Green Building
Project Management Teams Deliver Big Value for Tenants
There’s no question that the current real estate development market is challenging. Labor shortages and rising material costs are creating hurdles in the construction industry, which is being compounded by limited inventory of vacant real estate for certain property types, leaving companies with very few options for additional square footage or property upgrades. The good news is that companies that lease their building may be in luck thanks to a high-value service some landlords are offering: a dedicated project management team. Project management teams come in all shapes and sizes, but they have the potential to handle all types of development projects (e.g., expansions, renovations and build-to-suits) as well as deliver turnkey solutions. REITs and other longer-term investors will often invest in these teams, priding themselves on being a partner to their tenants for the duration of the lease and beyond. Project management teams manage everything from conceptual planning to design to construction management, assembling a team of architects, consultants and contractors. This holistic service is particularly valuable since most tenants don’t have the resources—be it the capital, relationships or expertise—to execute these projects themselves. And leveraging their landlord’s project management team is often more efficient and cost-effective than hiring a third-party developer, and enables them to focus on their core business, which is most likely not real estate development. In today’s market, having access to a dedicated project management team with a shared interest in their tenant’s business and the expertise to effectively navigate current challenges is more valuable than ever. Here’s why: Renovate, modernize or convert an existing building Project management teams can adapt an existing building to reflect the tenant’s evolving real estate needs. This could encompass a full renovation and modernization of an outdated building or converting one property type to another (e.g., office to R&D) to reflect a changing business model. Moreover, with prices continuing to increase having a project management partner that can finance the upfront costs associated with these projects is critical. In addition, working with a project management team that understands the ins and outs of a tenant’s business along with being able to offer a tailored approach means the final product will be ideally suited to the tenant’s long-term needs, in comparison to if the tenant worked with a third-party developer. Expand an asset to accommodate a need for more space In order to continue growing, many tenants need to expand their real estate footprint to make room for more equipment, inventory and more. However, record-low availability of real estate means that many tenants can’t find the additional space they need. An in-house project management team can help by working with tenants to expand their existing space to accommodate growing business needs. A huge benefit of this approach is that tenants can typically continue operating in their existing facilities during an expansion, offering minimal disruption to day-to-day operations. Retrofit an existing space to make it more sustainable With energy costs continuing to soar, there’s never been a better time for tenants to update their properties to make them more sustainable. In-house project management teams can work on a variety of sustainability projects including renewable energy opportunities – such as solar panel installations – energy efficiency retrofits and green building certifications. These sustainable projects can reduce tenants operating costs and help reduce scope 1 and 2 emissions to align with their sustainability goals. Conclusion For landlords, investing in a project management team is a win-win. Turnkey project management solutions add value for tenants by adapting their property to meet their long-term needs, helping increase lease renewals while also improving the overall quality of the portfolio. From an investment perspective, having a project management team also provides a steady pipeline of attractive internal investment opportunities, while enabling the landlord to have project oversight on deals where they are also serving as the capital provider.
