Why Companies Should Finance CRE Sustainability Projects Even When The Economy Is In Turmoil
While the commercial real estate industry struggles to get deals off the ground in this turbulent economic environment, certain commercial tenant and investor priorities are not going away, even if the economy enters a recession.
This includes the widespread expectation that today’s buildings need to operate more efficiently and sustainably.
“For several years, commercial real estate projects have been trending toward incorporating sustainability measures due to the dramatic reduction in operating costs, as well as the increase in property value that can be realized,” said Kate Cusack, vice president of originations for Nuveen Green Capital. “That continues to be where we are headed.”
U.S. commercial buildings consume 35% of all electricity and generate 16% of all carbon dioxide emissions, she said. In total, CRE accounts for about 40% of all greenhouse gas emissions in the country, a contribution that Cusack called "significant."
Despite the constant drumbeat of negative economic news, key stakeholders continue to prioritize the sustainability of CRE properties. That is unlikely to change no matter where the economy heads, Cusack said.
“There's an uber-focus today on the sustainability of commercial buildings and it is being driven by corporate sustainability measures and by investors looking for investments that have a sustainable angle,” she said. “But on the flip side of that, tenants are demanding cleaner, healthier and more efficient workspaces. The interest in environmental, sustainability and corporate governance factors is really coming from all angles.”
Commercial Property Assessed Clean Energy financing, known as C-PACE, is an option available in most states, Cusack said. C-PACE is a public-private funding mechanism that allows owners and developers to access fixed-rate, low-cost and long-term financing to support sustainability projects on their properties.
C-PACE funding has been around for several years, but Cusack said its value is becoming even clearer as other CRE funding sources are becoming more uncertain.
“This is a very challenging environment for getting new developments off the ground,” she said. “Interest rates are rising and that is squeezing a lot of construction projects. But costs are also rising, so developers are getting it from both ends even as debt markets are being squeezed. C-PACE offers the least-expensive construction financing available.”
In this environment, C-PACE gives project owners what Cusack called a “stable, very predictable financing tool.”
Unlike other types of construction loans, C-PACE is a fixed-rate product that won’t fluctuate during the life cycle of a project. In addition, payments are not due until the construction is completed.
“This gives developers a sort of grace period during construction when they don't have to make the payments, giving them a little bit of time for the project to go vertical before payments begin,” Cusack said.
Capital borrowed through C-PACE can be repaid over time through a voluntary tax assessment. Also, repayment obligations can be transferred to the next property owner and the borrower also may be able to pass along its costs to tenants.
Nuveen Green Capital, which was founded by C-PACE financing pioneers Jessica Bailey and Alexandra Cooley in 2015, has used the program to fund hundreds of projects across the country. Cusack mentioned a recent $12M deal Nuveen Green Capital facilitated for a student housing project in Washington, D.C.
“The developer was really interested in C-PACE as a way to replace high-priced mezzanine debt and dramatically improve his economic returns, while also installing energy-efficient measures to keep the utility costs down in his building,” she said. “So it was a win-win for him, particularly in this uncertain environment. Other property owners, too, are realizing dramatic savings with C-PACE while increasing their property values — not to mention the benefits to tenants and the environment.”
Cusack noted C-PACE financing has been applied to a wide variety of commercial projects in recent years, including multifamily and hospitality.
“C-PACE can slide into the capital stack in various ways to improve economic returns and really help out developers in these uncertain times,” she said. “A lot of senior lenders are pulling back from lending at this point. But C-PACE, being a long-term and fixed-rate product, is getting a lot of interest from developers who still want to complete their projects because it’s really the lowest-cost construction financing option in the marketplace today.”
Even with an economy in turmoil, financing CRE sustainability projects remains a smart business decision, Cusack said.
To learn more about C-PACE financing, visit here.
This article was produced in collaboration between Studio B and Nuveen Green Capital. Bisnow news staff was not involved in the production of this content.
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