuable and
generated 34 percent to 71 percent more NOI
per square oot.
The positive correlation between walkability
and property value and NOI was expected,
Dr. Pivo and Dr. Fisher said in the study.According to Dr. Pivo, the premiums suggest
higher rents, occupancy and general market
demand or walkable properties.
8 http://www.u.arizona.
edu/~gpivo/
Walkability%20Paper%20
8_4%20drat.pd
-
8/9/2019 Metrics for Responsible Property Investing: Developing and Maintaining a High Performance Portfolio
18/43
18
3.4.5 Resiliency
Properties that endure are inherently
sustainable. Properties can be vulnerable
to all kinds o disasters which in turn could
jeopardize the sustainability o the occupants
and/or community. Additionally, rebuilding
damaged properties has an enormous
environmental impact. Looking at the age
o buildings in a portolio is revealing, as
building codes have become more stringent
over time. However, dDesigning to code
protects lie saety, but does not protect the
asset. Thereore, a portolio manager shouldassess the resiliency o the portolio to risks
associated with climate change, earthquakes,
other natural disasters, and security. Rather
than establishing metrics or perormance
o the asset against specic risks, having
a risk management plan in place serves
as a proxy or perormance. As investors
become more sophisticated, they can begin
to look into specic risk parameters with the
potential to aect health and saety such as
location: climate, foodplain, or earthquakezones, structural stability, lie saety systems,
aade integrity, or business continuity plans.
Adequate knowledge and mitigation o risks
increases disaster resiliency and overall
sustainability by improving the durability and
longevity o properties. With certain risk
mitigation measures in place, appraised value
can be higher and insurance premiums can
be lowered, thereby establishing a direct link
to value.
3.4.6 Worker and Tenant Well-being
Taking an interest in the personal health and
wellbeing o tenants not only demonstrates
a dedication to RPI, but can bring benets
in the orm o increased property values
and occupancy rates. Occupancy surveys
provide valuable eedback on the occupant
experience in a building and can lead to a
better understand o what makes occupants
satised. Numerous studies have ound
benets in monitoring and improving occupant
comort, particularly in productivity gains.
Providing services such as childcare and
wellness programs on-site are another way
to improve worker well-being, and aiming to
institute these types o programs across a
portolio is a valuable RPI commitment.
We have chosen the property score on the
Kingsley survey as a metric that can establish
occupant satisaction across a broad range
o actors, and be aggregated across the
portolio. The Kingsley Index is the largest
and most comprehensive perormance-
benchmarking database in the industry.
Compiled rom over 20 years o analyzing the
perormance o real estate industry leaders,
the proprietary Index represents the standard
or measuring tenant, resident, employee and
client satisaction, as well as broker relations
and operational eectiveness. Many portolio
managers, such as TIAA-CREF, routinely
conduct Kingsley surveys or their properties.Scoring high on occupant satisaction has a
direct link to value, as tenant turnover will be
lower.
3.4.7 Social Equity and Community
Development
Three pressing and interconnected issues
have caused increasing amounts o concern
or real estate development as urban land
has become scarcer: gentrication, housing
aordability, and exclusionary policies andpractices. In low income areas, sustainability
equates to jobs as a rst priority. Underserved
areas typically need not only buildings, jobs,
transportation and green space, but access
to essential services, including local markets
or ood and sundries, health care, places o
worship, community centers, and day care
services. Investment practices can help to
bring essential services to underserved areas,
-
8/9/2019 Metrics for Responsible Property Investing: Developing and Maintaining a High Performance Portfolio
19/43
either through direct investment in retail, ood
markets, or urban agriculture, or through
inclusion o space or essential services as
part o a development program. By tracking
the ability o properties to create jobs and
provide services or underserved areas,
investors can lower risks associated with
regulation and community opposition as well
as setting an example o social sustainability.
For existing assets, the two metrics we
selected to represent this element o RPI
include investment in a CRA area (CommunityReinvestment Act), and the amount o space
allocated to essential services provided to
an underserved area as part o the project.
These metrics are easily tracked across a
portolio but are currently under-reported,
even or unds that have a stated goal o
targeting low to moderate income census
tracts or benetting CRA areas.
