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One Vanderbilt's Green CMBS Loan 'Shattered All Sorts Of Records' With Investor Demand In Overdrive

As building sustainability becomes increasingly important for office users to sign a lease, financing new office developments or renovations is about to get greener.

One Vanderbilt in Midtown Manhattan, which opened in 2020

As lenders have raised funds dedicated to sustainability-driven investment, they are increasingly looking to place that capital into the renovation and construction of office buildings that focus on environmentally friendly design and development, speakers at Bisnow’s Future of the Workplace event last week said. 

“The PIMCOs, the BlackRocks, the pension funds — they only have so much money to allocate to real estate,” Wells Fargo Managing Director Robert Rosenberg said. “But they all have new buckets of capital to allocate to whatever the asset class is to green financing … the folks they are investing for, they all want to know they're investing in environmental and sustainably conscious good causes. So you're gonna see a lot more of this.” 

Over the past year, investors such as CBRE Investment Management and Brookfield have raised hundreds of millions of dollars in funds to specifically put toward green development. The trend goes beyond real estate: There were 292% more sustainability loans in the first five months of 2021 than there were in all of 2020, Bloomberg reported.

Earlier this year, Wells Fargo co-led the single largest CMBS loan in history alongside Goldman Sachs: a $2.3B refinancing of SL Green’s One Vanderbilt. It was also the first green bond property that Wells Fargo had ever provided financing for, Rosenberg said, which helped propel the deal toward the finish line. The bank initially had worries about investor demand for the AAA tranche of the bond; while it is the safest investment in the capital stack, it also delivers the smallest profit to investors, he said. But the office tower’s sustainability rating significantly increased demand. 

“By being able to put a green bond designation on it, we shattered all sorts of records,” Rosenberg said. “We had more investors come in as compared to any other typical skyscraper, trophy office building.” 

Since that deal, Rosenberg and his colleagues have received one or two calls per week from developers who ask about the benefit of the green bond and how much more interest it pulled from investors, he said.

Hines, the Houston-based development giant that has a $19.8B East region portfolio, is one such developer looking to leverage green building to get favorable financing, Hines Managing Director Chris Roth said. 

Lane's Kofye Gyekye, Industrious' Jamie Hodari, Brookfield's Rachel Wachtel, essensys' Jeremy Bernard on a flexible office panel at the Workplace of the Future event

Hines is renovating one of its Hudson Square properties to include geothermal tiles, radiant slabs, air source heat pumps and chilled beams, among other things. It is looking for favorable financing terms because of the environmentally conscious nature of these upgrades, he said.  

“We're starting to get smart on financing options as a function of that,” Roth said. “I think you're starting to see, and you will continue to see, more development positions within existing assets and new assets to be able to accommodate for some of those creative green bonds.” 

The surge in green retrofits or new development, and the increase in funding available for such projects, is part of a flight-to-quality that began before the coronavirus pandemic and was accelerated by the crisis, he added. 

“Carbon neutrality is a big deal right now,” Roth said. “I think that also ties into the narrative around tenants looking for best-in-class product, which is not only safe [and] healthy, but also is responsible to the environment.” 

But green bonds are still new, Rosenberg said, and while there are a number of different ways to measure whether a building is environmentally friendly — such as LEED certifications — there is still not a clear, universal way to gauge exactly what makes a bond a green bond. As the use of green bonds takes off, the Securities and Exchange Commission has begun to attempt to codify the metrics for such a bond more clearly and uniformly.

“There's a movement to standardize this,” Rosenberg said. “So we can come out with a clear path and standard so developers can know what they should be shooting for. They’re going to probably help us, tell us what we should be shooting for, what the latest and greatest and best technology is.” 

The trend is not confined to the U.S. — green bonds are increasing in popularity on the other side of the Atlantic, where environmental issues are treated with more urgency

“The spread between green and non-green bonds is about 10 basis points at the moment, and that's because of the demand,” Samir Amichi, Blackstone’s head of European acquisitions, said during a recent Bisnow event in London. "There is more demand for green financing than non-green, so that demand will only spread. It goes across all parts of the capital spectrum.” 

Related Topics: Hines, Wells Fargo, Robert Rosenberg