MSREI: Sustainability could create $34.9bn of asset value

Sustainable practices are already impacting office building returns, according to the New York-based investment bank’s latest report.

Office buildings that integrate sustainable practices could create from $3.5 billion to $34.9 billion of asset value in the top 10 US markets, according to the latest report from Morgan Stanley's Real Estate Investing Business (MSREI).

Through reduced utility costs, managers could save 3 percent to 30 percent on building expenses, the report said. However, MSREI pointed out these are not theoretical future savings dependent on new technology, but that the real estate sustainability drivers are affecting investors’ returns now. A 2014 study, for example, found that a 1 percent improvement in a real estate investment trust’s Global Real Estate Sustainability Benchmark score was associated with a 3.4 percent increase in equity return.

“With growing pressure on natural resources, these trends are likely to be amplified in the future,” the report said.

MSREI said key drivers of sustainability include new policies and standards; building technology innovation; and shifts in stakeholder expectations that prompt managers to offer sustainability practices to attract and retain tenants. The firm found that if building managers implemented existing green retrofit technology, offices in New York alone could save $239 million, creating $4.8 billion of value.

The report cautioned that investors and managers should not equate sustainability with “charitable pursuits or political views” because the practices have real impacts on returns. Myriad value drivers can be impacted by sustainability. Occupancy, for example, can increase 2 percent or more in sustainable buildings, according to a 2013 study by the University of Cambridge. In addition, operating expenses ranging from water to energy to waste disposal can be reduced, which have a side benefit of cutting maintenance and repair expenses. Morgan Stanley cited an efficiency project at New York’s Empire State Building that is expected to reduce energy consumption by 38 percent, saving $4.4 million annually in operating expenses. Those savings translate to an increased property value of around $86.1 million, according to the firm.

Eventually, sustainable buildings could not only create cost savings, but also income if buildings could generate more energy than they use, then store and sell it to the grid for a profit. Sustainable buildings are also often considered more desirable by tenants, which pushes up occupancy levels and lessens the lease-up rate, and by financiers, which lowers loan costs.

The net result of all of these cost reductions and potential value additions is higher net operating income that should drive up property values.

“Integrating sustainability considerations into investment analysis is a long-term, evolving process that can help investors to stay ahead of risks and unlock new sources of value,” the report said.