3.4.8 Local Citizenship
Buildings even green buildings oten lacka close connection to their surrounding area
and community. Developing Community
Engagement plans on a site-by-site basis
allows projects to be sensitive to the needs
o the citizens and areas in which they are
constructed. Understanding issues such as
site context, cultural resources and concerns,
and potential or shared use agreements
ensures that negative impacts and public
opposition to projects will be minimized.
These plans should also include provisionsor the public use o private space, which has
well-documented success in San Francisco
and other cities. Across a portolio, investing
in projects that positively contribute to the
community in which they are anchored
creates a positive image, minimizes, risk, and
improves social sustainability.
3.4.9 Voluntary Certifcation
LEED has established itsel as the
predominant green building certication or
new development in the United States and
several other parts o the world, with its
marketability and value being realized by many
investors and managers across the country.
Still, many green building initiatives and LEED
certication achievements are reported as
single-property accomplishments and the
true sustainability impacts o the portolio
remain hidden . Because o the time,
complexity and cost o LEED certication,
many portolio managers have indicated an
unwillingness to make LEED certication a
portolio-wide policy. Energy Star is emerging
as the premier portolio wide approach or
certication o energy perormance, due to
low cost o certication, ease o use o the
Energy Star Portolio Manager sotware, and
ocus on value drivers. Portolio manager can
manage energy and water consumption or
all buildings, help set investment priorities,identiy underperorming assets, veriy
eciency improvements, and receive EPA
recognition or superior energy perormance.
TIAA-CREF, or example, has set a goal o
Energy Star labeling or 100% o their oce
buildings. Setting a goal o certiying most
or all o a portolios properties and tracking
progress toward this goal makes a proound
statement o a companys true commitment
to sustainability, reaching much beyond the
demonstration o the systems benets in a
single building.
-
8/9/2019 Metrics for Responsible Property Investing: Developing and Maintaining a High Performance Portfolio
20/43
20
3.4.10 Governance
This category represents the degree to which
metrics have been adopted and institutionalized
within the portolio management process.
Reporting perormance on RPI metrics is
a shared responsibility between property
managers and portolio managers. Systems
must be put in place to track perormance
In order to make sense o the perormance o a
portolio with respect to RPI metrics, portolios
must be characterized according to their
asset composition, geography, strategy, and
other actors. This can help in benchmarking,
review o progress against goals and in
identiying trends over time. In order to have
a complete picture o perormance, progress,
3.5Portolio characterization
and opportunities, certain measures need to
be understood at the outset and tracked along
with the perormance metrics. We have called
these attributes characterization indicators.
They are quite useul or normalization and
comparison o perormance data. They take a
slightly dierent orm or acquisition vs. portolio
management, and they are shown below.
o individual assets, with the capabilities to
aggregate and view perormance across theportolio. Finally, incentives must be aligned
with goals, i a commitment to RPI is to be
diused throughout the portolio. This means
that property managers must be not only
evaluated, but compensated, on the basis o
triple bottom line perormance.
Characterization Acquisition (Asset) Portolio
Asset type Property s and type (oce,
industrial, retail, apartment)
Asset type in portolio by s
Size Gross s o property Total gross s held in portolio
Climate Zone CBECS zone % property held in each CBECS climate
zone
NCREIF region NCREIF region or property % property held in each NCREIF region
Occupancy rate Most recent quarter
occupancy rate
Most recent quarter occupancy rate
(average across portolio)
Age o Buildings Age o building Average age o buildings in portolioOwnership structure For building Within portolio (direct or commingled)
Property Manager (s) For building Number o property managers working
with portolio
# o Distinct Properties In investment opportunity In portolio
Strategy Core, value-added or
opportunistic
% o portolio invested in core, value-
added, opportunistic
Return on Investment Targeted or deal Targeted or portolio
Table 3: Portfolio Characterization
-
8/9/2019 Metrics for Responsible Property Investing: Developing and Maintaining a High Performance Portfolio
21/43
The development o the RPI metrics or
acquisition and portolio management wasundertaken by piloting an original, longer
set o drat metrics with two real estate
undsTIAA-CREF and Bay Area Fund o
Funds. Individual case studies are presented
in the Appendix. The pilot testing sought to
determine i the metrics are valid, reasonable,
inormative, linked to value, and relevant or
decision-making. The metrics presented in
this document refect the ndings o this pilot
testing.
