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ESG Is Transforming the Multifamily Real Estate Landscape

I have to be honest, when I first heard the term ESG, I doubted how much it would be adopted by the real estate industry. I was skeptical that property firms, who exist to make money for shareholders, would be willing to prioritize sustainability. Today, however, it’s obvious that a forward-thinking approach to environmental and social practices has proven its value for many property owners. As a result, prioritizing ESG in the multifamily industry has reached a critical juncture. Today’s owners/operators face a choice: either embrace sustainability now and be well prepared for upcoming changes or delay and struggle to catch up later. Ignoring ESG will become increasingly difficult as demands begin to arrive from multiple sides, including investors, residents, employees, and lenders. And let’s be honest—playing catch-up is seldom a strategy for success.

One of the more significant areas of demand for sustainable multifamily properties is on the investment side. A recent report by PwC cites an exponential increase in the asset and wealth management industry’s desire for ESG investments, including assets under management in the US, which are projected to double from $4.5 trillion in 2021 to $10.5 trillion in 2026. This money has to go to sustainable investments, and for many of these wealth managers, qualifying real estate is an asset that they would like to have a lot more of. ESG is going to become a material part of business in terms of treatment from the debt market and retaining and attracting equity, which is the lifeblood of the industry. Communities that offer high-efficiency appliances, reliable and self-reliant EV charging, and technology to monitor and manage energy usage are quickly becoming the most desired by both investors and residents.

In addition, today’s regulatory environment is quickly evolving. Climate action plans are being written, and environmental disclosures are being required for businesses of all types. Local and state governments continue to present real estate investors with an ever-evolving set of rules and regulations, some even involving hefty fines for non-compliance. There are even several investment firms that have a strategy to buy buildings falling behind on sustainability regulations and bring them into compliance.

My employer, Stoneweg US, is one of those firms that specializes in the acquisition and development of sustainable properties. In our early days, we relied on common-sense sustainability practices as a cost-control strategy, further propelled by the opportunity to secure green loans. However, as our company grew, we recognized a burgeoning demand for investor-grade ESG policy, sustainable practices, and reporting. Recognizing the need for more sophistication, our approach evolved into a programmatic one involving surveys, benchmarking, and industry analysis, ensuring a robust and comprehensive ESG implementation that meets investors’ and residents’ expectations alike.

Every property organization can embrace ESG, no matter the size. The foundation starts with performance benchmarking. One entry-level and versatile example is the Energy Star Portfolio Manager from the US Department of Energy. It is a completely free tool and can help property managers get started with benchmarking, begin to understand their current state, and create a baseline to manage performance improvement.

Though the process may seem overwhelming for those unfamiliar, it is crucial for the entire multifamily industry to wholeheartedly embrace changes like adopting benchmarking that is proven to benefit residents, investors, and the bottom line. In addition to ESPM for benchmarking, we have adopted a utility management solution to collect real-time data to budget, report, forecast, and optimize energy spend. These sustainability analytics tools deliver sophistication in terms of measuring, reporting, and improving the environmental performance of each of our assets. This approach can take at least a couple of years of effort to fully develop, but now that we’ve moved past this maturity point of our asset level and portfolio environmental management, we’re now fully equipped to make data-driven decisions down to the meter level that result in immediate, measurable improvement. 

Investing and building out systems like this also provides an opportunity to demonstrate to stakeholders that you’ve moved beyond the stage of good intentions to be a results-oriented strategy. ESG is not just about being a good corporate citizen or being “nice.” It’s not about philanthropy, either. Those concepts are important and can be executed as a part of an overall business strategy, but they are not the most important to the product, partners, company stakeholders, or valued residents. Ultimately, the focus should be on creating efficiencies, managing risk strategically, and monitoring resident sentiment through surveys and benchmarks to ensure the initiatives are having the desired impact. This, in turn, moves the needle for owners, operators, and investors.

Building performance in multifamily real estate is truly the biggest environmental matter, as is how efficiently properties use resources. The most challenging item currently is collecting useful data around performance and benchmarking. The aspect of understanding your current business state and accessing this information, particularly around multifamily properties, is highly fragmented. Fortunately, there is an evolution taking place around data collection, monitoring, and reporting systems that will continue to provide greater insight into everyday efficiencies by reducing fragmentation and presenting data in a manner that is more comprehensive and easier to digest. We need real-time data observed over time, and major progress is being made. It’s already well known that real estate has a disproportionate effect on the environment and energy consumption. However, even though that environmental impact is present, people need a place to live, and people should be the focus of your ESG efforts.

You can have happy people and sustainable communities, but if you try to have a sustainable community without happy people, well, that simply doesn’t work. We consider resident experience when we consider any initiative or improvement that touches our investment properties. If an endeavor does not seek to support human comfort along with other intended results, like reducing HVAC runtime to reduce energy use, we’ll determine the project a no-go. People are the most important part of the equation, and if a good experience isn’t prioritized, you won’t get the intended results.

Organizations must gather data on what their residents believe will best contribute to their quality of life and comfort and then take the necessary steps to provide that. They also need to monitor emerging trends. Electric vehicles, along with tech such as smart thermostats, locks, water-efficient faucets, and smart guest-access technology, are perfect examples of this. The cost of EVs is coming down, and the accessibility to middle-income people is increasing, which is one of the most meaningful segments of the market. 

Multifamily owners should be removing obstacles for their residents to adopt EVs. Charging stations right now are considered an amenity; however, having this infrastructure in place over the next few years will set your communities apart and insulate you from exposure to vacancy loss. Proactively instituting ESG offerings like efficient faucets, toilets, smart thermostats, and better, more efficient building materials are ultimately going to benefit residents and their way of life. This leads to better retention, increased NOI, and investor buy-in. Viewed through a different lens, upgrading these items as regulations demand it will have a very similar outcome. No matter the approach, a new frontier that increases the quality of life in rental housing is an inevitable reality and a win for all.

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