While commercial and residential properties differ in their nature and their needs, they both represent significant investments, and with any investment, there is a degree of risk involved. After all, not only are market conditions (i.e. level of competition, the balance of supply and demand, etc.) always subject to change, but there also any number of unforeseeable events or factors that can impact the value or profitability of an investment.
In the real estate market, one significant way of mitigating those risks is through strategic property management. Through a measured property management strategy, real estate investors can not only prevent a decrease in the value of their property (and investment), but can even increase its value by improving how efficiently that property operates. Indeed, from reducing operating costs to finding new sources of revenue, property management is largely about increasing both the profitability and value of a property.
And one of the latest trends in property management is ESG – i.e. ‘Environmental Social Governance’. Simply put, ESG is about adopting business practices that focus on environmental sustainability, social inclusion, and ethical governance. Indeed, ESG offers property managers and investors more than just a warm sense of well-being about their business decisions. It also presents unique opportunities to both cut costs and access more strategic financing.
Environmental ESG Trends in Property Management
From rising global temperatures to unprecedented flooding around the world to plastic garbage patches floating in the oceans, environmental issues are at the forefront of market priorities. It’s no surprise then that ESG starts with the environment.
And there are three key areas in which property managers are reducing their costs and making their businesses more sustainable: energy management and sustainable infrastructure.
A property’s energy consumption extends well beyond just keeping the lights on. It’s also a fundamental part of occupant experiences – from climate control to providing other basic amenities. Indeed, a significant portion of both a property’s overhead and it ESG score is determined by its energy consumption. And there are six main ways in which property managers are leveraging energy management technology to reduce both their operating costs and carbon footprint.
1. Demand Response Programs
One way in which property managers are reducing their energy consumption and costs is by responding to the real-time energy grid needs of the communities around them. And in doing so, they’re also turning their energy consumption into a source of revenue. Specifically, by opting into Demand Response Programs, property managers are accessing financial incentives for curbing their energy consumption.
Generally managed by either utility providers or third-party entities, Demand Response Programs operate on an opt-in basis. Essentially, Demand Response Program members receive notifications prior to forecasted peak usage hours (these are referred to as ‘events’), and then unless a member opts-out of that ‘event’, their electrical appliances (e.g. thermostats, water heaters, etc.) automatically adjust to draw less energy from the grid.
So in a sense, Demand Response Programs allow property managers to sell energy back to the grid, receiving either credit on their next bill, or outright cash payouts – effectively incentivizing a property’s ESG compliance.
2. Smart HVAC Systems
Property managers are also installing smart HVAC systems to reduce both energy consumption and energy costs. For starters, property managers are investing in smart thermostats, occupancy sensors, and door and window sensors to adjust energy consumption around real-time occupancy patterns, and ensure that any given space is not being overheated or overcooled when unoccupied.
Of course, not all smart thermostats are created equal. While consumer-grade thermostats (such as those sold by Nest and Ecobee) are suitable for single family properties, larger commercial properties require commercial-grade thermostats that can interface with their central HVAC system to optimize energy consumption across multiple units and common areas.
For instance, Verdant’s EI energy management system fully integrates with smart thermostats and occupancy sensors, collecting data on peak demand loads, historical thermodynamics, local weather patterns, and real-time occupancy patterns, and continually analyzes that data to optimize energy consumption on an ongoing basis, all year round.
And the investment in a smart HVAC system is an entirely sound one. Indeed, smart HVAC systems have the lowest payback/breakeven period, with some commercial property managers recouping their investment in as little as 12 months. They also increase the resale value of residential and commercial properties alike – demonstrating how ESG compliant properties are in greater demand and, therefore, worth more. The energy savings potential of smart HVAC systems is so significant, in fact, that they’re installation is already standard practice in the hotel industry.