Financing Sustainable Real Estate Through Sale-leasebacks
Financing sustainable building upgrades can be a daunting and expensive endeavor for many businesses. The upfront costs associated with sustainable materials, energy-efficient systems and eco-friendly designs often deter companies from pursuing these environmentally beneficial projects, even when they know there are long-term cost savings. Sale-leasebacks offer an effective solution to this challenge. By selling their real estate to an investor and leasing it back, companies can unlock capital which they can invest in sustainability upgrades, improving the quality of their building and often lowering operating costs. Landlords, like W. P. Carey, are also typically supportive of sustainability-focused building upgrades as they increase the overall value of the building. Here are several ways companies can leverage sale-leaseback financing to make their buildings more sustainable. Solar panel installations and green roofs One of the most effective sustainable upgrades for commercial facilities is installing solar panels on a roof or carport. Solar panels provide a clean source of energy and can help companies save on power costs. They also reduce over-reliance on the grid during peak periods when electricity demand is high and clean up the grid, providing a renewable and cost-effective alternative to fossil fuels. Depending on the location, companies may also be able to receive Renewable Energy Credits (RECs) or Guarantees of Origin (GOs). Another sustainable upgrade that can provide both environmental and economic benefits is a green roof, also known as vegetated or living roof. These are roof systems covered with waterproofing membrane, soil and vegetation. Green roofs can significantly improve stormwater management, reduce urban heat island effect, boost biodiversity by providing a habitat for plants and animals, and improve building energy efficiency. Both solar panels and green roofs are a great way to make a building more sustainable and help reduce energy costs for the tenant, but they require significant investment. By utilizing sale-leaseback financing, companies can easily unlock the capital they need to invest in these improvements. Sustainable construction For companies who are looking for a brand-new building and want to prioritize sustainability, a build-to-suit, which uses the sale-leaseback structure, is a great solution. Through a build-to-suit, a company can secure a custom-built, sustainable facility without the upfront capital investment. An investor funds and manages the construction of the new facility to meet the specifications of the future tenant, and upon completion, the company enters into a long-term lease. During the build-to-suit planning, companies can specify that they want to utilize sustainable construction, which means using recyclable and renewable materials during the building process as well as minimizing energy consumption and waste production. In addition, the building can be designed to minimize its carbon footprint by incorporating elements and materials that have a continuous positive influence on the environment. These features can include electric-vehicle charging stations, drought-resistant landscaping, heat pumps, appropriate insulation to prevent heat loss and greywater recycling. Energy-efficiency upgrades Implementing sustainable features to improve energy efficiency significantly impacts a property's life-cycle emissions. These upgrades are often relatively easy to implement but can be costly to install. By unlocking capital through a sale-leaseback, companies can extract the cash they need to invest in these improvements, making their building more sustainable and saving on energy costs in the long run. One example of an energy-efficiency upgrade is installing Internet of Things (IoT) technology, including smart meters, which help companies manage building efficiency on a daily basis. IoT sensors can gather information on energy consumption, temperature, air quality and occupancy levels, enabling tenants to best optimize the efficiency of their buildings. Companies can also leverage the capital from a sale-leaseback for building systems upgrades. Upgrading an outdated heating, ventilation and air conditioning (HVAC) system can help decrease utility consumption and create maintenance cost savings for the tenant. W. P. Carey can help While the financial burden of sustainable building upgrades can be substantial, sale-leasebacks provide a viable and strategic solution. Embracing this approach allows companies to align their environmental goals with their economic objectives, paving the way for a greener and more prosperous future. W. P. Carey is one of the largest net lease real estate investors and has significant experience working with companies on sale-leasebacks and sustainability solutions. If you’re interested in learning more, contact us today!
Tenant Partnerships – The Road to a Sustainable Future