Use o Metrics to Screen PotentialAssets during Acquisition
Successul property acquisition rests on
equal parts judgment and execution. While
investment managers have to make sure
that their due diligence is accurate, the
most successul develop a reputation or
closing in a t imely and reliable ashion. Unlike
portolio management which is an on-going
monitoring unction, acquisition evaluation is a
collection o one-o evaluations that must be
accomplished within a very limited timerame.
So the use o responsible property investing
metrics has to t the timing o real estate
acquisition.
Our work indicates that an investor can
develop decisions and execute on a potential
investment utilizing many o the proposed
metrics. Moreover, the inclusion o RPI
metrics within the acquisition process may
strengthen a key objective: identiying the
areas o potential value enhancement within
the investment.
3.6Case Study Results
For many o the issues covered within the
realm o RPI, the acquisition decision is themost critical stage in dening perormance
achievement, as improvement may depend
on outside actors (such as CRA location
or walkability) or quite simply, the metric is
static (such as browneld site or vulnerable
location). It is essential then that perormance
results or these metrics be at an acceptable
level at the acquisition stage.
Several categories contain RPI metrics
which investment managers could directly
tie to value either through their indication odecreased operating expenses or indirectly
aid in obtaining higher rents, lower vacancy or
selling the property at a higher price. Other
categories do not link directly to asset value,
rather allow the investor to property determine
the correct ESG measures which must be
in place in order to achieve maximum RPI
benets.
The key to obtaining the biggest benets
rom RPI metrics during acquisition is to
conduct the review o the right metrics atthe right stage o the acquisition process.
Some metrics are more easily obtained
during the pre-LOI stage, others require more
investigation and so can only be obtained
during ormal due diligence. A ew might not
be available until post-closing.
No matter when perormance is measured, it
is clear that the RPI metrics lend themselves
to the classic investment process and can
supply valuable inormation or both classic
and triple bottom line acquisition decisionmaking.
The inclusion of RPI metrics within the
acquisition process may strengthen a key
objective: identifying areas for potential
value enhancement
-
8/9/2019 Metrics for Responsible Property Investing: Developing and Maintaining a High Performance Portfolio
22/43
22
Use o Metrics or Portolio
Characterization and Management
Managing a real estate portolio requires
measuring and monitoring a variety o nancial
undamentals, including asset value, operating
income, occupancy rates, and others. Use o
ESG metrics can provide insight into risks and
opportunities across the portolio, however,
the burden o additional data collection
requirements must be balanced with the
potential insight to be obtained. Metrics
must point to potential actions to take, or
indicate the results o those actions, or they
are not worth the additional cost and time.
Our work indicates that RPI metrics can be
incorporated into standard procedures or
portolio management, even where multiple
property managers exist. The perormance
results help to drive strategies or improving
perormance across the portoliobeginning
with low hanging ruit, such as no cost
and low cost measures to improve energy
eciency, to measures that may involve more
signicant capital cost but deliver greater
payback.
A view into ESG perormance across the
portolio helps to prioritize investments that
can be implemented portolio wide. Our
research indicates that once ESG metrics
are in place portolio widemanagers take a
horizontal rather than a vertical approach
to greening the portolioin other words,
rather than greening one building at a time,
strategies are enacted in tranches across the
portolio. Moving to a horizontal portolio
management approach is one o the best
ways to achieve valuevalue creation rom
the initial measures can help to make the
business case or subsequent measures.
Additionally, leveraging the size o the
portolio can mean economies o scale or
implementation.
Prudent portolio managers will look to
enter into portolio wide contracts or
commissioning, eciency, renewables, and
other measures to improve perormance,
and use RPI metrics to track the value o
improvements portolio wide.
The ability to benchmark ESG metrics
portolio wide provides deep insight. While
external benchmarks are helpul, the ability to
evaluate progress over time and characterize
the changing nature o the portolio is viewed
as even more benecial.
