Responsible

Property Investing

Sustainable

Cities and

Buildings

Real

Estate

Investing

Corporate

Social

Responsibility

Socially

Responsible

Investing

Responsible

Property

Investing

RPI lies at the nexus of …

Definitions

• Real estate investments that benefit investors and the common good

• Portfolio, asset, or property mgt. practices that produce social or environmental gains consistent with fiduciary responsibilities.

• Efforts to address ecological integrity, community development, and human fulfillment in the course of profitable real estate investing

• Going beyond compliance with minimum legal requirements to better manage the risks and opportunities associated with social and environmental issues

James A. GrasskampUW-Madison Professor of Real Estate

“Man really is the only animal

that builds his terrarium

around him as he goes and real

estate is really the business of

building that terrarium. So we

have a tremendous ethical

content, tremendous social

purpose”

1996 by the UN Habitat

Agenda

“We endorse adequate shelter for all

and making human settlements

safer, healthier and more livable,

equitable, sustainable and

productive by socially and

environmentally responsible

corporate investment”

Property matters

• > 50% of energy-related CO2 is from

building operations and transport

• Perhaps 1 million+ janitors, maids,

bellhops and doormen in the USA

earn below a living wage

• US loses 1.5 million acres of farmland

per year to urbanization

• 2 million occupied housing units in

America lack water, toilets or

electricity

Property‟s Triple Bottom Line

• Economic Accounts

– income, value, returns, public tax revenues

• Environmental Accounts

– carbon footprint, biodiversity, eco-efficiency, natural hazards, land conservation, etc.

• Social Accounts

– worker wages and benefits, worker safety, respiratory illness, affordable housing, urban revitalization, segregation, unemployment, security, history & culture, aesthetics, childcare, infrastructure

RPI Style Funds

• Urban Funds

• Land Conservation Funds

• Brownfield Funds

• Historic Preservation Funds

• Low Income Housing Funds

• Community Development Funds

• Green Building and Smart Growth Funds

• Responsible Contractor Funds

Two examplesLearning Links

Centers, LLC

MuniMae Sustainable Land Fund

Working Groups

• TIAA-CREF

• CalPERS

• BC Investment Mgt Corp.

• AFL-CIO Investment Trust

• Methodist Church Pension Board

• GE Real Estate

• Kennedy Real Estate Counsel

• BOMA Intl.

• Urban Land Institute

• Real Estate Roundtable

• New Boston USA

• Institution Real Estate, Inc.

• Aviva

• AXA

• BC IMC

• Caisse des Depots

• F&C

• Hermes

• IL&FS

• Innovest

• Mistubishi

• Mn Services

• PruPIM

• Sumitomo

• West LB

Common Environmental

Practices• Setting energy, water, waste, GHG targets

• Building recommissioning

• Obtaining 3rd party endorsements (e.g., DJWSI)

• Using renewable energy

• Preparing habitat conservation plans for projects

• Training occupiers on conservation

• Supporting urban forestry

Common Social Practices

• Providing fair benefits and wages

• Investing in urban revitalization and affordable

housing

• Pursuing local hiring and training

• Seeking design and service awards

• Supporting community organizations

• Maintaining good health and safety

records

www.unepfi.net

UNEP Finance Initiative

Energy Conservation Better lighting, boilers, AC and office

equipment and recommissioning are

nearly always cost-effective.

Investa saved AUS$30,000

and 363 tonnes of CO2 per

year in Parramatta offices

at “minimal or no cost”.

www.unepfi.net

UNEP Finance Initiative

Fair Labor PracticesFair wages and benefits require 2.5% higher

rents. But they improve service by 25% and

increase rental income by 7% .

General Growth Properties has promised janitors at its 194 regional shopping centers access to affordable health insurance, market-based wage rates, complaint resolution procedures, and green cleaning products.

SRPI REITs

• Brandywine Realty Trust USGBC member and LEED building owner

• Boston Properties US EPA energy star partner and

NAREIT Leader in the Light

• Simon Properties Carbon Disclosure Project participant

• Equity Office Properties General Growth Properties DJWSI and FTSE4Good constituents

• Others

What are the key criteria?

