Sustainable Real Estate-Institutional Investor Perspective Doug Lawrence Managing Director Real Estate Portfolio Managers JPMorgan Global Real Assets Group 212-648-2156 [email_address] 20th Annual Pension and Financial Services Conference June 10-12 2009 Atlanta, GA
THE NEXT LONG-RUN TREND Greening U.S. Real Estate Markets Windpower Sustainable Communities Solar Energy Urban Sustainable Design The Kalahari, Manhattan, NY
The Jury is in…… Doing Well by Doing Good? Green Office Buildings-January 2009 Piet Eichholtz Maastricht University, Nils Kok Maastricht University, John M. Quigley University of California “ For some 10,000 subject and control buildings… we find that buildings with a “green rating” command… effective rents above six percent more than otherwise identical buildings…Selling prices of green buildings are higher by about 16 percent ”
The Big Picture…..Real Estate will be a focus of regulation because its environmental impact is enormous <ul><li>World Green Building Council </li></ul><ul><ul><li>business-led coalition </li></ul></ul><ul><ul><li>8,000+ companies </li></ul></ul><ul><ul><li>14 countries </li></ul></ul><ul><ul><li>50% of global construction </li></ul></ul><ul><li>72% of electric consumption </li></ul><ul><li>39% of energy use </li></ul><ul><li>38% of greenhouse gas </li></ul><ul><li>40% of raw materials </li></ul><ul><li>30% of waste (136mm tons/yr) </li></ul><ul><li>14% of potable water </li></ul>View of Manhattan from Queens West, NY Godrej Green Business Ctr. Hyderabad, India Beijing, June 18-20, 2009 Int’l Green Building & Sustainable Cities Exposition Source: USGBC: Green Building Research , World Green Building Council Consumption Estimates China vies to be leader in electric vehicles 500,000 cars per year Tianjin-Qingyuan Electric Vehicle Company. China’s Great Leap Forward? … .. Beijing 6/2009
There’s no way to reduce carbon emissions without tackling real estate’s contribution..public policy is shifting but not fast enough
This Landmark decision (4/17) may impact real estate Supreme Court Backs EPA EPA Director Lisa Jackson will regulate carbon dioxide under the Clean Air Act Green House Gas Due Diligence will be required Are national green building codes coming ?
The White House convened Plan Sponsors to talk about green 2 consultants-Courtland, FIS Group 2 Vendors-Turner Construction, Johnson Controls 4 pension plans-LA Power & Water, Maryland, Connecticut, Baltimore 8 Federal officials including: Jared Bernstein- Chief Economist Terrell McSweeney- Chief Domestic Policy Advisor Moe Vela- Director of Administration Vice President Biden is in charge of the Stimulus/Recovery Package 4/28/09
What did the Administration emphasize? Sustainability- key economic driver Subsidies-domestic green products & mfg Regulation-speed to adoption Financing-spur innovation and adoption Regulation-stable, predictable ARLEN SPECTER’s switch to the Dem= 60 vote Senate majority with Ind. allies 4/28/09
What’s the “Green” Value Thesis for real estate investors Standard Construction Green Construction versus Similar construction costs for LEED Certified, Silver and Gold to standard, lower future cap-x, lower operating expenses, result in improved NOI and cash flows that we believe will create more value over the long-run. Operating Expenses Operating Expenses > Future Capital Expenditures Future Capital Expenditures > Hard Construction Costs Hard Construction Costs = Net Operating Income < Net Operating Income
Serious Misinformation: Green costs too much! Note: Development of software applications to reduce reliance on consultants to complete paperwork, partners that will guarantee energy consumption levels, buy and install systems at less cost, and guarantee technology updates will reduce overall cost and we expect will increase the long-run value of the asset. NOT SO! ASK THE ENGINEERS! Soft Costs are falling Tax treatment Subsidies and grants Difficult to suspend disbelief-part of the lnvestor learning curve Hines Tischman Speyer Turner Construction Johnson Controls Davis Langdon McGraw Hill Gensler Mostly Soft Costs of consultants & learning curve More Exotic Tech
Green saves operating expenses….we expect an increase in NOI of 4-8% over standard construction Average bottom line savings Source: LEED, U.S. Green Building Council Green is Asset Mgmt intensive
Green gets higher direct rental rates It looks like the rate spread has widened during this downturn Source: CoStar Group 2009
Green gets higher occupancy rates Source: CoStar Group 2009, Investment Returns from Responsible Property Investing Is there a flight to quality? Better retention? Or both?
