Prologis Seeks Cost Savings For Tenants Through Sustainability, Leasing Innovation

Sustainable and resilient buildings are increasingly becoming key aspects of the built environment and more developers, such as Prologis, Duke Realty and CenterPoint Properties, are pursuing aggressive sustainability goals within their industrial portfolios. Sustainability is increasingly becoming a competitive advantage, especially as tenants are seeking to use sustainable and resilient buildings.

Investors and stakeholders are increasingly asking about sustainability goals, making it easier for developers to invest further in resilient and sustainable features in buildings.

For Prologis, its sustainability goals are part of the overall business strategy of environmental stewardship, social responsibility and governance (ESG), Prologis Chief Operating Officer of the Americas Larry Harmsen said in an email.

Its portfolio has 304 sustainable building certifications in 17 countries, according Prologis’ 2017 Sustainability Report. Prologis' portfolio spans 684M SF around the world, including 3,282 industrial properties. The company acquired DCT Industrial for $8.4B earlier this year, adding 71M SF to its operating portfolio in the U.S. DCT Industrial also has high sustainability standards across its portfolio.

Prologis’ objectives continue to focus on high-quality, resilient design and construction; innovation in renewable energy and energy efficiency; water, waste and carbon emission reduction; working with supply chain partners to support sustainability objectives; measuring and reporting its carbon footprint; and tracking and reducing climate risk through building design, he said.

The company's latest efforts include the creation of a Customer Sustainability Advisory Board made up of key Prologis customers on its ESG initiatives, best practices and shared goals and to better understand its customers’ top priorities, Harmsen said.

Prologis also developed a Green Bond Framework where the company can issue green bonds and use proceeds to finance expenditures related to the construction and refurbishment of green buildings, generation of renewable energy and energy efficiency, he said.

Earlier this year, it issued a €300M ($352M) bond for one of its co-investment vehicles, Prologis European Logistics Fund, becoming the first green bond issued by an industrial real estate company, Harmsen said.

More Energy and Water Efficient Warehouses

In 2017, the company added 10 megawatts of solar power, bringing its capacity to 175 MW in nine countries, according to the Prologis report. These installations produce enough energy to power 26,000 U.S. homes.

The company is on track to achieve its goal of 200 MW of solar-generating capacity within its global portfolio by 2020, Harmsen said.  

Prologis recently added 3.8 MW of solar to an Amazon distribution facility in Tracy, California. The system creates the equivalent energy to power 634 homes, he said.

Amazon has a goal of installing solar power on 50 of its fulfillment centers worldwide by 2020.

In addition to solar energy, Prologis has been adding features that increase efficiency for energy and water use across its portfolio. Harmsen said 82% of the company’s global operating portfolio had efficient lighting in 2017 compared to 78% in 2016. Efficient lighting can reduce energy consumption and electric bills by 35%, according to the sustainability report.

In 2017 the company also set a goal of installing cool roofs, which reflect sunlight and absorb less heat to reduce roof surface temperatures by up to 50%, to all of its new developments and property improvements where feasible. At the end of 2017, 40% of its portfolio had cool roofing material.

Many of its facilities also have incorporated water-saving landscaping and water-efficient features such as low-flow toilets, motion-activated faucets and systems that capture rainwater for irrigation, according to the report.

Prologis uses materials that are recycled or contain a high amount of recycled materials whenever it can during the construction process. About 25% to 30% of building materials are locally sourced and manufactured.

Prologis' resilient roofing, building materials and emergency protocols helped buildings get back into service quickly following several natural disasters in 2017. Prologis reported negligible damage across $2B of assets impacted by extreme weather events, Prologis Vice President of Sustainability Jeannie Renné-Malone said in the report.

In Japan, Prologis buildings have seismic isolation systems that work like shock absorbers during earthquakes. Many of its buildings also have early warning systems and backup energy and water supplies, according to the report.

“These efforts improve operational efficiency for our customers, make the assets more valuable for our investors and diminish environmental impacts and effects of climate change,” Harmsen said.

A New Way Of Leasing

In addition to decreasing costs for tenants through resiliency and sustainability efforts, Prologis also instituted a streamlined lease in 2017.

Harmsen said the typical triple net lease is often dense with legal jargon and time-consuming to go through. It doesn’t provide clear operating expenses and exposes customers to surprise capital expenses that can lead to additional payments by the customer, he said.

Clear Lease is a streamlined lease document that simplifies negotiation and reduces time spent negotiating expenses and obligations, he said. The lease provides all operating and capital expenses, such as roof, parking lot, drainage, sewer, office HVAC, warehouse ventilation, landscape, snow removal, insurance and management fees.

Since the initial launch of Clear Lease, Prologis has added more features to address additional issues customers face. In a typical NNN lease, tenants are responsible for maintaining, repairing and sometimes replacing office HVAC systems.

During the development of Clear Lease, customers and brokers asked if HVAC could be added as a fixed cost and Prologis structured the Clear Lease to include HVAC, Harmsen said.

“The monthly cost is known with certainty by the customer before signing the lease,” he said.

The lease is now standard for Prologis throughout the U.S. and Mexico, he said.