3. Air Source Heat Pumps
Smart thermostats and HVAC systems are not the only way that property managers are reducing their climate control related energy costs. Specifically, by installing Air Source Heat Pumps (ASHPs), property managers are reducing their energy costs by reducing the load on their HVAC systems. ASHPs function something like energy efficient space heaters (or coolers), transferring warm or cold air from outside a facility to the inside areas, removing the need rely solely on their central HVAC system, and in turn, reducing their energy consumption.
4. Smart Lighting Systems
Of course, not all utility energy consumption is HVAC related. Indeed, whether in common areas or occupancy units, another energy costs that property managers incur is lighting. And property managers are installing smart lighting systems to further reduce their energy consumption.
Similar to smart HVAC systems, smart lighting systems also use occupancy sensors to adjust lighting according to a number of variables, such as occupancy and time of day. They also help create to a more seamless and comfortable experience for occupants.
Many smart lighting systems, moreover, also integrate with third-party energy management systems. For instance, Verdant’s own line of occupancy sensors integrate with many third-party lighting systems to not only adjust lighting around real-time occupancy needs, but also allow property managers to monitor and optimize their lighting energy consumption alongside their HVAC energy consumption, all through a single interface.
5. Solar Panels
While reducing energy consumption is a great way to reduce energy costs and a property’s carbon footprint, property managers can also increase the profitability and ESG score of their properties by making them more energy self-sufficient. And they are doing that by installing solar panels.
Indeed, not only do solar panels help reduce energy consumption from the mainstream power grid, but property managers can even sell any excess solar energy production back into that grid. So by making their properties more energy self-sufficient, property managers are both reducing energy costs, and creating new revenue streams in the process.
6. Automatic Shutdown Sockets
Solar panels and ASHPs are not the only ways in which property manager are investing in smart energy infrastructure to reduce the environmental impact of their properties. They’re also installing Automatic Shutdown Sockets throughout their properties – i.e. in both common areas and private units.
Essentially, standby power or vampire power draw “refers to the way electric power is consumed by electronic and electrical appliances while they are switched off,” but still plugged in and on standby mode. Automatic Shutdown Sockets, however, are smart power outlets that use either timers or infrared sensors to cut power to any connected device when (1) the device is not in use, or (2) the space is outright unoccupied.
Energy management technology is a great way for property managers to reap both the financial and environmental benefits of being ESG compliant, but they’re still mostly reactive measures – i.e. responding to real-time energy consumption needs. There are, however, also several proactive measures that property managers are taking to ensure that their properties are ESG compliant, and these are being employed at the infrastructure level.
1. Sustainable Construction Materials
First, whether property managers are renovating existing properties or developing new ones altogether, they are turning more and more to sustainable construction materials and construction methods. Indeed, the production of construction materials, such as steel and concrete, creates significant carbon emissions. By opting for more renewable construction materials that created fewer emissions (such as timber), property managers are not only improve their ESG score, but saving on their overhead construction costs.
2. Smart Water Management
Insofar as water is a necessary condition for life, it’s also a factor in both a property’s profitability and environmental footprint. It’s no surprise, then, many property managers are installing smart technologies to help them conserve water and improve their ESG compliance.
In fact, McGraw-Hill Construction estimates that implementing smart water management systems can reduce water consumption by 15%, energy use by 10%, and overall operating costs by 11%. In other words, by implementing water management technologies, property managers are also reducing their carbon footprint because they use less energy to consume that water – which, in turn, leads to additional operational cost-savings.
For instance, a single leaky toilet can cost property managers as much as $840/year. Add to that the costs of any potential water damage, and it’s remarkable just how quickly that water consumption can lead to unnecessary overhead costs. Some property owners even take smart water management a level up by installing showers systems that filter their own water. The result is that occupants are also involved in reducing their water consumption, creating a more sustainable experience end-to-end.
3. Predictive Maintenance
Smart water management, moreover, isn’t the only way in which property managers can both prevent costly maintenance issues while improving their ESG score. Another step property managers can take is to install Predictive Maintenance technology throughout a property’s infrastructure.
