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ESG Trends in the Real Estate Industry and Their Effects on Valuation

Aug 8, 2023

ESG can be factored into real estate in many ways, including the use of eco-friendly materials and renewable energy sources, focusing on workplace wellness features and DEI throughout the business, and considering transparency and disclosures for the ESG strategies they are working on.

ESG Trends in the Real Estate Industry 

Sustainability trends today that can be implemented during any stage of the project life cycle to reduce commercial real estate’s impact on the environment include:

  • Investing and financing
    • Performing a sustainability risk assessment when evaluating a property prior to purchasing.
    • Real Estate asset tokenization which makes sustainable investments more accessible.
    • Collective green investments in solar and wind energy.
  • Sourcing materials
    • Using repurposed and/or recycled materials from decommissioned buildings.
    • Implementing sustainable insulation solutions.
    • Using circular and low-carbon materials.
  • Planning and design
    • Moving away from fossil fuels and implementing renewable energy.
    • Implementing smart building technology, also known as PropTech, including building sensors to help optimize building performance.
    • Use of 3D technology and modeling to help improve and optimize the sustainable design based on demand.
  • Construction
    • Use of low carbon material
    • Integrate solar panels.
    • Use of modular or prefabricated structures.
  • Property operations and maintenance
    • Implementing active energy management, cooling technology, water treatment, and recycling programs.
    • Previously installed PropTech could play a key role during operations to help management. optimize utility consumption and assess the data of the building’s performance.

ESG and Its Impact on Real Estate Valuation

The implementation of ESG initiatives is not formally considered during real estate valuations currently within the industry. Nonetheless, ESG is rapidly evolving and expected to become increasingly more prevalent and evident in the built market. There are currently three acceptable approaches to consider the valuation of real estate, including:

  • Cost approach
  • Sale comparison approach
  • Income approach

Climate change poses both physical and transitional risks that could have a substantial impact on a real estate property’s value. Appraisers often refer to historical data, and comparatives to determine value. Unfortunately, there’s currently a lack of ESG data, and there aren’t a lot of true ESG comparable properties available. However, laws and regulations are forthcoming that could impact property value so real estate appraisers and owners may want to consider alternative trends and projections in their assessments, such as:

  • Weather forecast projections, including (but not limited to), extreme weather, rising sea levels, rising temperatures.
  • Society’s responses to climate change. There can be significant shifts in demand for real estate, as towns or even entire metropolitan areas could become less appealing due to climate-change-related events.
  • As laws and regulations change surrounding ESG and climate change, so can property value. Real estate owners can improve asset value and overall position by meeting carbon and energy reduction targets. By implementing ESG and sustainability initiatives, real estate owners create an immediate increase in real fair market value and mitigate against potential decreases in fair market value associated with failure to comply with new laws.

Advantages of Implementing ESG Strategies 

Incorporating ESG practices has proven to increase value, improve investor confidence, and decrease long-term risk. Creating sustainable practices, while preparing for the implementation of future regulations, will help real estate owners be environmentally conscious and socially responsible, while simultaneously mitigating risks associated with climate change.

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Amy Menist

Amy Menist is an Audit Senior in the firms Real Estate Services Group and the Construction Services Group with over 10 years of accounting experience serving both public and private companies.

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