Proptech Responds to CRE Sustainability Now Driven by ROI

For all the talk in recent years about environmental, social and corporate governance (ESG) issues, more than ever the bottom line for real estate owners and operators is: It’d be nice if my return on investment (ROI) is positive.

As the Trump administration’s opposition to renewable energy mounts and economic uncertainty continues, for most real estate companies and proptech providers and advisers, sustainability remains an important part of business — but mostly when it lowers energy costs, the main line item in building operations.

At the same time, investor demands as well as municipal and state environmental regulations continue to compel companies to maintain, and even advance, sustainability goals.

Paige Mueller, managing principal at Eigen 10 Advisors, a San Francisco Bay Area-based commercial real estate investment consultancy, said her firm “got dragged into ESG by our clients several years ago, and that business has pretty much overtaken our business. Probably 80 percent of what we do is to work with mostly general partners to help them with a variety of things, from reporting to corporate sustainability reports; but, most importantly, to figure out how to integrate their ESG goals with their investment performance, strategy and goals.”

Whatever headwinds are affecting ESG and sustainability goals, companies are adapting to them in practical ways, said Mueller, whose firm works with small and medium-size businesses.

“Most companies, if they have net-zero goals, don’t know how they’re going to get there,” Mueller said. “But it’s absolutely fine, because there’s lots of new technology coming up. The grids are changing. So, there was a culture of, ‘Hey, we’re committed to this. We want to reduce pollution, reduce natural disaster events, and we believe that we have a role to play in that as a private sector. And so we’re going to make those goals and figure out how we’re going to get there, but we’re going to start measuring our progress.’”

Mueller said the U.S. political environment has changed in a way that such statements are not  … well … sustainable, and some companies have retracted them. However, companies’ efforts to meet these goals have largely remained in place due to other factors, she said.

“There is, and it’s a good thing, a reversion to what’s material, and that has a very specific meaning in the ESG world,” said Mueller. “It means what kinds of things could impact our financial performance, our ability to raise capital, how our investments perform. And those are the things that we should prioritize.”

This reversion is best seen through the language that’s now used when ESG comes up, Mueller said. 

“The E part is easier to see, and it’s more regulated right now,” she said. “It’s regulated by the states, so you may get fines if you have buildings that are producing too much greenhouse gas. I think there should be a change in the language away from climate. People don’t understand climate. It’s too complex. It’s very political. I think we should just talk about pollution. ‘Do you want to look outside and see gray, ugly brown skies? Do you want to have your water polluted? If not, what are you going to do about it?’”

Matt Ellis, CEO of Measurabl, an ESG data management platform for commercial real estate, sees an opportunity for the industry presented by one of the current administration’s energy policies.

“The proposed dismantling of Energy Star by the Trump administration actually presents an unprecedented opportunity to modernize the way that the industry utilizes technology to measure and manage sustainability,” Ellis said in an email. “Energy Star Portfolio Manager (ESPM) has long served as the default system for benchmarking building energy use across U.S. real estate — a federally managed, taxpayer-funded tool used to support compliance, certifications, financing and public disclosure for 333,000-plus buildings. ESPM played a critical role in advancing the business case for sustainability — delivering $350 in energy cost savings for every dollar invested, according to the EPA.” 

Its biggest contribution has been showing what’s possible when building performance is measured at scale, Ellis said. And therein lay the opportunity. 

“To help the industry navigate the current uncertainty, we’ve made free accounts available, ensuring critical activities like data aggregation, benchmarking and reporting can continue uninterrupted,” Ellis said. “But what’s needed goes far beyond continuity. We need a modern, resilient data infrastructure powered by technology built for the complexity of today and the promise of tomorrow. Our customers, which include many of the world’s largest real estate owners and investors, and represent more than $3 trillion in assets under management, are clear that this new system should be industry-led, innovation-forward, globally referenceable, agnostic and open to all, and built on a sustainable, apolitical business model.”

Environmental compliance for buildings is actually refocusing landlords and investors on sustainability, said Stephanie Grayson, co-CEO of Cambio, a Washington, D.C.-based climate tech company that helps building owners and operators track emissions and stay compliant with local climate laws.

