Are CRE Investors Impacting Environmental Social Governance (ESG)?

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Many experts are confirming the number of commercial real estate (CRE) investors who are considering environmental, social, and governance (ESG) standards when looking at potential investment opportunities is significantly increasing. A staggering 60 percent of respondents to brokerage CBRE’s 2021 Global Investor Intentions Survey stated that they had already adopted ESG criteria as part of their investment strategies. In other words, 3 out of every 5 CRE investors have factored ESG into their investment portfolio’s strategy. That’s an extremely significant number.

What’s The Impact?

This will force real estate investment firms to start catering to ESG conscious investors if they want to remain competitive. According to the same 2021 CBRE report, some CRE firms have committed to net-zero carbon emissions: Heitman by 2030, Nuveen by 2040, and Brookfield Properties by 2050. Overall, that seems like a win-win in the end. Commercial real estate properties will be built to be more eco-friendly and investors will continue to profit. What’s not to like?

Industry executives, primarily, in the CRE property construction industry have been frustrated by increased scrutiny. This seems to be common in amongst senior executives, for the most part, and especially in an industry like construction. Anytime there’s increased regulation, that always leads to greater frustration. More tensions regarding profit margins, income statements, investor reports. Increased regulation almost always results in greater costs for corporations. What does that result in, in turn? Layoffs, a decrease in quality, a decrease in work/life balance, etc. Another way to look at it is when executives become worse off, employees under them are sure to suffer too. The same is true in the CRE market, both for companies on the demand and supply side.

What Will Happen to the “Other” 40%?

What about the other 40%; the investors who haven’t considered ESG as part of their investment strategy. Perhaps they don’t care about climate change, or they don’t believe factoring in ESG is a winning investment position. Either way, 40% of a group is still an extremely significant number. It’s not like those 40% can be forgotten or neglected. It’s basically the same situation as the other side of the coin: real estate investment firms will have to carry products that cater to ESG negligent investors too. This could include (amongst other things) REITs that hedge against heavily ESG driven CRE investment properties.

What’s The Ultimate Outcome?

Investors and investment firms that nail down the perfect balance of ESG conscious investments will prosper. Ultimately, with names in the CRE space like Heitman, Nuveen, and Brookfield Properties all committing to net-zero carbon emissions, you can expect “greener” CRE properties to be built in the future. That’s surely a win-win for everyone, political agenda, or affiliation notwithstanding. For investors, it means being more mindful of the ESG impact of a given CRE construction project. For example, if you’re in a REIG, or even more importantly as an individual investor, much like the 60% of current CRE investors who factored ESG into their CRE investment portfolio, you must do the same. With a REIG, you benefit from economies of scale where investors can collaboratively think of the best long-term approach. When you’re on your own, you must be certain you’re cognizant of all variables that may cause you to potentially get into the red on an investment. The research from this article shows that for CRE specifically, ESG will be included in prospective long-term plans.

Be sure to take note!