Once RPI metrics are in place, portfolio
managers take a horizontal rather than
a vertical approach to greening the
portfolioimplementing strategies in
tranches across the portfolio
Environmental metrics are perceived as having
more direct links to value, however social
metrics are seen as helpul in characterizing
progress on advancing the social agenda o
the und, while maintaining nancial returns.
Environmental metrics are more malleable
than social metricsin other words, most
environmental metrics can be improved over
time across the portolio, whereas social
metrics are oten determined at the point o
acquisition, and remain static (walkability, CBD
properties, etc.) Over time, both environmental
and social metrics may help drive investmentstrategy and portolio management, by setting
targets or certain parameters.
In summary, tracking RPI metrics in addition
to standard nancial metrics can provide
added insight into risks and opportunities
(useul or all investors), and can provide
tangible evidence o a socially responsible
investment agenda.
-
8/9/2019 Metrics for Responsible Property Investing: Developing and Maintaining a High Performance Portfolio
23/43
4 Implications or Reporting and Management
4.1Adapting or higher perormance
Implementing a system which tracks all o the
key perormance indicators recommendedor RPI will take some investment and require
changes to current reporting and management
processes. However, implementing these
changes will contribute positively to long-
term portolio perormance and help oster
better relationships between investors and
asset managers around RPI and sustainability
objectives. Additionally, reporting across RPI
metrics will help to develop a new literacy
o investment criteria and perormance.
Portolio managers, property managers,and stakeholders will be able to engage in
a dialogue regarding value created across
the triple bottom line through responsible
investment practices.
Adapting portolio reporting processes to
include RPI metrics involves:
1 Establishing a commitment to
obtaining, managing and reporting
on the metrics
A concrete commitment to tracking a new
set o metrics at the investor level is an
important rst step toward realizing benets
or the portolio, as well as toward gaining
acceptance or the metrics industry-wide. An
investment o time and resources should be
put toward understanding existing available
data, establishing a baseline, benchmarking,
and perorming a gap analysis to target key
improvement areas. Examples o this type o
action are available rom industry leaders who
have proven that this approach has benets orreporting and perormance9.
In 2007, Lend Lease released a
ramework or tracking and assessing its
progress in reaching key sustainability
targets. Among these was a
commitment to ensuring that energy,
water, and waste data are measured and
monitored in a comparable way across
all assets under management. This
commitment is an essential rst step
toward using the metrics to improve
perormance.
2 Implement a system or tracking
and updating the listed metrics
To ensure ease o collection and interpretation
o the additional data, systems should be put
into place to ensure the metrics are tracked
at each property and easily aggregated to the
portolio level. This should generally align well
with current inormation-gathering practices,
though may require improved relationships
with managers to be ully eective (discussed
below). Furthermore, having an individual
or team dedicated to RPI and sustainability-
related analysis and management would helpthe metrics reach their ull potential as portolio
improvement tools.
9 Responsible Property
Investing: What the
leaders are doing, UNEP-
Finance Initiative, 2008I
Reporting across RPI metrics will help
to develop a new literacy of investment
criteria and performance
-
8/9/2019 Metrics for Responsible Property Investing: Developing and Maintaining a High Performance Portfolio
24/43
24
3 Institute education programs
with managers to increase
awareness o needed changes at
the property level
Many key improvements at the portolio level
rely heavily on improvements occurring at the
property level through design and siting as
well as operations. Creating a standardized
education program tailored specically toward
managers, promoting awareness o new
metrics and their implications should provide
or participation and consistency across
the portolio. Eective relationships witheducated managers will greatly improve the
accountability associated with many o the
operational issues in particular, and improve
perormance in the long-term .
Use o new KPIs to characterize portolios
is akin to creating a new language- a way to
articulate value beyond nancial perormance,
using standardized metrics and benchmarks.
Over time, property managers and portolio
managers alike will become fuent in this new
language o RPI.