Similar to how smart HVAC management systems allow property managers to measure, monitor, and optimize their energy consumption, Predictive Maintenance allows property managers to:
- leverage sensor data to track wasteful or hazardous infrastructure performance
- identify malfunctioning hardware
- and alert maintenance staff before those malfunctions (1) lead to higher ongoing operational costs, and/or (2) escalate into a much more problematic and costly maintenance issue
In other words, instead of waiting for a component to completely fail before being serviced or replaced, Predictive Maintenance allows property managers and maintenance staff to identify and diagnose maintenance requirements based on system performance. This helps them prevent critical system failures, reduce the costs of operating a faulty system, and avoid having to replace components that have deteriorate beyond repair.
Social ESG Trends in Property Management
As big as environmental considerations are in ESG, they are only one third of the piece of the puzzle. Social considerations are equality important in terms of establishing an ESG compliant business, and as Robeco explains, the social side of the equation encompasses many aspects of a business:
Social includes human rights, labor standards in the supply chain, […] and more routine issues such as adherence to workplace health and safety. A social score also rises if a company is well integrated with its local community and therefore has a ‘social license’ to operate with consent.
In other words, the social side of ESG spans everything from a business’s operations to their relationship with the community. And in the world of property management, there are eight social trends that are particularly important for improving a property’s ESG score.
1. Affordable Housing
The goal of any business, of course, is to generate revenue and maximize profits (without compromising the long-term viability of the business, that is). In the case of property management, that means finding the right balance between rental prices and occupancy rates (which is where smart pricing comes in).
Focusing strictly on maximizing profits, however, does not a socially conscious business make. Consequently, property managers looking to increase the ESG score of their business often choose to set-aside a certain percentage of their units as affordable housing, or even invest in entire properties that appeal to the needs of lower-income renters.
2. Resident Feedback
Another way that property managers are developing more socially inclusive business practices is through resident feedback. Specifically, they are not only soliciting feedback from their tenants, but they’re taking proactive measures to incorporate that feedback into their business operations. The result is not only a more socially inclusive business that better serves the needs of its tenants, but businesses that demonstrate that they’ve taken such measures achieve higher ESG scores.
3. Accessible Amenities
A common business strategy for hitting critical mass with a product or service offering is to appeal to as large of a market as possible. Consequently, it’s not uncommon to see many businesses race toward the middle as they try to appeal to the most common denominator.
As the saying goes, however, if you try to please everyone, you end up pleasing no one, and businesses that employ such a strategy are often regarded as unremarkable at best. And unremarkable is no way to improve your ESG score. As a result, an increasing number of property managers are offering more accessible amenities, making their properties more mindful of and usable for tenants with a wider range of support needs.
4. Local Supplier
Supporting local communities is about more than being conscientious and accommodating of residents’ and neighbors’ needs and priorities. It’s also about investing in the community by supporting local businesses so that that community itself is prosperous.
This is why many property managers who are invested in their ESG score are choosing local suppliers for many of their support services. Of course, local suppliers might not always be able to offer the same rebates as their larger counterparts, but when property managers invest in local suppliers, they are investing in the community, and the more a community prospers, the more property values tend to rise. In other words, what little more ESG-conscious property manager pay to local suppliers they tend to recoup in terms of property values.
5. Local Needs Analysis
Another way that ESG-conscious property managers can support their local communities is through a Local Needs Analysis. As Designing Buildings explains:
A local needs analysis […] evaluates a community to identify the requirements of the area and determine an appropriate strategy for a project that may translate into social value to help build stronger and more resilient neighbourhoods. One such project might be the addition of designated walking paths in an area where pedestrians or runners may feel unsafe sharing the roads with cyclists and motor vehicles.
In other words, Local Needs Analysis is about property managers either (1) planning their property development projects around the needs of the communities that they serve, or (2) investing in additional infrastructure that serves the needs of the community at large. Again, this might seem like reckless spending to the more frugal property investor, but to the ESG-savvy property manager, it’s about increasing property value by helping to create more prosperous communities around them.
