Saturday, September 1, 2007

Getting Institutional Real Estate to Invest in Sustainable Buildings

In my work, the hot question from my sustainability friends is “how do we convince lenders and investors to allocate capital towards green real estate?” They are baffled about why institutional lenders and investors often nod their heads politely in meetings, but are still largely noncommittal about writing the checks for green real estate, despite all of the verified proof of its superior investment performance. You would think that such a crowd would automatically embrace the higher return and value story. So why is that not happening, yet?

A classic problem, really. The idea that people and companies will act to enlarge their own self-interest is accepted as conventional wisdom. Not true, says the Rockridge Institute's George Lakoff, people routinely make decisions and take actions, which are not in their self-interest. In Don’t Think of an Elephant, Lakoff explains that people’s actions are driven more by how the subject fits with their view of themselves in the world as opposed to their self-interests. This could help us understand the slow adoption by institutional real estate as well as hint the way forward to greater capital flows into sustainable buildings.

The sustainability community is focusing on this disconnect. Earlier this week, Joel Makower covered the LaFarge and United Technologies study which highlighted the fact that compartmentalized expertise within the real estate value chain, incorrect perceptions about sustainable real estate costs, plus many not-so-obvious complexities of building green combine into daunting challenges to widespread capitalizing of green real estate projects. Financiers and developers are specifically identified as the biggest barriers to more sustainable approaches in the building value chain.

Among eight recommendations on influencing decision makers about sustainable buildings, the study points to personal know how, business community acceptance, a supportive corporate environment and individual personal commitment as the four main barriers to “greater consideration and adoption” of sustainable building. Bring in Lakoff’s explanation about people acting according to their identity more than their self-interests and we have a more focused definition of the disconnect and how we can better advocate for greater investment in sustainable buildings:

  • Know U.S. institutional real estate’s identity. This industry has been experiencing a long, successful economic cycle without having to differentiate assets in the way the sustainability requires. Sustainability doesn’t exist within the investment world view. And this world functions around highly compartmentalized expertise. Integration, a basic tenet of sustainable building, does not naturally exist between participants in the institutional real estate value chain. So it is difficult for already successful real estate executives to fully appreciate how their investments will benefit from concepts and processes which do not exist in their world.
  • Talk in the language they understand. These days, interest rate increases are eroding financing proceeds and are expected to result in a drop in property valuations. Did I hear someone say, “decreased net asset value”? This is a good time to start presenting sustainable building’s financial benefits as a potential hedge against eroding values from interest rate increases and lower sales prices. It is also a problem within their world that they can understand. Lenders and investors could understand this as ‘cash flow preservation’ and/or ‘risk management due diligence’.
  • Use a metaphor from their world. I like the Carrier Division’s way of borrowing tools and techniques from its aerospace division to lead real estate executives through the green building decision making process. Airplanes are a powerful metaphor to assist institutional real estate in its evaluation of risks, costs, tradeoffs and profits. Air travel is full of emotional decisionmaking. Airline travelers have a monetary, health and safety interest in the condition of a plane. Airlines must invest in updating their fleets in order to remain competitive. Most real estate executives are frequent business travelers. Their emotional stake in an airplane's safety and their innate understanding of the relationship between a new, state of the art fleet and an airline's reputation could be used to convey the important messages about the risks of not investing in sustainable building.

1 comment:

Anonymous said...

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