Fifth Wall Aims To Cut Real Estate’s Carbon Output By Backing The Boring Stuff That Makes Landlords Money
In the real estate world, cutting carbon emissions and making money are often presented as an either/or choice: You can do one or the other, but not both.
But a new fund being raised by the world’s biggest proptech venture capital firm aims to do both and more — to cut carbon emissions and allow building owners to make a profit while doing so, so they get on board whether they care about the environment or not.
At the same time, it wants to back technology that will help unemployment fall more quickly post-COVID. How? By backing companies doing some pretty boring, but very important things.
“When people think of climate technology, they think of things that sound like they are from science fiction and take hundreds of millions of dollars of equity to get out of the door, like nuclear fusion,” said Greg Smithies, Fifth Wall partner and co-leader of the climate technology investment team. “That needs investment, but that is not the kind of business we are investing in. In real estate and climate tech, there is a lot of stuff that is boring but moves the needle for the world in a very significant way.”
Fifth Wall has more than $1B in assets under management, and its funds count some of the world’s largest real estate firms among their investors, including CBRE, Hines, TIAA, Lennar, Macerich and British Land.
It is in the process of raising $200M for the Fifth Wall Carbon Impact Fund. Smithies joined in December from BMW’s climate investment division and has done his fair share of sci-fi thinking, having previously worked for Elon Musk at The Boring Company and Neuralink, the entrepreneur’s brain-computer interface company.
But Smithies has a series of eye-opening stats that show why Fifth Wall will be looking for companies that are more lo-fi than sci-fi.
He cites data from consulting and research firm Global Efficiency Intelligence that said that electric motors account for 47% of global electricity consumption. About half of that consumption comes from the electric motors used in the heating, ventilation and cooling of buildings, principally large commercial buildings. That means about a quarter of the world’s electricity is used to heat and cool buildings and keep the air in them fresh. So companies and technologies that make the HVAC systems of buildings more efficient and use less electricity can have a huge impact on global carbon emissions.
The HVAC systems themselves can be made more efficient, but things like windows and cladding that contain heat more efficiently also fall into this category.
“This is the kind of boring stuff that venture companies are ignoring because it’s not sexy enough,” Smithies said. “But we are talking to a lot of companies that haven’t taken VC money but are already growing like weeds.”
Smithies is confident the fund can persuade building owners to adopt this technology because it has the element that ultimately drives all business: profit.
He said the systems or products being created by companies the fund is looking to invest in reduce the cost of running a building to such an extent that property owners can recoup their money in less than three years, or at the most in less than five years.
“The capital expenditure payback means that it makes financial sense to do it by default, even if you don’t care about the environment,” he said.
Smithies said a trifecta of factors is pushing building owners toward making their assets more carbon efficient. The first is increased regulation, a process that in the U.S. is likely to be accelerated by the election of President Joe Biden.
Another stat: at a city level, Fifth Wall estimated in a recent white paper that if New York City property owners don’t take action to hit 2050 climate targets, a process that needs to start now, they will be on the hook for a collective $10B a year in fines, much less than the cost of improving buildings to meet the targets.
Then there are tenants who only want to rent the most carbon-efficient buildings to meet their own ESG pledges and investors who want to buy those same buildings for the same reason.
“The cost of capital for a green building will go down, and the cost of capital of a dirty building will go up,” Smithies said.
Retrofitting old buildings to make them more efficient is less carbon-intensive than building new ones because of all the new concrete and steel that is needed for them. And it creates a lot of jobs, too.
A paper on how to create a sustainable economic recovery after the coronavirus pandemic, written by the International Energy Agency and the International Monetary Fund, found that 15 jobs are created for every $1M spent on retrofitting buildings to make them more energy-efficient. That is more than seven times more jobs than building a new hydro-electric, wind power or nuclear plant, and leads the field among climate technology industries alongside building new energy-efficient buildings.
“Compared to an industry like hydro, retrofitting buildings is not as highly skilled a job, so you can scale up quickly and help those who have been most impacted by COVID,” Smithies said.
Real estate’s question around climate change has often been about how much it is going to cost. The way Fifth Wall sees it, cutting emissions can make owners money, while helping the economy and environment, too, whether that is the ultimate end goal or not.