2006 SRPI Delphi Project

RPI Metrics4.0-5.0, 3.0-4.0, 2.0-3.0

• More Walkable, Less Auto Dependent Places

– Transit Oriented, Centrally Located, Walkable,Carpool Friendly, Bike Trails and Facilities

• Low Carbon

– Energy Efficiency, Daylight and Ventilation, Renewables, Local Sources

• Worker Well Being

– Parks & Open Space, Sense of Community & Place, Childcare, Handicapped Accessible, Amenities for Working Parents

• Urban Revitalization and Reuse

– Urban Revitalization, Adaptable Interiors, Suburban Redevelopment, Brownfield, Not on prime farmland

RPI Indicators Study

0.00

0.20

0.40

0.60

0.80

1.00

Energy Conservation

Less Auto-Dependence

Worker Well-Being

Urban Revitalization

Environmental Quality

Health & Safety

Corporate Citizenship

RPI Index, Sub-Indices Scores

Portfolio 1 Portfolio 2

Leaders‟ views on RPI2007 Survey of Senior Real Estate Executives

Sponsored by

BOMA Intl., ULI, NAREIT, The Real

Estate Roundtable

Conducted in cooperation with

Institutional Real Estate, Inc.

Not Done

Planned or Under

Consideration Implemented

% % %

Value Statement 39% 18% 43%

Strategic Planning 36% 22% 42%

Learning/Management Systems 55% 29% 16%

Conservation 24% 23% 53%

Responsible Contractor 50% 16% 34%

Women or Minority Owned Businesses 52% 13% 35%

Committee for Sustainability or CSR 68% 12% 19%

Social or Environmental Accounting 59% 15% 26%

Targets and Benchmarks 69% 19% 13%

Disclosure 65% 18% 18%

Stakeholder Engagement 44% 11% 45%

Are you using…?

Not Invested

Planned or Under

Consideration Invested

% % %

Brownfields 52.4% 17.0% 30.6%

Green Bldgs 35.1% 32.4% 32.4%

TOD 31.8% 16.9% 51.4%

Infill or Revitalization 22.3% 15.5% 62.2%

Are You Invested In…?

SRPI Stage

%

Non Responsiveness 7.1%

Compliance 17.0%

Efficiency 37.6%

Strategic Proactivity 29.1%

Sustaining Organization 9.2%

Your RPI Stage?

Mean

Cost avoidance 3.8

Concern for risk and return 4.6

Peer activity 2.8

Employee recruitment/retention 3.2

Internal leadership 3.8

Business advantage 4.2

Opportunities to outperform 4.3

Moral responsibility 4.1

Voluntary codes of behavior 3.9

Stakeholder pressure 2.7

Investors 3.0

Customers 3.7

Drivers

Prospects

• 82% of executives would increase

their allocation to RPI if it could meet

their risk and return criteria

Is RPI neutral or positive for

returns?

Desert Riparian Areas along Tucson‟s

Tanque Verde Wash, 96-99

Colby and Wishart, The Appraisal Journal, 2002

Open Space in Portland,

1990-92

Bolitzer and Netusil, J. of Env Mgt, 2000

Note: best type

was golf courses

Conservation Subdivisions

outperformed in So.

Kingston, RI

Mohamed, Urban

Affairs Review, 2006

Average price

per acre of

lots sold

Average

improvement

costs per lot

Average

selling time

Conservation

Subdivision

$125,000 $18,700 9.1 months

Conventional

Subdivision

$107,000 $26,100 17.0 months

Regeneration OutperformedTotal Annualized Returns, „81-‟02

J. of RE Portfolio Mgt, 2006

Retail Office Industrial

All UK Property 11.49% 9.65% 9.09%

Regeneration

Properties

15.50% 10.59% 12.60%

The “Green Tilt” at Work

Source: Innovest

Land Use Mixing in Single Family

Neighborhoods, 1970 Tucson

Use Benefit to Median Home

Value from 10% increase

in land use

Maximum studied

Commercial $990 12%

Multifamily $940 20%

Industrial $440 10%

Public $930 21%

Cao and Cory, Annals of Regional Science, 1982

Changes in Valuations near Dallas

Light Rail Stations, 1997-2001Clower, Australasian J. of Regional Studies, 2002

Land Use Control DART

Office 11.5% 24.7%

MFR 34.8% 42.0%

Retail 30.4% 28.3%

Industrial 21.5% 13.0%

Investment Returns from

Responsible Property

Investments:

Energy Efficient, Transit Oriented and

Urban Regeneration Office Properties in the

US from 1998-2008

Study Question

Can an investor be “responsible” and

earn competitive returns?

Methods• Data

– Financial from NCREIF

– Energy Star from EPA

– Regeneration from HUD RC/EZ/EC locator

– Transit data from BTS

• 4,460 office properties, 1999-2008

• Portfolio analysis & OLS regression

Methods

• Dependent financial variables

– End of quarter market value per square foot

(log)

– Annual income return (log of 1 + return)

– Annual appreciation return (log of 1 + return)

– Annual total return (log of 1 + return)

Methods

• Control variables

– Regional supply (completions)

– Regional demand (job growth)

– National market (NCREIF office index)

– Property (age, size, floors)

– Region

– Subtype (CBD, suburban)

– Congestion (density)

Independent variables• Energy Star dummy

• Transit dummies – within ½ mile of fixed rail

– transitcb, near transit in a CBD or not near in a CBD

– transitsu, near transit in a suburb or not near in a

suburb

• Regeneration dummies – in or near RC/EZ/EC

– regencb, in or near zone in a CBD or not in one in a

CBD

– regensu, in or near zone in a suburb v. not in one in a

suburb

Total Return Std. Dev.

