Spreading the benefits
ESG extends to other property types
One indicator of how widely adopted environmental, social, and governance (ESG) and sustainability practices are among the different asset classes is the number of each property type benchmarked in ENERGY STAR® Portfolio Manager®, the U.S. Environmental Protection Agency’s (EPA) energy, water, and waste benchmarking tool. In 2015, the last time the EPA released the data, office buildings were the most widely benchmarked property type in Portfolio Manager, with 60,848 in the tool. Retail stores were next, followed by K–12 schools. The next most benchmarked commercial real estate asset? Non-refrigerated warehouses at 7,976 properties in Portfolio Manager—a distant second to office buildings.
Office buildings were the early adopters of ESG and sustainability practices. Those practices have extended to multifamily with the introduction of ENERGY STAR Portfolio Manager benchmarking and ENERGY STAR certification for the property type in 2014. The release of the IREM Certified Sustainable Property (CSP) for multifamily program in 2015 further drove adoption in multifamily communities.
Combined, these pressures have created something of a tipping point in the adoption of ESG and sustainability practices. Asset and property managers are now extending efforts to increase efficiency, reduce expenses, and limit greenhouse gas emissions to other property types, beyond those early adopters in the office market. They’re looking hard at their portfolios’ industrial, medical office, senior housing, self-storage, and manufactured housing assets. But how do ESG and sustainability practices apply to these property types? Each has its unique characteristics that are far different from office and multifamily. Do tried-and-true methods work?
Let’s take a look at the opportunities and challenges for each.
The biggest hurdle with industrial properties is the lack of management control over properties with single tenants on triple-net leases. Management can seek tenant cooperation, especially when tenants are large companies with global brand recognition. They often have their own corporate ESG programs and may be interested in reducing their real estate’s environmental impact.
Otherwise, depending on the lease, management may be able to apply sustainability and efficiency practices to exteriors—the grounds, the building envelope, the parking lot, and stormwater management systems. Practices like LED exterior lighting, water-efficient irrigation, and stormwater reuse may be possible. Humane wildlife management can also be part of ESG practices since sites are often large and located in underdeveloped natural areas. With the right incentives and financing, solar energy is an ample opportunity because of the amount of surface area on warehouses’ and distribution centers’ rooftops.
In 2015, there were 5,422 medical office buildings (MOBs) in ENERGY STAR Portfolio Manager. That number has undoubtedly grown, and in 2022, the EPA made MOBs eligible for ENERGY STAR certification, which will drive further adoption of energy efficiency practices. The IREM CSP has been available for MOBs since 2018, and companies are using the program to apply sustainability best practices to their portfolios.
Resource efficiency is a key challenge with MOBs because they often have energy-intensive medical equipment, such as MRI machines, and medical procedures and sanitization practices can require large amounts of water and generate a great deal of waste. The success of medical procedures and patients’ health are paramount, so it’s challenging to overcome these hurdles. Management must make an impact anywhere they can. Examples of opportunities include HVAC and conventional, nonmedical lighting, water fixtures and landscaping, and indoor air quality. Otherwise, management can support tenants in using the most efficient medical equipment available and employing best practices in their healthcare operations.
One of the biggest opportunities for ESG growth in senior housing is through resident engagement. Getting residents more involved in sustainability efforts can drive positive results to all areas of the property, including individual units, and contribute to resident programs that seek to enrich the lives of seniors. This effort can extend into the community through partnerships with local nonprofits, companies, schools, and governments.
With food service and healthcare operations, waste is a significant challenge in senior housing. Optimizing purchasing can help with food waste. Senior housing operators often use software for menu planning and efficient purchasing. Composting is another option. While some waste haulers and recycling service providers are beginning to offer composting, it can also be done safely and correctly on-site. Composting on the grounds of the senior housing community can also provide nutrient-rich fertilizer for the property’s landscaping and gardening, including flower and vegetable gardens for residents.
Self-storage has taken off as a growing asset type. According to the U.S. Census Bureau, construction spending on self-storage increased by 584% from January 2015 to January 2020. Societal upheaval caused by the pandemic and churn in the housing market have further increased demand for these properties.
Self-storage shares some characteristics with industrial, such as flat roofs that are ideal locations for solar installations, along with opportunities for site maintenance and LED lighting. However, self-storage properties are most often filled with items, not occupants, so management has free reign to improve energy and water management efficiency. Technology opens additional opportunities, as self-storage buildings are great candidates for automation. On-site electric vehicle (EV) charging can reduce overall emissions attributable to the property and provide additional value to tenants.
Reducing impact begins in the factory with manufactured housing. The construction process produces 30% less waste than site-built, single-family housing, according to the Manufactured Housing Institute. Manufactured housing can be highly energy-efficient, and the ENERGY STAR rating is available for the entire structure. LED lighting and water-efficient landscaping practices are other key opportunities. Low-impact stormwater management practices, including the use of rain gardens and bioswales, are also possible at some sites.
One significant ESG-related benefit of manufactured housing is that it’s typically affordable, both in terms of the purchase price and utility costs. This provides housing security to those who can’t access alternative types of housing; it also helps them build equity.
The trend of extending ESG and sustainability practices to these various property types will continue. More owners will be looking for improvements and cost savings in greater portions of their portfolios as the impacts of climate change continue to become more evident and present greater risks to profitability. As managers of these properties gain experience and refine best practices, they’ll become savvier in their strategies and deploy new technologies, further improving the performance of their properties and reducing their environmental impact.
Translating environmental, social, and governance goals into on-site actions