Academic journal article Journal of Real Estate Portfolio Management

Sustaining Sustainability in Large Real Estate Investment Management Firms

Academic journal article Journal of Real Estate Portfolio Management

Sustaining Sustainability in Large Real Estate Investment Management Firms

Article excerpt

By the end of 2016, ~38% of the office building stock in the top 30 U.S. markets had been certified with an ENERGY STAR or LEED eco-label, with a number of buildings having both. Representing nearly 50,000 buildings and an area of ~7 billion square feet (CBRE, 2015 & 2016), this trajectory evidenced an important segment of growth in demand for sustainability in the commercial property market. A significant increase in demand for, or at the very least interest in, sustainable single-family homes (Sanderford, McCoy, and Keefe, 2017), multi-family buildings (Bond and Devine, 2016a), retail space (Thompson, 2007), and industrial facilities (Harrison and Seiler, 2009) has also been observed over the last two decades. With rising market shares and increased data availability, the attendant empirical research (e.g., Miller, Spivey, and Florance, 2009; Eicholtz, Kok, and Quigley, 2010; Wiley, Benefield, and Johnson, 2010; Devine and Chang, 2017) supports the hypotheses of early scholarship (Pivo and McNamara, 2005) that investing in sustainable real estate is often good business practice. Investors can do well and do good concurrently.

Indeed, a number of positive effects from sustainability across different types of real estate are identified in the literature including superior asset values, premium rents (though not rent rate growth premiums), attractiveness to capital markets, advantageous technologies generating operational economies, lower occupant churn, and the need to offer fewer incentives to attract and retain tenants. Two broad conclusions might be drawn from this body of scholarship. First, sustainability is substantively dynamic and exists as a part of many management decisions. Firms are implementing complex agendas that capture value at acquisition and also during asset, portfolio, and firm operations (Muldavin, 2010). Second, given the dominant research focus on sustainable asset acquisitions, there is a need to examine who could be responsible for sustaining the sustainability (and by extension the value proposition) of assets within portfolios and as part of broader firm-level operations. Given the substantive dynamism of property sustainability, management teams must be adroit in the way they work and assign responsibility for these important strategic tasks (Hopkins, Read, and Goss, 2017).

While there is substantial evidence that real estate investors are embracing sustainability in meaningful ways, there is limited consideration in the literature as to who should be charged with creating durable competitive advantage, or put more plainly, sustaining sustainability after acquisition. It stands to reason that real estate asset managers may be well suited for the task because they are typically charged with maximizing the value of the individual properties in their portfolios (Read, Hopkins, and Goss, 2016). However, real estate fund managers may also have an incentive to participate in sustainability initiatives as a result of their return-driven responsibilities at the portfolio level (Larsen, 2010), whereas property managers may seek to exploit sustainability as a means of optimizing operations and creating the "small monopolies" (Graaskamp, 1993) that come from intense familiarity with facilities. These interrelated motivations suggest multiple roles in the management hierarchy may be charged with sustaining sustainability after acquisition and promoting it within the organizations they represent.

In this paper, we focus on responsibility for sustainability relative to both properties and firm operations, not on the initial acquisition decisions relative to sustainable buildings. We build on recent work by Devine and Yonder (2017), who examine how the benefits of eco-certification agglomerate within U.S. and international REITs. By decomposing cash flow streams, their work helps illustrate the distinct channels through which sustainability practices contribute to firm value. Both property operations and firm-level value aggregation are noted. …

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