As Climate Week NYC approaches, the spotlight on sustainability is brighter than ever. For companies across industries, the annual event underscores the urgent need to address climate change. The real estate sector, estimated to be responsible for nearly 40% of global carbon emissions, plays a critical role in advancing this worldwide effort. At W. P. Carey, we recognize our potential to drive meaningful impact in the fight against climate change through our extensive portfolio of over 1,200 net lease properties. While the net lease model means our tenants have full operational control of their properties, we are committed to collaborating with them to achieve shared sustainability goals and enhance the quality of our properties. Here’s how: Gaining insights through data Collecting detailed energy data remains a core focus for us. Collaborating with our tenants to install IoT smart meter systems provides both us and our tenants access to high-quality utility data for their leased properties. This data can be utilized to assess energy usage for regulatory compliance as well as voluntary reporting. It also enables us to calculate the carbon footprint of our portfolio and identify opportunities to implement energy-saving measures at our properties. In 2023, we began a smart meter installation program with our European tenants, making the process more efficient for both W. P. Carey and our tenants while also reducing the risk of data errors. Renewable energy opportunities Renewable energy can reduce building operating costs and lower carbon emissions. One of the most accessible sources of renewable energy is solar power, which can be harnessed through the installation of solar panels. Particularly given the roof space that our industrial and warehouse assets provide, we believe we have a large addressable market for solar. Through W. P. Carey’s CareySolar® program, tenants have the opportunity to take advantage of rooftop and carport solar installations at their leased properties through a broad array of structures. These include: Landlord-operated Landlord-financed Tenant projects Rooftop leases W. P. Carey collaborates with each tenant to understand their current energy usage and determine the ideal solar solution for their unique property. In 2023, W. P. Carey extended the lease term with an existing tenant for their 265,000-square-foot industrial facility in Illinois. Simultaneously, we signed a 15-year power purchase agreement where we plan to build a 1,350-kilowatt roof mounted solar system that would offset 740 metric tons of CO2 annually. We will manage and fund the construction of the system and sell the power generated by the system to the tenant. Building energy retrofits Implementing sustainable features to improve energy efficiency has a huge impact on a property’s life-cycle emissions. W. P. Carey can do this through property-specific energy retrofits. An example of an energy retrofit is the installation of LED lighting. LED lights are 80% to 90% more energy efficient than other light bulbs and do not contain any environmentally hazardous materials. Additionally, LEDs last up to 25 times longer than traditional incandescent bulbs. In 2023, W. P. Carey completed a full LED retrofit at our 1.5 million-square-foot warehouse in University Park, Illinois. The LED project is expected to result in a 35% reduction in lighting electricity usage and 41% reduction in utility and maintenance bills at the property. Following the completion of the retrofit, we leased the property to Samsung for a term of 10.5 years. Green-building certifications Green-building certifications such as LEED and BREEAM can provide many benefits for both landlords and tenants. Achieving a green-building certification means that a property meets certain sustainability requirements across a variety of categories including energy, air quality and water usage. Certified buildings are typically more energy and cost efficient and create healthier work environments for employees. In addition to being more environmentally friendly, green-certified buildings can offer tax benefits. Many states offer tax incentives for green building projects, based on either energy savings or reaching a certain level of certification. Real estate studies have also shown that green buildings sell and lease faster than traditional buildings, and garner higher rents and lease rates. At W. P. Carey, we’re committed to achieving green-building certifications where we can, and our portfolio includes 6.6 million square feet of green-certified buildings as of June 30, 2024. In 2024, our state-of-the-art food research facility in the Netherlands received a BREEAM Outstanding certification, the highest level of BREEAM certification for buildings worldwide. Conclusion Reducing the carbon footprint of a net lease portfolio is an enormous challenge, but by bolstering tenant engagement and systematically identifying sustainability opportunities, progress is possible. Sustainable real estate is beneficial to the planet, attractive to tenants and improves the value of our broader portfolio, making it a win-win-win for all.
Benefits of Green Leasing for Net Lease REITs
The real estate industry continues to face increased scrutiny regarding climate-related disclosures from many different stakeholders, including investors and regulatory agencies. As the SEC finalizes its proposed rules around these disclosures, the net lease industry is grappling with how to collect and report on climate-related data given the majority of a net lease REIT’s carbon emissions are Scope 3, or indirect. Without any direct control over the operations of their properties, net lease REITs have the added challenge of establishing access to their tenants’ utility data in order to understand the power consumption and potential sustainability opportunities at their properties. One effective approach to improving sustainability and disclosure quality for net lease REITs is through green leasing, in which green clauses are incorporated into leases that encourage landlords and tenants to collaborate on energy efficient and sustainable practices by aligning financial incentives and sustainability goals. Here are three of the most significant benefits of green leasing for net lease REITs: Increases data transparency to help identify a greater number of sustainability opportunities Collecting sustainability-related data has historically been difficult for net lease REITs due to the triple-net lease structure whereby tenants are responsible for the day-to-day operations of the property. However, by implementing a green clause in their leases, landlords can require tenants to disclose