4 Educating appraisers and
seeking support or increased
appraisal values where
appropriate
Investments which improve perormance
across key RPI metrics, particularly in areas
such as energy perormance, GHG emissions,
resource management, and connection to
transit and essential services, may bring an
added value compared to standard assets
without such considerations. As energy
prices fuctuate and government regulations
become increasingly stringent, these benetswill bring risk reduction, reduced operating
costs, and other benets which are generally
not accounted or in the current standard
appraisal process. Though these may be
dicult to quantiy directly in the short term,
making a case or their incorporation into the
appraised value o assets in some orm is one
o the most important ways or investors to
realize their value across a portolio .
The chicken and egg situation should be
avoidedsome portolio managers want tosee clear links to value beore committing
the additional time and energy to reporting,
while reporting on these metrics over time
is the only way to demonstrate clear links
to value. A common complaint o investors
who are committed in principle to RPI is that
appraisers are slow to recognize value beyond
BAU. Appraisers are oten unclear how to
value specic sustainability techniques or
atypical assets. Appraisers notoriously deault
to comps to assess property, and the onlyway to create a comparable database o
sustainable properties is to begin reporting on
those metrics that matter, beyond traditional
nancial metrics or real estate valuation. This
situation may improve with the emergence o
the new National Green Building Underwriting
Standards, a tool that can be used to assign a
green value score to a property.
In 2008, CB Richard Ellis established
its Standards o Sustainability which
create a minimum set o sustainability-
related actions to be completed or all
o its oce buildings. These include
seeking ENERGY STAR certication or
any eligible buildings, providing relevant
training at each building, and reporting
internally on sustainability perormance
each month to ownership. These
standards align well with RPI goals,
and could be very powerul i applied
successully at the portolio level.
-
8/9/2019 Metrics for Responsible Property Investing: Developing and Maintaining a High Performance Portfolio
25/43
4.2High-Perormance Portolio Dashboard
Ideally, a unied approach could also be taken
to visualizing, analyzing, and managing thedata obtained or individual metrics, building
upon the action items mentioned above
to create a dashboard or monitoring and
improving portolio perormance in the context
o RPI and investor and stakeholder interests.
In the short-term this would take the orm
o a standardized aggregation o data rom
properties across the portolio (gathered
quarterly or monthly) which could be analyzed
or specic trends. This data should be airly
easily accessed, particularly once relationshipswith managers are streamlined. This would
allow quick identication o the winners and
losers in a portolio with respect to the RPI
metrics. From this analysis, best practices
rom the winners could be applied to
underperorming properties to maximize the
perormance o the portolio as a whole.
Finally, in the mid- to long-term there is
potential or real-time inormation monitoring,benchmarking, and analysis across a portolio.
Sensors exist which are capable o monitoring
building resource use and transmitting this
data or analysis and visualization or every
minute o the day. This technology, combined
with regular manager reports and occupant
surveys, can give an incredibly a timely and
accurate picture o perormance across a
portolio, and lead to new realizations and
improvements.
There are many useul sotware tools on themarket- rom EnergyStar Portolio Manager
(mentioned previously) to proprietary systems
such as Tririga (www.tririga.com). Tririga
combines portolio management tools with
portal views or property managers, and
acilities management unctionality. This
helps to integrate goals and establish
common metrics rom asset to asset, which
roll up to a portolio wide view o costs,
benets, and perormance.
-
8/9/2019 Metrics for Responsible Property Investing: Developing and Maintaining a High Performance Portfolio
26/43
26
The benets o committing to RPI are
potentially signicant, but a lack o uniormmetrics which can be adopted industry-
wide has hindered the potential impact o
RPI on the real estate sector. By adopting
the metrics listed above and ollowing the
suggested implementation program, individual
investors can realize substantial gains which
could be quantied and managed without
signicant additional reporting burden. The
most notable o these gains are:
Long-termvaluecreationthrough
increases in assessed value o property
Greatlyreducedoperatingcostsbydriving
environmental metrics
Minimizationofriskinseveralkeyareas
during acquisition
Improvedpublicimageandinvestor
condence
Improvedrelationshipbetweeninvestors
and asset managers
Increasedvisibilityandtransparency
Demonstrationofvaluesinpractice
5 Notable Benets and Conclusion
Through adoption o these KPIs, investors
can become literate in responsible propertyinvesting. RPI literacy is powerulit
enables us to nally begin to articulate the
connection between the values o mission
driven investing, the actions that are taken
by investors to shape a sustainable portolio,
and the resulting perormance o the portolio.
