Multifamily and industrial properties are routinely lumped together as favoured investment assets for these pandemic times, but they present divergent degrees of difficulty for asset managers seeking to mine value from energy performance and emissions reductions. Panellists speaking last week at the release of the 2020 GRESB environmental, social and governance (ESG) benchmarking results for Canadian commercial real estate portfolios advise that deep savings should be easily achievable in one property type, while long-term capital investment strategies may be required to meaningfully curb energy use and carbon intensity in the other.
“New industrial developments are the most viable to go net-zero,” said Jamie Gray-Donald, vice president, sustainability, environmental health and safety, with QuadReal Property Group. “With multifamily, it’s the one asset that’s been really resistant to energy efficiency improvements.”
QuadReal, the real estate arm of BC Investment Management Corporation (BCI), emerged as a global sector leader for private diversified portfolios in this year’s GRESB assessment and also attained a 4-star rating in the field of 1,229 participating portfolios, collectively holding 96,000 real estate assets valued at USD $4.8 trillion. Among its ESG efforts, Gray-Donald reports the company has launched an ambitious 20-year strategy to dramatically shrink its carbon footprint through fuel-switching and long-term power purchase agreements for clean power. That’s in keeping with what he sees as a wider willingness to set aggressive targets.
“I think there’s a real shift happening at QuadReal and across the industry where we’re going from: Hey, let’s figure out what this sustainability thing is, and we must get 20 per cent better, 30 per cent better,” he mused. “We’re now quickly realizing that we need to get 100 per cent better.”
In its industrial portfolio — reported at approximately 15 million square feet earlier this year in Canadian Property Management’s 2020 Who’s Who in Canadian Real Estate survey — pilot projects to target net-zero energy are in the works.
“They’ve got large roof spaces. They’ve got simpler mechanical systems. Heat pumps could replace rooftop units,” Gray-Donald tallied. “It’s much harder with the density of office buildings and other types of properties to get to net-zero.”
The 2020 GRESB assessment data paints a similar picture. Industrial properties were the best energy performers with an average energy-use intensity pegged at 82 kilowatt-hours per square metre (kWh/m2) based on 5,278 reporting assets. The residential average was 148 kWh/m2 across 8,100 assets, while the retail (196 kWh/m2 for 3,918 assets) and office (208 kWh/m2 based on 9,960 assets) averages were even higher.
Fuel-switching economics work when tied to sub-metering
Within QuadReal’s approximately 8.2 million square feet of multifamily apartments, an energy use assessment revealed relatively lacklustre improvement against a 2007 baseline despite effort and investment. Looking to data indicating the same improvements that routinely cut energy use in office buildings delivered negligible results in the multifamily portfolio, the QuadReal team refined the game plan.
“The challenge in multifamily is the building operators and asset managers feel that they don’t control things. It’s a variation on the split incentive in office,” Gray-Donald recounted. “For example, when we replace a piece of equipment, we’d think, ‘oh, we just put a variable speed drive in, we should see a 10 per cent reduction’ and then (in multifamily) we tend to see next to nothing. So we’re changing tactics.”
As with office, there is a continued emphasis on smart metering to collect real-time electricity, water and gas data to inform web-connected building automations systems. That’s coupled with a longer-term strategy to replace natural gas boilers with either in-suite or central heat pumps and to sub-meter suites as tenants turn over.
“The economics actually work in multifamily. When we sub-meter tenants on suite turnover we’re seeing, with no change in the building, 30 to 40 per cent reduction with utilities when a tenant pays for it,” Gray-Donald said. “So we feel comfortable putting additional equipment in their suites because the result is improved comfort, reduced carbon impact, reduced expenses.”
While he acknowledged it has also taken some time “getting upper management comfortable with modelling those savings out,” other modest investments with impressive returns — such as a $150,000 water bill saving from a $3,000 expenditure to replace toilet gaskets — have delivered more timely paybacks.
Net-zero targets influencing decision-making
Conan O’Connor, vice president, technology, with the energy management and analytics firm, Energy Profiles Limited, emphasized that low-cost and big-ticket investments are both contributing factors to energy-efficient, low-carbon building performance. What’s changing, he concurred with Gray-Donald, is the context for those decisions.
“The industry is taking a hard look at strategies for better performance in this bigger picture of trying to go to net zero, as opposed to incrementally reducing energy and emissions over time, which has been kind of the historical strategy,” O’Connor submitted.
“There really are two sides to driving the strategy of performance going forward. One is continuing good building operations — continuing using analytic tools to drive performance and to drive down operating costs on an ongoing basis,” he added. “The other is about the intelligent flowing of capital into projects that are going to make a real significant impact when they come along — it could be 10- 20- or 30-year projects at a given building — but making sure that those decisions, when they need to be made, are made well.”
While GRESB’s roster of investor members — more than 100 institutional and financial investors, including several large Canadian pension funds, that subscribe to the database —have perhaps been the major driver of ESG disclosure and performance benchmarking in the Canadian and global commercial real estate industry thus far, panellists also note that other influential forces are now seeking the same information and assurance. Governments at all levels, insurers and lenders are making more pressing demands.
“ESG is moving into the money,” Gray-Donald observed. “Increasingly, there’s legislation, whether it’s in Toronto or Vancouver or New York, setting it up so that if you’re ignoring your carbon intensity, you’ll be paying a heavy, heavy penalty. The money is going to start getting real, and fast.”
That’s also seen in the readjustment of the GRESB scoring factors in 2020 to give more weight to asset-level results for energy and water-use intensity, emissions and solid waste output. Despite new reporting requirements and the general upheaval of COVID-19, two additional Canadian companies joined this year — taking participation up to 28 prominent portfolios, representing private companies, investment advisors, property funds and real estate investment trusts.
As one of this year’s newcomers, CAPREIT is proudly pointing to its achievement of a Green Star rating and a sixth place ranking for listed multifamily companies in the North and South America region. “Integrating sustainable practices into all aspects of our corporate culture will drive results and support CAPREIT’s long-term strategy, which will ultimately deliver better-measured results to our unitholders,” asserts Mark Kenney, CAPREIT president and chief executive officer.
In addition to QuadReal and CAPREIT, other Canadian GRESB participants with multifamily properties include: BentallGreenOak; Boadwalk REIT; Colliers Canada; GWL Realty Advisors; Healthcare of Ontario Pension Plan (HOOPP); InterRent REIT; Killam Apartment REIT; Manulife Investment Management; Minto Properties; and Oxford Properties.
Barbara Carss is editor-in-chief of Canadian Property Management.