From Our Chief Investment Officer, Chris Fraley
We have some exciting news to share. After a couple of years of preparation and research, RealtyMogul is formally launching its sustainability program to do our part to combat the climate crisis. We believe there is tremendous demand by the individual investors utilizing our platform for real estate investment to work toward solving some of the many challenges we face. We also believe that it is possible to have a positive impact on the environment and generate healthy investment returns. We hope to become the market leader in this space and share best practices of sustainable technology implementation with our network of over 100 sponsors. Here is some background on the program.
Background
Greta Thurnberg’s impassioned “How Dare You” speech at the United Nations General Assembly in September 2019 shook me to my core. Here was a 16 year old girl pleading with global leaders and corporate executives to respond to the climate crisis and prevent mass extinction of species. The outlook for children today is quite glum if we don’t take immediate action. It saddens me to think of the world we are passing on to my 9 and 11 year old daughters, who may live to see the next turn of the century. I am inspired by Greta Thurnberg’s passion and call to action.
The problem is so overwhelming that it is easy to feel helpless and ignore or deny what is happening. I reflected on my own inaction. After all, what could I possibly do to combat this existential problem? Then I reminded myself that I am the Chief Investment Officer of a platform through which real estate sponsors and developers raise hundreds of millions of dollars of capital. According to the United Nations Environment Program, our industry accounts for 39% of greenhouse gas emissions globally. RealtyMogul is a leading real estate investment platform with an incredible reach in the media and has a tremendous opportunity to create impact. We made the decision to take action.
Action
We started by naming one of our most seasoned Commercial Real Estate team members, David Karle, the Chief Sustainability Officer for the company. David’s role is threefold:
- Source new opportunities and relationships with sponsors that execute sustainable business plans
- Observe the execution of these plans and share best practices with our network of over 100 sponsors
- Educate sponsors on the benefits of sustainable technologies
David started by hiring a team from UCLA to study investor demand and create a matrix of governmental incentives for sustainable projects. Our study found that there was very significant investor demand and tremendous incentives for those real estate operators who knew how to obtain the benefits. We also did our own internal survey of our internal database which found that over 70% of those polled would be more likely to invest in an opportunity that had an element of sustainability. In addition, David was accepted into the Financing and Deploying Clean Energy Certificate Program at the Yale Center for Business and the Environment and is working on a partnership with the Impact Finance Center to help source opportunities in Cross Laminated Timber (“CLT”) development projects.
Challenges of Solar Implementation
It had always puzzled me that, despite the significant focus on sustainability, not one of the thousands of business plans that have been submitted through the RealtyMogul platform has included a solar upgrade to a multifamily community. We have learned that there are a number of reasons why it is so challenging to implement solar on a multifamily property, including:
- It can often be cost-prohibitive. Fortunately, the cost of solar implementation has come down, but successful installations require sponsors to be extremely knowledgeable and experienced.
- Solar power is most effective in communities that get regular direct access to sunlight. While not impossible to implement, heavily wooded communities, or climates that are regularly cloudy can be challenging.
- The policy and regulatory environment are convoluted. Solar doesn’t work the same in every market, which makes it challenging for sponsors to implement across portfolios.
- The benefits of solar upgrades are easiest to monetize in master metered apartment buildings, yet almost all apartment communities built during the past few decades are individually metered.
Ironically, individual metering in apartment buildings was encouraged several decades ago as a way of holding tenants accountable for their own energy usage. With master metering, there is one meter for the whole apartment community and there is no way to bill back tenants for their individual usage. Most apartment buildings built over the past few decades have individual meters for each unit. The theory is that tenants will use less energy if they are paying for it themselves (i.e. they won’t leave their air conditioning running all day at full blast, even when they are not there). Unfortunately, with individually metered buildings, there is no way to directly pass the energy savings generated through solar energy along to the tenants.
Doing Well While Doing Good
There are a number of benefits of a sustainable investment overall. Freddie Mac and Fannie Mae have created a Green program that lowers the interest rate for projects which qualify with sustainable upgrades. In addition, while difficult to quantify, I believe that apartment communities with a sustainability component will result in a competitive marketing advantage as consumers demand and give value to sustainable upgrades in their leasing decisions.
Role of Real Estate in Climate Crisis
As mentioned previously, real estate, in all of its forms, is estimated to represent 39% of carbon emissions globally. Our industry should be at the forefront of combatting climate change, but sadly, there is very little truly transformative leadership in this arena. Most real estate firms have issued statements saying that they will be carbon neutral several decades from now. Another popular initiative is meeting certain LEED standards. While these efforts are a good start, to me they are performative sustainability, and not the radical measure that we need to take to save our environment.
Nascent Capital Markets
Despite all the talk and initiatives, to my knowledge, it is shocking to me that there is no apparent marketplace that connects investors seeking to invest in ESG project to developers and operators who are hoping to execute on ESG project for their properties. I am also not aware that any of the national real estate brokerage houses have experts in this field. I noticed this several years ago as CIO of Forge Development Partners. Forge’s prospective project at the intersection of Turk and Leavenworth in San Francisco might have been the most technologically advanced and sustainable building in the country at the time. The lightweight steel frame system dramatically reduced the delivery time and amount of carbon-producing concrete. The low voltage electric system will reduce power demands. Every outlet will have an IOT sensor to track power usage (thus obviating the need for individual metering). Hot water will be heated by solar power. The HVAC system is the most powerful available, capable of filtering nuclear fallout. At the time, Forge searched for an investment broker that had a specialty in raising capital for investors seeking ESG investments and its search turned up unsuccessful. There was clearly a lack of definition within the impact space and very difficult to navigate.
Why won’t the institutions back innovation? It is very risky to try something new. It takes courage to be one of the first to attempt the utilization of new technology. It is so much easier to continue to build the same proven building with the same proven systems and the same proven construction delivery methods. Contractors and labor markets often don’t know how to build or implement new technologies. Developers can face substantial regulatory hurdles and permitting review issues with building inspectors and codes that are not used to newer technologies. We hope to cultivate a community of investors that support sponsors employing innovative sustainable technologies, even when the institutional investors refuse.
Next Steps
We expect that there will be many real estate investment opportunities presented on the RealtyMogul platform which generate market returns while having a positive impact on the environment. We have several cross-laminated timber (CLT) development projects in the pipeline and hope to launch one over the next six months. Going forward we will include an ECO icon on opportunities that are included in the sustainability program.
See what ECO opportunities we currently have on the platform here.
This letter is for informational and educational purposes only and is not intended to be relied on to make any investment decisions. This letter expresses the views of the author as of the date of writing and are subject to change due to market conditions and without notice.
Certain information contained herein constitutes forward-looking statements (including projections, targets, hypotheticals, ratios, estimates, returns, performance, opinions, activity and other events contained or referenced herein), which can be identified by the use of terms such as “may,” “will,” “should,” “expect,” “anticipate,” “project,” “estimate,” “intend,” “continue” or “believe” or other variations (or the negatives thereof) thereof. Due to various risks, assumptions, uncertainties and actual events, including those discussed herein and in the respective analyses, actual results, returns or performance may differ materially from those reflected or contemplated in such forward-looking statements. As a result, you should not rely on such forward-looking statements in making any investment decisions.