From a small northwestern observatory…

Finance and economics generally focused on real estate

Sustainability — Follow the Money

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Sustainability seems to be the real estate buzz word du jour.  A “google” of “sustainable real estate” brings me slightly over 56 million hits.  Number two on the list is the Journal of Sustainable Real Estate, (a more-or-less joint presentation of the American Real Estate Society and CoStar) of which I’m apparently on the editorial committee.  Go figure.

I don’t want to sound too cynical here, but as a “finance guy” in the real estate field, I tend to follow the money.  A lot of what’s going on in real estate, particularly at the individual building-level, has a lot to do with sustainable energy (e.g. — LEED Certification, Energy Star) or sustainable architecture.  There was a nice paper out of Clemson University by David Heuber and Elaine Worzala recently on sustainable golf course development (click here for a link) which begins with the irony that no one is building golf courses today.  Scott Muldavin has a great book on underwriting and evaluation sustainable financing (reviewed here) which gets close to the heart of the matter.

However, Ben Johnson, writing for the current issue of Real Estate Forum, seems to have caught the scent, to use a hunting dog analogy.  In his article, “When CalPERS Talks, People Listen”, he notes that this mega-pension fund n($228 billion) has about 8% of its total invested in real estate.  (My own estimate is a bit higher and more current than that — see here for details.) The noteworthy thing, however, is that CalPERS just made a $100 million stake in Bentall Kennedy outt of Toronto.  B-K is one of North America’s largest real estate investment advisors, resulting from the 2010 merger of the Canadian firm Bentall with Seattle’s own Kennedy Associates.

Two things make this all very interesting.  First, B-K earned the top spot this year on the Global Real Estate Sustainability Benchmark Foundation’s ranking of fund managers in the Americas.  This ranking, covering 340 of the world’s largest funds, measures social and environmental performance.  (Given B-K’s Pacific Northwest and Canadian pedegrees, this doesn’t surprise me at all.)

Second — and this may be the biggie — as CalPERS goes, so goes the industry.  The focus of Mr. Johnson’s article was to note that now every pension fund in the known universe will need to consider using an advisor like B-K.  Johnson notes that this deal “gives the largest public institutional player in the US a deeper investment in understanding real estate as an asset class and a unique insider’s view of the industry’s dynamics.”  More interestingly, I would posit, it puts a leader in sustainable real estate front-and-center in the view of the sorts of pension managers who, until now, have very little cross-pollination with the real estate industry.  In short, as institutions look to find good real estate partners, sustainability will be a key element of consideration.

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