And literacy enables us to communicate
our shared values in a shared language
managers with investors; investors with
shareholders. In a changing and volatile
investment environment, there is a uniqueand urgent need to better understand
the benets o making a commitment to
responsible property investing. The potential
or improvements at the portolio level is
great, with benets accruing to investors,
the industry, and society as a whole, and the
potential or these considerations to improve
the industry as a whole is even greater. There
is no better time or their adoption than now.
RPI literacy is powerfulit enablesus to finally begin to articulate the
connection between the values of
mission driven investing, the actions
that are taken by investors to shape a
sustainable portfolio, and the resulting
performance of the portfolio
-
8/9/2019 Metrics for Responsible Property Investing: Developing and Maintaining a High Performance Portfolio
27/43
Metrics Case Study:
Acquisitions
APPENDIX A
-
8/9/2019 Metrics for Responsible Property Investing: Developing and Maintaining a High Performance Portfolio
28/43
28
Objectives
The objective o this case study was to trial
the drat metrics or assessing a property
acquisition according to the principles
o Responsible Property Investing. The
drat metrics were developed through a
collaborative research eort between the
Responsible Property Investing Center, Arup
and Galley EcoCapital. The ndings rom the
trial were used to rene, streamline and evolve
the metrics into a nal set that best refected
the RPI principles and a triple bottom line
approach to investing.
The Bay Area Council Family o Funds (FOF)
oered to participate in the trial by testing the
metrics on three recently acquired properties.
The study considered:
WhichRPImetricscanprovidethebest
indicators o value during the acquisition
process?
WhichRPImetricscanbemosteasily
applied by investment acquisitions sta
during the acquisitions process? WouldtheuseofRPImetricsmaterially
change the investment acquisitions
process?
About the Bay Area Council Family oFunds
The Bay Area Council Family o Funds is a
regional eort developed by the Bay Area
Council to attract private capital into low-to-
moderate income (LMI) neighborhoods o the
San Francisco Bay Area. FOF acts as a FundSponsor and Special Member or several
commercial real estate investment unds.
It works with Kennedy Wilson, the Fund
Manager, who manages the investments on
a day-to-day basis.
Using Metrics in Property Acquisitions:
Bay Area Council Family o Funds Case Study
Portolio Strategy
The three properties studied are part o FOFs
Smart Growth Portolio o Funds, which are
two private real estate equity unds, with a
combined size o approximately $191 million.
The Funds have a 10-year term. They are
comprised o 17 assets, totaling 1,971,172
square eet commercial space and 1,066 or-
sale homes and 514 rental units.
The Smart Growth Portolio o Funds
objectives are two-old:
Firstbottomlinereturns:toseekmarketreturns rom oce, industrial, retail and
multiamily properties in low-to-moderate
income submarkets, generally located
along transportation corridors. The Fund
believes that these assets are typically
under-managed and that insucient
organized competition plus enjoys
the support o local government and
community groups or investment in these
areas.
Secondbottomlinereturn:tobenetthecommunities the investments are made
in, by ocusing on improving jobs, housing
and environmental impact.
The Smart Growth Portolio o Funds
investment parameters are to ocus on LMI
census tracts within the nine county Bay Area
region, provide equity to real estate projects
and invest mainly in value-add opportunities,
with a no more than 20% o und capital being
made available or new development.
Per FOF, the expected
combined target size
o the unds will be $191
million.
-
8/9/2019 Metrics for Responsible Property Investing: Developing and Maintaining a High Performance Portfolio
29/43
Current Use o Metrics
The FOF has a dened strategy and process
or assuring double bottom line outcomes
on its investments. The FOF, as Sponsor,
has the ormal responsibility o establishing
the double bottom line strategy or each
o its investments. The Sponsor and the
Fund Manager have joint responsibility or
implementation o the established double
bottom line strategy. Within implementation,
the Sponsor and Fund Manager track the
progress o the double bottom line actors
on all investments on a quarterly basis. The
ollowing criteria are among the criteria that
are part o the double bottom line strategy
that the Sponsor and Fund Manager may
adopt:
Overall,qualitativeassessmentof
environmental return/impact
EconomicImpact:Catalystforincreased
economic activity and value creation in
the priority neighborhoods, particularly or
current residents.
