ESG and sustainability-linked real estate debt strategies are climbing higher on the agendas of a growing number of US lenders and borrowers as the global climate crisis intensifies. Here are five things to think about as ESG-related commercial real estate loans and bond strategies rise.
1. Get in on the ground floor
Lenders, borrowers and investors are interested in the potential for ESG-linked debt and need to get in to what could be a major trend early, said Eric Rubin, a partner at Deloitte. More institutional investors are prioritizing ESG-linked strategies and are now taking this into consideration as they evaluate managers.
“We don’t want to be on a list with a manager with a poor rating. We advise our clients to at least start thinking about ESG while it’s in an infancy stage,” Rubin said. “There’s a lot of capital from institutions such as pensions as well as asset management firms headed this way.”
2. REITs are leading the charge
Green bond offerings represent an increasing share of US real estate investment trusts’ debt capital raises as property owners move to earmark proceeds to environmentally sustainable projects, according to S&P Global.
Green bond offering proceeds represent 16.4 percent of the capital raised through US REIT debt offerings so far in 2021, putting the segment on track for an all-time, full-year high. Last year, about 10.3 percent of total REIT debt capital raises were for green bonds. Deloitte believes this trend will only strengthen into 2022 and beyond.
“My outlook is that there will be a significant increase in focus on ESG, especially when it comes to disclosure whereby companies are regularly releasing sustainability reports,” said Rubin. “It is definitely something that is growing and is here to stay.”
3. Europe is leading the way
US commercial debt professionals believe that their peers in the UK and Europe are ahead of the game in terms of green lending.
“The European market is about five years ahead of the US thanks to government mandates,” said Alan Todd, a managing director and CMBS analyst at Bank of America. There are a handful of US cities that are getting behind green principles, including New York and Boston, he added.
4. Building standards
The Commercial Real Estate Finance Council is working on standardized templates for the US commercial mortgage-backed securities market.
“While CREFC is working on getting a standard template for ESG metrics for CMBS deals, the only place this is tracked now in CMBS is in the single-asset, single-borrower market, where it’s merely noted if a building is green,” Todd said. “The biggest question is how do you define the framework, how narrowly do you set the parameters and what do you do about the tenants? You can have a LEED platinum building, but if your largest tenant doesn’t follow ESG principles, what does that mean? It’s like Alice in Wonderland – how deep does the rabbit hole go?”
5. Lenders will raise pricing for non-green buildings
The day is coming when borrowers that can demonstrate sustainability in their commercial properties will reap the benefits with lenders, according to Anthony Malkin, CEO of Empire State Realty Trust, speaking at a conference in New York recently.
“Already in Europe, if you are not energy efficient, if you are not sustainable, you pay more for debt and soon you will get reduced proceeds,” Malkin told attendees of the CRETech New York conference earlier this month. “You need to future-proof what you do going forward.”
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