electricity, water consumption, waste management and other energy usage data at their properties. This enables net lease REITs to easily collect data and benchmark the energy usage of their portfolio to better identify inefficient buildings and target attractive sustainability opportunities within their portfolio. Incentivizes landlords to invest in green building upgrades There are a number of ways green leasing can support the implementation of projects that reduce a property’s carbon footprint. For example, green leases can include a clause that give landlords the ability to install on-site renewable energy such as solar panels at their properties so long as they can sell power back to the tenant at the same retail electricity rates as the tenant pays a utility company. Furthermore, green leases often include cost-recovery clauses for energy efficiency upgrades which helps solve the “split-incentive problem” – where landlords pay 100% of the capital expense for energy upgrades while only tenants receive the monetary benefits attributed to the decrease in energy consumption. Through a cost-recovery clause, landlords can amortize and recover capital costs for energy efficiency improvements, increasing incentives to pursue these types of projects while still benefiting the tenant through cost savings. Fosters greater tenant-landlord sustainability partnerships Perhaps the biggest benefit of green leasing is the improvement in tenant engagement. Green leases are designed to benefit both tenants and landlords, providing incentive for both parties to partner on sustainability projects including renewable energy opportunities, building energy retrofits and green building certifications. In order to implement a green lease, landlords and tenants must engage in an ongoing dialogue and align on sustainability goals, objectives and opportunities, ultimately strengthening the relationship, enabling tenants to achieve their own sustainability goals and improving the likelihood of tenant renewals. Conclusion Green leasing is a great tool to enable both landlords and tenants to reduce the adverse effect that real estate has on climate change. Particularly for the net lease industry, green leasing can help improve energy data collection, enhance the environmental performance of leased properties and align financial incentives so all parties benefit. It’s a win-win-win for everyone involved – landlords, tenants and most importantly, the environment.
W. P. Carey's Approach to Sustainability
Net Lease REITs are unique because our tenants typically retain operational control of the property. This structure has enormous benefits for both landlord and tenant. The landlord is not exposed to operating costs or capital expenses and is able to own and manage a large and growing portfolio very efficiently. Meanwhile, the tenant retains operational control, enabling them to adapt the property to their specific operational needs. W. P. Carey prides itself on its proactive approach to asset management. Our goal is to create long-term relationships with our tenants, proactively working with their management teams to optimize their real estate to meet their evolving needs. In recent years, sustainability has grown to be a top priority for W. P. Carey and our tenant base alike. While the net lease structure has many benefits, it presents some challenges when it comes to helping our tenants reduce their carbon footprint. First and foremost, without direct operational control, it can be difficult for net lease landlords to access property-level emissions data in a scalable way. However, with real estate being one of the biggest contributors to global greenhouse gas emissions, net lease REITs must create the systems and processes to facilitate collaboration with our tenants to reduce the carbon footprint of the portfolio. To tackle the challenge, we employ a three-phased approach to quantify and reduce our portfolio’s global carbon footprint: Step 1: Data – Scalable systems to collect and analyze our portfolio’s carbon footprint data The first step – and perhaps the most challenging for net lease REITs in general – is to collect tenants’ energy usage data to accurately analyze and benchmark our portfolio. In 2021, W. P. Carey launched a program to leverage a suite of SaaS platforms to collect utility data in an automated and scalable manner. The data feeds into our proprietary business intelligence platform, enabling us to track energy usage, identify outliers and opportunities, and integrate with third-party benchmarking organizations. It also enables us to equip our tenants with tools to better manage and benchmark their own energy consumption. As of December 31, 2021, we’ve collected data from tenants representing over 30% of annualized base rent (ABR). In 2022, we intend to further expand this program throughout our portfolio. Step 2: Engagement – Systematic tenant outreach and collaboration The next step is to proactively engage with tenants to jumpstart actionable conversations that lead to projects that reduce carbon footprint. At W. P. Carey, each asset manager is responsible for a portfolio of tenants across all property types and regions. Our asset managers develop long-term relationships with tenant management teams, providing a direct and ongoing dialogue about the tenant’s business and how they can operate more effectively in their real estate. These conversations have created direct opportunities to pursue sustainability projects that both lower tenant operating costs and enhance W. P. Carey portfolio value. Step 3: Action – Targeted sustainability projects that lower carbon footprint The final step is to act on the insights and identify property-level sustainability opportunities within the portfolio. Sustainability projects fall within five key areas: renewable