WealthCreation:Home,businessand
real estate ownership, better quality
community shopping centers, and access
to mainline nancial services (e.g. local
banking), particularly or current local
residents.
CommunityImpact:Jobcreation,
aordable housing and home ownership,
joint ventures with community developers,
and local and minority contracting.
CommunityEngagement:Incorporation
o community input in projects through
the entitlement process and/or other
community participation vehicles.
EnvironmentalImpact:Energy
conservation, waste reduction, recycling,
pollution prevention, alternative energy,
and green building construction and
operations.
It should be noted that, while double bottom
line results are critical to the FOF investment
thesis, the Sponsor indicates that it does
not set double bottom line targets per se
or its acquisition and portolio management
process. This is because the potential or
double bottom line impact or any given
investment can vary widely by type and
amount mainly due to local market actors,
and so decision making on individual assets
can require tradeos between equally good
options that are very hard to quantiy.
Methodology or pilot test
The pilot test was carried out by providing
the Smart Growth Fund investment manager
with a worksheet containing a drat large set
o RPI metrics that could be used to evaluate
property acquisitions. The investment
manager selected three recently acquired
properties to test the metrics so that a
minimum base o observations could be used
to draw common themes about the exercise.
The investment manger was asked to:
Identifyperformancedataforeach
indicator
Assespotentialforimprovement
(post-acquisition)
Assessvalueimpact:
a. Does this metric currently actor into
your due diligence? (Yes/No)
b. Do you think this metric can directly
or indirectly impact the propertys
value? (Directly, Indirectly, No Impact,or Not Sure)
c. Link to Value (i possible, list where you
would account/budget or the impact
on value)
d. How important is this ino or acquisition
decisions? (1=no importance, 2=some
relevance, 3=critical)
-
8/9/2019 Metrics for Responsible Property Investing: Developing and Maintaining a High Performance Portfolio
30/43
30
Property Characterization
The three properties studied were o dierent asset classes and in dierent urban locations within the
San Francisco Bay Area.
Application o the Metrics
The table below summarizes the results o applying the metrics to the three properties.
Property A B C
Asset Class Oce Retail Multiamily
Location San Francisco Marin Richmond
Age 1958 1995 Late 1980s
Square Feet / Units 124,980 182,000 712 units
Tenancy Multi-tenant Multi-tenant Multi-tenant
Certied Green or Energy-Star Labeled? No No No
Located In CRA-designated census area? Yes Yes Yes
Energy Mix Gas & electric Gas & electric Gas & electric
RPI metric Currently
Tracked?
Data
available?
Perceived
link to Value
Perceived relevance
or acquisition decisions
Energy conservation and
carbon mangement
No No Yes High
Environmental protection No Some tYes High
Urban revitalization No Yes No Medium
Smart growth / TOD Some Some Yes Unknown - medium
Health & Saety No Yes Yes High
Worker and Tenant Well-being No No No None
Social Equity and Community
Development
Some Some No High
Local Citizenship No Some No Medium
Voluntary Certication No Yes Yes Unknown
-
8/9/2019 Metrics for Responsible Property Investing: Developing and Maintaining a High Performance Portfolio
31/43
Other specic insights include:
Interestingly,onprojectsAandB,value
potential through decreased vacancy
allowance/rent concessions was perceived
to be linked to the percentage o tenants
with green leases and quality o green
space.
Onesetofdatathatwasreadilyavailable
is the walkscore, which relies on an
external data source. Properties A
and B had walkscores o 80 and 97
respectively. Property C had a walkscore
o 52. The properties distance to public
transportation ranged rom 0.25 miles to
0.75 miles.
Findings
1 The use o responsible property
investing metrics during acquisition
can help pinpoint opportunities to
improve an assets tangible value and
its environmental and social profle at
the same time.
FOF indicated that opportunity analysis during
prospective acquisitions is a critical task o the
investment manager, particularly opportunities
to improve asset value. They indicated that
the perormance benchmarks and indicators
o many o the metrics within the ollowing
categories directly and indirectly linked to
asset value as well as provided helpul or even
critical inormation or acquisition decision
making.