Green commands better Sales Prices / Square Foot ® Real Estate Information
Greening older buildings requires special skills The Project Johnson Controls - technology leader $20 million package of retrofits Energy savings alone est. to be $4.4 million…. 3 year payback Reduce energy use by 40% Target: LEED Gold JCI greens Empire State Building With any retrofit-there are issues <ul><li>Tenant relocation costs </li></ul><ul><li>Taking space off line </li></ul><ul><li>Lease modification-capital costs </li></ul><ul><li>Easier to fit building to the technology, </li></ul><ul><li>than the technology to the building </li></ul>Source: LEED, U.S. Green Building Council <ul><li>Retrofitted Buildings can bring: </li></ul><ul><ul><li>3% higher occupancy rates </li></ul></ul><ul><ul><li>7.5% increase in value </li></ul></ul><ul><ul><li>And use an average of 25% to 30% less energy than conventional buildings </li></ul></ul>
Green is seen as Value-Added plus risk with the potential for near opportunistic returns in this current market <ul><li>Expected return </li></ul>Expected risk Core Core Plus Value added <ul><li>Subsidies & grants </li></ul><ul><li>Tax abatements </li></ul><ul><li>Lower cost financings </li></ul><ul><li>Re-zoning benefits </li></ul><ul><li>Lower operating costs </li></ul><ul><li>Green technology </li></ul>* Volatility or risk is reduced due to We think there is lower volatility in green real estate Opportunity Green Real Estate Source: JPMorgan Asset Management — Global Real Assets. The above is show for illustrative purposes only. *Risk characteristics (including leverage, percentage of development, lease-up risk, etc.) are somewhat subjective, and it is possible the strategy could be viewed as having risk characteristics some would consider to be more consistent with value-added strategy or opportunistic strategy . The manager seeks to achieve the stated objectives. There can be no guarantee those objectives will be met. Projected 15%+ before tax net IRR
Future ? green cash flow underwriting = price distinction <ul><li>Green Building Value Rating System-Green vs. Standard Construction </li></ul><ul><li>Underwriting guidelines to value green cash flows </li></ul><ul><li>Aiding the market in identifying higher valued collateral to the real estate finance sector and securities markets thereby facilitating new securitization opportunities, increased investor confidence and enhanced liquidity. </li></ul><ul><li>70 Partners -including JPMorgan </li></ul><ul><li>A global standard-like LEED-but for cash flows </li></ul>Primary Market 1. Loan application review 2. Loan committee decision making 3. Purchase and sale negotiations Secondary Market- Portfolio Analysis and Disclosure 1. Pooled debt/equity investment vehicles (private / public) 2. Real estate private equity portfolios 3. REIT stock analysis
Summary: Sustainable Real Estate may have 9 benefits for the investor… <ul><li>Protection against technological obsolescence </li></ul><ul><li>Protection against physical obsolescence </li></ul><ul><li>Protection against inflation </li></ul><ul><li>Protection against appraisal risk </li></ul><ul><li>Greater NOI and greater Cash flow </li></ul><ul><li>Better future disposition value </li></ul><ul><li>Alignment with Public Policy </li></ul><ul><li>Ability to mitigate risk through public incentives, subsidies and grants </li></ul><ul><li>Better overall portfolio diversification </li></ul>
Biographies-Portfolio Managers Douglas P. Lawrence, managing director , is the Portfolio Manager of the Urban Renaissance Property strategy for J.P.Morgan Asset Management – Global Real Assets. Prior to this role, he was a Client Portfolio Manager for JPMIM wherein he was responsible for helping clients design and implement their real estate strategies and portfolios. Douglas has 24 years of industry experience. An employee of JPMAM-Global Real Assets since July 1997, he was previously a senior asset manager responsible for managing more than four million square feet of real estate assets. He won nine (9) national and regional awards in this role for JPMAM – Global Real Assets. Before joining the firm, he was a Senior Asset Manager for TIAA-CREF. He also worked in the public sector as the Asset Manager for the City of Hartford. Prior to that post, he was a residential developer in the Southwest. Douglas obtained a B.A. from Yale University and an M.B.A. from the University of Connecticut in International Business Finance. He is Chairman of the Real Estate Committee of the $500 million Abyssinian Development Corporation. He is a member of the Pension Real Estate Association, Urban Land Institute, National Association of Securities Professionals, National Association of Real Estate Investment Managers, International Conference of Shopping Centers, and U.S. Green Building Council. Douglas holds FINRA series 7 & 63 licenses. He is a member of the Capital Markets Partnership which is establishing underwriting guidelines for green real estate. Lewis P. Jones, managing director , is the Portfolio Manager of the Urban Renaissance Property strategy for J.P.Morgan Asset Management – Global Real Assets. An employee since 1988, Lewis has 21 years of industry experience and has been a senior member of the Acquisitions Team. Prior to joining JPMAM – Global Real Assets in 2005, Lewis served as President of the JPMorgan Chase Community Development Corporation, where he held overall management responsibility for the firm’s community development lending and investment activities, which have totaled more than $5 billion since the corporation was established in 1987. These activities included real estate construction lending and equity investments in projects focusing on urban revitalization that use low income housing and new markets tax credits. Prior to joining the firm, Lewis practiced law, worked as an investment banker in public finance and was a reporter. Lewis holds an A.B. from Harvard College and a J.D. and M.B.A. from Columbia University. He is a member of the Urban Land Institute and has served on several of its inner city advisory panels. Additionally, Lewis is a member of the International Conference of Shopping Centers, and the Pension Real Estate Association. He also serves on the boards of Mount Sinai Hospital Center, the Housing Partnership Development Corporation and Neighborhood Restore and has previously served on the board of the Enterprise Foundation. Lewis holds FINRA series 7 & 63 license. He is a member of the Capital Markets Partnership which is establishing underwriting guidelines for green real estate.