“There are nearly 100 municipalities and states with sustainability compliance requirements,” said Grayson. “It’s everything from [New York City’s] Local Law 97, which is very well known, to benchmarking and transparency requirements at the state and city level.

“On top of that, investors, limited partners, have extremely extensive requirements for emissions transparency,” she added. “It’s no small fact that around 40 percent of global real estate investment capital is coming from Europe, for example. We know that while they are not the only limited partners requiring emissions transparency, they are some of the loudest voices. So all of this is required. It’s non-negotiable. It’s effectively the requirement to operate in this ecosystem.”

Public sector pressure on how to achieve sustainability, whether through renewable energy or curbing carbon emissions, can be a positive in focusing ESG goals, Grayson said.

“When you look at policy volatility or question marks, it’s really driving operational clarity for the market, because the smartest firms, the most proactive market leaders, they’re not waiting now for assurance coming from stabilization in the public sector,” Grayson said. “They’re investing in building resilience now.

“So we’ve seen retrenchment and actually a huge amount of inbound [business] to ourselves and our core tool, which I think is aligned with what the market needs right now. We’re aligning the automation of critical sustainability workflows with an ROI creation engine. Ultimately, that’s not political, that’s not controversial. Everybody wants to drive improved building performance.”

Seyed Madaeni, co-founder and CEO of San Francisco-based Verse, an AI-enabled software platform that helps companies plan and manage clean energy, sees another major factor in the sustainability ecosystem equation. At a macro level, he said what is pushing people toward greater adoption of clean energy is primarily power load growth, which has been doubling annually.

“Never in my career have I actually observed that,” Madaeni said. “So with load growth, which you can argue is being driven by AI and EV adoption, there needs to be supply to meet that demand. If there’s not enough supply to meet that demand, you will see pretty high electricity prices, which we’re observing today. Year-over-year, we’ve had 10 percent growth on wholesale electricity prices, with 10 to 20 percent volatility increases in electricity prices. That would leave a lot of the CFOs pulling their hair in terms of reducing [operating expenses, or opex], as a big portion of that is spent on electricity. So that is the big problem at hand. Costs are high and volatile, and forecasting your opex is pretty much impossible.

“So what do you do when electricity prices are high? You can pray and build a natural gas power plant that takes six years to build, or you invest in solar and storage and a lot of grid-scale technologies to get you faster, cheaper results.”

In the proptech niche of EV charging, Iben Falconer, director of strategic partnerships at It’s Electric, a Brooklyn-based startup that focuses on curbside charging, sees continued demand from both drivers and landlords, who are always looking for another revenue stream.

“There is still demand for electric vehicles, especially because in some of the cities that we’re working in, that demand likely wasn’t going to change with federal administration headwinds,” said Falconer. “And, because that is not leveling off, we are still seeing residential tenants asking their landlords, ‘How can we get access to convenient charging?’ We’re a great option for that.”

Beyond the U.S., Zurich-based Optiml is attempting to make a software business model out of capex and sustainability planning from component to asset to portfolio, said Evan Petkov, co-founder and CEO of the company.

“Most of our clients are asset portfolio managers and large real estate firms, and our other clients are consultancy that serve leaner asset managers like pension funds,” said Petkov, whose company operates primarily in Europe, but has just come out of stealth mode in the U.S.

Petkov described the difference between sustainability drivers in Europe and the U.S. as: “If you think about sticks and carrots — sticks being regulations, carrots being incentives — ESG is slightly receding because [Europe has] shown that the green premium is not really there. It’s only existing in prime offices in central cities, which is a fraction of the market. What’s happening more, though, is the brown discount, and that’s actually real in the European market.

“Brown to green strategies are quite common now, which is a value-add strategy, essentially meaning, ‘I’ll buy this brown, crappy asset and I’ll put in some capex. It’s in a rising area, so I can raise the rents and then it will get a greener score.’ That is a strategy that’s been working for certain investors, but they obviously have to be attuned to that. So a large part of our business is related to those strategies.”

Philip Russo can be reached at prusso@commercialobserver.com.