Energyconservationandcarbon
management
Environmentalprotection
Smartgrowth/TOD
Voluntarycertication
Healthandsafety
2 Some RPI metrics correspond to
double bottom line characteristics
already in use during acquisition
screening process.
FOF would be able to build on that oundationi they chose to broaden their RPI approach.
A metrics-based approach works better
i there is a oundation o compatible
assessment criteria to build upon. We
determined that FOF already uses some RPI
metrics as acquisitions assessment criteria:
Distancetopublictransportation
ManagementreportingonESG
characteristics
Tenantsub-metering(oncertainproperties)
Minorityandwomen-ownedbusiness
contracting
-
8/9/2019 Metrics for Responsible Property Investing: Developing and Maintaining a High Performance Portfolio
32/43
32
3 RPI Metrics should be grouped
according to acquisition stage.
Upon use o the metrics, it becameimmediately clear that certain types o
inormation is made available to the
investment manager at dierent stages o
the acquisition process, and so some metrics
could be evaluated in the initial, pre-LOI
stage, while many would be evaluated later
during ormal due diligence. A ew, such as
worker and tenant well being would only
be obtainable post-closing. The investment
manager indicated that separating the metrics
according to their applicable acquisition stagemade the evaluation process much easier. An
easier process makes or more likely use o
the metrics in investment decision making.
4 Consider adding or revising some o
the metrics or better acquisition review
FOF also recommended that certainchanges to the metrics helped them to
deliver more insights to the acquisitions
personnel. O primary interest were metrics
which more clearly helped to identiy value-
add opportunities, such as opportunity or
commissioning, or opportunity or upgrading
energy and water systems. This sort o
assessment ts well with the typical objectives
o an acquisition analysis.
-
8/9/2019 Metrics for Responsible Property Investing: Developing and Maintaining a High Performance Portfolio
33/43
RPI Metric Acquisition Property A Property B Property C
Energy Conservation and Carbon Management
Energy Use Intensity For property, BTU/s Not available Not available Not available
Total Annual Energy Use For property, BTU/yr Not available Not available Not available
Renewable Energy On-site generation at propertylocation, % o total demand
0% 0% 0%
CO2 Emissions Intensity From energy use, or property,pounds/s/yr
Not available Not available Not available
Energy Star Rating Energy Star Score or Property No No No
Retrocommissioning Perormed last 24 months, yes/no No No No
Environmental Protection
Water Use Intensity For property, gal/occupant/day Not available Not available Not available
Total Annual Water Use For property, MG/yr Not available Not available Not available
Recycled Water Use On property, % o total water use Not available Not available Not available
Water Management Fees For property, combined water andwastewater charges, $/yr
Not available Not available Not available
Solid Waste Generation For property, tons/yr Not available Not available Not available
Diversion Rate For property, % diverted rom landllsthrough recycling programs
Not available Not available Not available
Green Leases In place on property, yes or no Not available Not available Not available
Urban Revitalization and Adaptability
Browneld Yes or no Not available Not available Yes
Inll Yes or no Yes Yes Yes
Smart Growth and Transit Oriented Development
Walkscore Rating Rating or property 97 80 52
Health and Saety
Risk Management Plans Prepared or property, yes or no Not applicable Not applicable
Vulnerable Location Yes or no Yes Yes Yes
Worker and Tenant Well Being
Tenant Satisaction Survey Score on Kingsley survey Not available Not available Not available
Social Equity and Community Development
Benets to CRA area Property located in a CRA censustract, yes or no
Yes Yes Yes
Essential services Project brings essential services to anunderserved area, yes or no
Yes Yes Yes
Local Citizenship
-
8/9/2019 Metrics for Responsible Property Investing: Developing and Maintaining a High Performance Portfolio
34/43
34
Conclusion
This was a very insightul exercise or Bay
Area Council Family o Funds, which revealed
a deep sensitivity to achieving the goals o
double bottom line investing. The rm is
already oriented towards the principles o
responsible property investing, with a dened
strategic and implementation process or
achieving its double-bottom line