Green retail properties are more desirable to both investors and tenants than non-green properties. That’s the message from Nils Kok, Ph.D., executive director of the Global Real Estate Sustainability Benchmark (GRESB) and associate professor of finance at Maastricht University.
Kok will be the keynote speaker at ICSC’s RetailGreen Conference in Phoenix on December 2-3, where he will provide an investment perspective on sustainability in retail real estate. Karla Zens, ICSC 2014 RetailGreen Conference program planning committee co-chair and director of business development of Capital Pacific Real Estate Brokerage Co., will conduct a keynote interview with Kok.
According to Kok, the retail sector in the United States is making progress when it comes to executing sustainable strategies. “Retail is not the fastest sector, but it’s not lagging either,” he notes.
In fact, GRESB’s data on REITs and private equity firms around the globe shows that retail property owners outperform other owners from a sustainability perspective. “This indicates that sustainability is beginning to be incorporated into day-to-day decisions in the retail sector,” he says.
Moreover, Kok’s academic research on individual office properties suggests that green office buildings trade at a 13 percent premium, on average, to non-green properties. “We found that LEED-certified and Energy Star-rated office buildings financially outperform their non-green peers in terms of rental rates and occupancy rates,” he notes, adding that green office buildings achieve rental rates that are, on average, three percent higher than non-green properties.
Although Kok’s property-specific research is primarily focused on office buildings, he believes the findings apply to the retail sector as well. “There’s no reason why these same trends wouldn’t apply to retail assets,” he says. “To some extent, achieved rental rates are determined by operational costs, and if a tenant is going to spend 10 to 20 percent less on operations in a green building, that tenant will choose the more efficient building.”
Kok points to retail tenants as one of the driving forces behind retail property owners implementing a sustainable strategy. “If you look at the top 50 largest retailers, the majority has a social responsibility policy that talks about their real estate,” he notes.
Retail owners with a lot of visibility, e.g. publicly-traded REITs, and those with a long-term investment horizon also are more likely to pursue a sustainable strategy, according to Kok. REITs and other highly-visible funds are increasingly under pressure from Wall Street and investors to run their businesses with an eye toward energy efficiency and social responsibility, and owners with a long-term investment horizon want to go green because it will save them greenbacks, by reducing operating expenses and thereby increase their investment returns.
Mandatory reporting of energy consumption, now enacted in over 10 cities, states and counties, also is impacting retail owners and compelling them to implement sustainable strategies. In California, for example, owners must disclose their “energy” score when signing new leases, refinancing the mortgage, or selling the property. Zens expects tenants and investors to increasingly view buildings with higher scores as less risky, and therefore, more valuable.
GRESB, which recently merged with the GBCI, evaluates retail owners of all sizes and found that size had little to do with the quality and outcomes of a company’s sustainability program. “It’s true that larger companies, such as Simon and Kimco, might have more resources to execute sustainability initiatives,” Kok says. “They can hire someone to manage the program and to invest in green technology. Larger owners were the first ones that moved on a sustainable strategy. But smaller REITs and fund are catching up quickly.”
Earlier this year, for example, Regency Centers Corp.’s operating partnership issued $250 million in senior unsecured notes. The REIT said the proceeds will be used to fund “eligible green projects.”
Regency Centers said in a press release: “Regency views this issuance as an opportunity to support an important market as investors seek more socially responsible investment options. This placement also confirms Regency’s commitment and long-term view on sustainability, as evidenced by its market-leading greengenuity® program, which is the company’s commitment to do all that is practical to reduce its environmental impact in developing and operating shopping centers.”
However, Kok points out that large companies with lots of properties have a bigger challenge executing a green strategy than an owner with only a handful of properties. “It becomes much more complex and difficult,” he says.
Zens points out that sustainability is relevant to all retail owners, not just those that are large and well-capitalized. In fact, smaller owners with less money might benefit from green strategies even more than larger owners with deep pockets. “In the long run, green buildings are cheaper to operate and more attractive to tenants,” she says.