energy opportunities, building energy retrofits, existing building green certifications, new construction green certifications and tenant energy audits. In addition to the primary goal of reducing carbon footprint, collaborating with our tenants to invest in sustainability projects has several key benefits. For the tenant, a more efficient building reduces operating cost and helps reduces the tenant’s scope 1 and 2 emissions. For W. P. Carey, sustainability projects provide an enormous addressable opportunity set of accretive investments within our existing portfolio. These projects enable us to extend leases, enhance criticality of properties and improve the overall value of the portfolio. Conclusion Reducing the carbon footprint of a global net lease portfolio is an enormous long-term challenge. However, by developing a scalable, technology-driven approach to collecting data and engaging with tenants, we can systematically identify sustainability opportunities that are beneficial to the planet, attractive to tenants and improve our broader portfolio. At W. P. Carey, we’re committed to scaling up this effort and being an innovative sustainability leader in the net lease industry.
Why Tenant-Landlord Relationships Matter
Since our founding in 1973, W. P. Carey has been a long-term partner to our tenants. This means that when we invest in a property, we are also committed to advancing the tenant’s business and look to support their evolving real estate and capital needs throughout the duration of their lease and beyond. A Long-term Partner: Building Beyond the Original Transaction W. P. Carey partnered with Sonae MC, a leading Portuguese food retailer, in 2018 when it acquired its mission-critical warehouse facility in the Azambuja logistics park, Portugal’s prime logistics hub outside of Lisbon. Since its founding in 1985, Sonae MC has steadily grown its market share. Today, the company has more than 1,300 stores throughout Portugal and Spain, 35,000 employees and a broad range of products and services. At the time of the acquisition, Sonae MC was experiencing rapid growth, particularly through its city-center convenience stores and e-commerce operations. In order to meet rising demand and continue executing on its strategic plans, the company needed additional food distribution warehouse space. “In recent years, Sonae MC has been expanding its store portfolio, mostly with small, convenience stores; in the last decade, 750 new stores were opened. This growth will continue for the next few years to solidify even more of our dominant market share. This means our company’s logistics operation has to continue growing its warehouse footprint to be able to receive, prepare and ship an ever-growing number of merchandise," explained Rui Braz, Head of Area – Logistics Development at Sonae MC. To support Sonae MC’s growing business, W. P. Carey partnered with the company and agreed to fund a $28 million expansion of the Azambuja facility. Completed in 2020, the 300,000-square-foot expansion was custom built to Sonae MC’s specifications and totaled over 840,000 square feet, making it the largest refrigerated warehouse in Portugal. With the additional space, Sonae MC was able to increase its capacity and speed of supply to Mainland stores in the central and southern regions of Portugal. “The Azambuja expansion was part of a plan to strengthen our logistic capability, which makes it a fundamental piece to the company’s strategy,” said Braz. A Shared Vision: Committing to a Greener Future Our ability to support our tenants’ real estate needs goes beyond just expansions. We can also partner with our tenants on projects to help reduce their carbon footprint and meet their sustainability goals. W. P. Carey and Sonae MC are both committed to creating a greener future, which meant the expansion of the Azambuja warehouse was built with sustainability in mind. In 2021, a solar roof generating an estimated 4,000 MWh/year was successfully installed on the newly expanded facility, earning a LEED Gold certification for the property. This makes the facility Portugal’s first LEED Gold certified warehouse, an exciting milestone for W. P. Carey, Sonae MC and the country as a whole. “Receiving a LEED Gold certification for our new building in Azambuja, being the first in Portugal and, on top of that, the first for a refrigerated warehouse, is an important acknowledgement of our focus on sustainability. The thought that was put into multiple aspects like the isolation of the building, rainwater utilization system, and the investment in the photovoltaic solar plant–that reduces 30% of our electrical power grid needs for the entire facility–clearly portrays our intention in diminishing the operation’s environmental footprint,” Braz added. The new building is also equipped with innovative cooling and insulation systems that are more energy efficient and environmentally friendly. The joint delivery of fresh produce allows 20% fewer deliveries to shops, a reduction of 1.4 million km traveled per year and the equivalent of 1,100 tons of CO2 saved per year. A Win-Win: Long-term Benefits for Both Tenant and Landlord W. P. Carey prides itself on serving as a long-term, flexible partner to its tenants. By building strong relationships we are able to not only understand the business objectives of each tenant, but also their unique corporate values. In the case of Sonae MC, we were thrilled to have the opportunity to support them and their business needs, while also advancing our goal of reducing the carbon footprint of our overall portfolio. “W. P. Carey has had a fundamental role in the development of this project, proving to be the right partner along the entire process of building this warehouse and its sustainability and efficiency features, which we’re all proud of,” Braz concluded.
