Developers Say Capital Sources Slowing Sustainability Progress

The commercial real estate sector has sharpened its sustainability focus over the past half-decade, with more and more companies accepting that they need to implement environmental measures in at least some way to stay competitive.

But rollouts of sustainability initiatives are moving much slower than they could be, industry leaders said at Bisnow’s 2024 National Sustainability Conference this week. The big obstacles are cash and politics. Some investors are more concerned about their bottom lines than sustainability goals, while some developers are concerned about losing investor dollars if their environmental goals are perceived as political.

Those dynamics are getting in the way of decarbonization efforts and the use of lower-carbon building materials.

“Nobody will give up their returns,” Related Cos. Senior Vice President for Environmental Performance Geoff Hurst said onstage at Convene’s 117 W. 46th St. location. “No matter how much they care about sustainability.”

Most investors see the correlation between sustainability initiatives and long-term returns, Hurst said. The result is that Related is seeing increased demand from investors of all stripes for information about the company’s sustainability progress, he told Bisnow’s audience. 

“I would say in the last five years, the investors that were just asking check-the-box questions have progressed to highly detailed, sophisticated questions,” Hurst said. “And then the people who have never asked anything are asking the check-box questions at this point.”

The increased demand for information is a result of the investment community gradually becoming more educated on sustainability, developers and owners said onstage.

Statistics about sustainability are the first thing that lenders and investors ask RXR about after pro formas, said Eric Schlameuss, the developer's senior vice president of design, major projects and capital improvements.

“It is top of mind on every kind of request and negotiation and term sheet that we look at,” Schlameuss said. “That narrative has to be ready to go. It has to be buttoned up, solid, all metric — all the data behind it, because we have to push it out weekly.”

While capital sources are hungry for data to back up developers' green claims, the stats still need to show a project with a return that can beat alternative investments.

Alloy Development is trying to raise around $500M for a large-scale Downtown Brooklyn development. Alloy Vice President David McCarty said this process has given him insight into the range of attitudes that exist among debt and equity players.

“If you showed up to an investor with two projects, and they both stood out similar returns, and one was a conventional building and one was really state-of-the-art from the sustainability perspective, the state-of-the-art sustainability building would win,” McCarty said.

“But if there's a meaningful difference in return because you have invested in a lot of more expensive systems and your construction costs have gone way up, and you aren't able to show corresponding increased revenue in some way, it's going to have a hard time getting financed.”

Alloy has had recent, real-life experience with negotiations like this one, McCarty said.

“We were in a Midtown boardroom pitching it to equity last week, and the response we got was, ‘We don't care. We want the money, the numbers, the IRR. The returns need to work. If this plays into the returns, great. If it doesn't, it's not part of our mandate,’” he said. 

That was one conversation out of what will likely be dozens before Alloy settles on a deal, McCarty said. He is confident that the project will find a lender that makes sense because sustainability is a central theme for a plethora of other debt and equity providers, he said.

“They want to have these real capstone projects that they can put in their portfolio and be like, ‘This is what we lent on,’” he said.

But the hesitation in funding individual developments is also affecting how quickly innovative building materials — like low- and zero-carbon concrete — are being used on job sites, Lendlease Americas Head of Sustainability Sara Neff said. 

Lendlease has been working with philanthropic organization ClimateWorks, which has been demonstrating new cement mixtures and alternatives with much lower carbon footprints at Lendlease developments on the East and West coasts, Neff said. But it’s hard for those startups to get the funding they need to scale unless they can demonstrate enough demand from developers, she said. 

“We have a bunch of really late stage, ready-to-go, demonstration-project-level pours,” she said. “We should all get a little more comfortable using them.”

Lendlease has been working with other developers to drive demand, Jamestown Senior Vice President for Development and Construction Anna Coltrane said. Jamestown and Lendlease are currently “in dialogue” about using some materials in a West Coast project, Coltrane said. 

“It's a huge space that is growing,” she said. “Our internal architects have been really excited about some of the innovation that we've seen in that space.”

But it’s not just a lack of developer demand that’s stemming capital from flowing to innovative materials or properties designed with sustainability in mind, Coltrane said. The cost of construction financing is every bit as big of a hurdle. 

“You're seeing a lot of projects kind of put on ice at the moment until the economy cools off and you have interest rates returning to a place of normalcy,” she said.

An additional obstacle creating hesitation around sustainability for the industry is the political perception, Camber Creek investor Lionel Foster said. Plenty of companies are putting in the work to reduce energy costs and take actions that have social impacts in measurable ways, but some are choosing not to highlight it, he said. 

“I see people are doing the work,” he said. “But they're not labeling it ESG ... they're trying to avoid the blowback of what that label could bring.”

That hesitation over political perception is misplaced, BXP Senior Vice President for Sustainability Ben Myers said. While sustainability courses will teach companies that they should take all stakeholders’ views into account, allowing one sole voice to dictate a company’s direction is short-sighted, he argued. 

“When a certain stakeholder, maybe a contrarian, has a megaphone to the ear of an executive, that’s not a good thing,” he said. 

The best way to counter that is by collecting data to make a business case for sustainability, as BXP has had to do because of its position as a publicly traded company, Myers said.

“A stakeholder may be making these claims, activist claims, against ESG to their own detriment,” he said. “In that case, you need to inform them why.”

Related has had similar experiences, Hurst said. It is active in Florida, where Gov. Ron DeSantis has signed laws prohibiting financial institutions from considering ESG when making investments.

“There was a political pullback from ESG because of what it symbolized, but people still care about environmental performance,” he said. “We haven't really changed how we approach it.”