6. Hiring Practices
Every business, of course, relies on its employees to operate. Indeed, without its employees, a business’s daily operations can quickly grind to a halt, damaging both that business’s bottom-line and reputation.
Unsurprisingly, then, another socially minded strategy that property managers are employing to boost their ESG score pertains to their hiring practices. Essentially, similar to how ESG-conscious property manager will rely on local suppliers or operate around community needs, they are also implementing hiring practices that prioritizes hiring from the local community. Doing so not only support the local economy, but ensures that a property’s staff reflects the community that it serves.
7. Labor Standards Compliance
It is one thing to hire from the local community, but for a business to truly support social goals and be ESG compliant, it must also treat those employees with the utmost respect and dignity. And that means respecting local and regional labor standards. For property managers, this requires that they establish clear employee systems and protocols to ensure that those local and regional labor standards are adhered to not only in principle, but throughout their daily operations.
8. Workplace Health and Safety
Labor standard compliance goes a long way toward ensuring fair employment outcomes, but it does not go the entire way. For instance, labor standards vary from region to region, and meeting the legal bare minimum is not always enough to ensure employee well-being.
For this reason, many ESG conscious property managers implement additional health and safety measures to ensure the well-being of their teams. This can range from offering health benefits to taking added safety measures beyond what labor standard require. For example, while mask mandates might be a thing of the past, property managers may still implement advance COVID measures to protect the health and safety of both employees and tenants alike.
Governance ESG Trends in Property Management
Finally, while the environmental and social aspect of ESG help property managers ensure that their operations are more ESG compliant, governance measures help ensure that the management practices of those properties are also both ethical and inclusive.
It is one thing for property managers to talk the talk of ESG, but they also must walk to walk. In other words, despite their claims about ESG efforts, to fully access the benefits of ESG compliance, they need to report on those efforts to both potential investors and potential financers. As Douglas L. Peterson, President & CEO of S&P Global illustrates:
Transparent and rigorous ESG scoring is an essential tool for market participants to evaluate and optimize their societal impact.[…]
There are a number of different approaches or methodologies for assessing the performance of a company against ESG criteria. […] But there must be transparency to mitigate market confusion and enhance understanding.
In other words, if property managers want to reap the benefits of ESG compliance, it’s not enough that they take the necessary steps and implement the necessary measures. They must also ensure that they have the tracking in place to provide transparency into those efforts to investors, financers, and community stakeholder writ large.
2. Legal and Regulatory Compliance
Labor standards aren’t the only area in which ESG conscious property managers must be compliant with local regulations. Depending on the region, there are also any number of other legal and regulatory requirements that property managers will have to meet to ensure that they are ESG compliant.
Such regulations can include everything from zoning bylaws to building codes to financing. Whatever those regulations might be, property managers should ensure that they’re in compliance with them, and be able to transparently demonstrate that to investors, financers, and community members alike.
3. ESG Lease Clauses
Finally, another important way that property managers are ensuring that their properties are ESG compliant is by making that ESG commitment a core component of the service they are offering (i.e. rental units). In other words, property managers are building their commitment to ESG right into their leases with tenants. As MRI software explains:
When commercial landlords or tenants enter into leases, those contracts can include “green clauses” that set sustainability requirements based on the property’s environmental, social and corporate governance (ESG). For example, landlords could agree with tenants to fit a space with environmentally sound equipment, such as energy-saving light fixtures, or use socially responsible processes and procedures.
In other words, by making clear in leases both their commitment to ESG targets and the measures they will take to meet them, property managers can not only establish trust with their tenants, but also establish a paper trail that support their need for transparency.
The ROI of ESG
From climate change to record levels of inflation, the world and its markets will face significant challenges in the years to come. And property managers are in no way exempt from having to overcome them.
Modern problems, of course, require modern solutions, and one of those solutions is ESG. By becoming ESG compliant, not only can property manager do their part to make the world a better place for themselves, their suppliers, and their occupants, but they can also ensure a healthy and stable return on their investment.