The Importance of ESG for Net Lease REITs
Nearly three-quarters of institutional investors are factoring ESG into their investment decisions, up 18% since 2019 according to a recent report. As the importance of responsible investing continues to grow and more investors evaluate companies based on ESG-related criteria, REITs are recognizing both the benefits and necessity of a holistic ESG strategy. Despite the increased focus, the net lease industry has lagged behind. In a recent WMRE survey focused on the net lease sector, only six percent of respondents said ESG was a significant factor in their investment decisions. While net lease REITs have developed robust governance policies and social initiatives, environmental has been more difficult to address—largely due to the triple-net lease structure whereby tenants are responsible for the day-to-day operations of the property, including energy usage and environmental practices. While net lease REITs don’t directly control property operations, there is an enormous opportunity to work with tenants to reduce their environmental impact and implement sustainability initiatives to support the ‘E’ in ESG—here’s how. Integrate ESG into underwriting ESG criteria can be integrated into the underwriting of new investments both at the property and tenant levels. In assessing properties, factors to consider are the types of energy used, equipment age and waste management standards. Most importantly, considering not only the current state of the building, but what improvements can be made in the future, is critical. On the tenant level, it’s important to understand the company’s broader ESG goals and ensure they are committed to reducing their carbon footprint. For build-to-suit investments—where REITs fund the construction of a new facility— taking a proactive approach to engaging with tenants on sustainable design decisions early in the process is crucial and a great way to turn a conventional investment into a green one. Source sustainability projects from within Net lease REITs can source sustainability-focused opportunities from their own portfolio. REITs with industrial properties are particularly well suited to working with tenants on sustainability projects that improve carbon footprint, reduce operating expenses and enhance asset quality. Such projects include, renewable energy opportunities, green building certifications (ie. LEED, BREEAM), building efficiency retrofits or energy audits. By identifying owned properties best suited for certain projects and proactively reaching out to tenants, net lease REITs can build a steady pipeline of sustainable investments while helping tenants decrease operating costs and advance their environmental goals. Finance investments through green bonds As more investors look to increase their allocation to ESG-related investments, public net lease REITs may be able to secure attractive financing to fund their pipeline of sustainable investments through the issuance of green bonds. Green bonds are designed to support strategies and initiatives that have a positive environmental benefit and can help net lease REITs appeal to a wider investor base and raise the capital needed to fund green investments. In closing Implementing environmental initiatives as part of a broader ESG strategy is possible for all REITs, net lease included. At W. P. Carey, we take a proactive approach to reducing our global carbon footprint, partnering with our tenants to reduce their environmental impact and meet their own ESG goals. These initiatives are not only beneficial to the planet, but to a REIT’s broader portfolio. Green buildings generally increase property value, drive higher rents, attract higher-caliber tenants and often improve renewal outcomes, which can all lead to enhanced cost of capital and accelerated growth.