RPI

(since 2006)

12.05%

(11.63%)

2.46%

Non-RPI

(since 2006)

10.18%

(6.61%)

2.50%

Portfolio analysis

estar.254* (5.9%)

regensu.317* (9.4%)

regencb-.144* (-2.4%)

transitsu.553*

(12.7%)

transitcb.193*(4.5%)

Net operating income

Controls were significant with expected

sign, .25 R-squared, 31,000 observations

RPI properties had from 5% to13%

higher net incomes except in CBD

Regeneration areas, consistent w/ their

designation

Caused by various combinations of

+rents, +occupancy and -expenses

Energy Star had +5% rent, +1%

occupancy and -10% utilities (the rent is

similar but occupancy is less than what

others have found)

NOI per SF

0

1

2

3

4

5

6

2000 2001 2002 2003 2004 2005 2006 2007 2008

Year

NO

I p

er

SF

Estar

Not Estar

estar.127*

(13.5%)

regensu.023

(2.3%)

regencb.011

(1.1%)

transitsu.150*

(16.2%)

transitcb.099*

(10.4%)

Market values

Generally found higher values, consistent

with higher incomes

Energy Star had +13.5% value (similar to

what’s been found by others)

Exception was RegenCB which had

higher value contrary to lower NOI

estar.002

(0.2%)

regensu-.014* (-1.4%)

regencb.004

(0.4%)

transitsu.011* (1.1%)

transitcb.005

(0.5%)

Capital appreciation returns

In theory, these do not automatically

follow from higher income or value

With one exception, appreciation

returns for RPI properties were greater

or the same as other properties;

therefore RPI did not dilute

appreciation

The exception was suburban

regeneration properties ; their higher

incomes were unable to sustain their

higher values; this is an example of

how higher income or value doesn’t

necessarily mean higher return

estar-.005* (-0.5%)

regensu-.001

(-0.1%)

regencb-.005* (-0.5%)

transitsu-.003* (-0.3%)

transitcb-.002* (-0.2%)

Income returns

All RPI types had lower income

returns, analogous to lower cap rates

Suggests they were appraised at

higher value per dollar of income due

to expectations of lower risk or faster

future growth

Lowest was Energy Star, consistent

with concerns about future gas and

energy issues

Other lower cap rates suggest

optimism about future redevelopment

and Transit Oriented Development

estar-.005

(-0.05%)

regensu-.021* (-2.1%)

regencb.002

(0.2%)

transitsu.009* (0.9%)

transitcb.002

(0.2%)

Total returns

Total returns are the sum of income

and appreciation returns

With one exception was total returns

for RPI were positive or neutral

The exception was property in

suburban regeneration areas where

stimulus policies may not be effective

The best opportunities appear to be

Suburban Transit Oriented

Development – 13% higher NOI, 16%

higher Value, 1% higher Total Return

per year

Total Return Index for Estar and not Estar

0

0.5

1

1.5

2

2.5

3

3.5

4

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Year

Cap

ital

Ind

ex

Estar

Not Estar

Higher NOI and Value does not mean Higher Returns

But returns do not determine feasibility for developers.

If excess costs do not exhaust value premiums, then

projects can be very profitable. Except for suburban

regeneration, value premiums are holding. That bodes

well for the profitability of RPI development.

NOI per SF

0

1

2

3

4

5

6

2000 2001 2002 2003 2004 2005 2006 2007 2008

Year

NO

I p

er S

F

Estar

Not Estar

Study Conclusions

• Executives can invest in RPI with more

confidence it will not dilute returns

• Special RPI portfolios could be created

without added risk or less return

• RPI returns may be insufficient to shift

investors toward RPI; however higher

values could mean higher profits for

developers who could tend toward RPI

WALKABILITY, PROPERTY

VALUES AND INVESTMENT

RETURNS

Study Question

• What are the effects of walkability on

property values and investment

returns?

Methods• Financial data from NCREIF, Walkability

data from Front Seat

• 10,981 office, retail, industrial,

apartments, 1998-2008

• OLS regression models

• Dependent financial variables

– End of quarter market value per square foot (log)

– Annual income return (log of 1 + return)

– Annual appreciation return (log of 1 + return)

– Annual total return (log of 1 + return)

Methods

• Independent control variables

– Regional supply (completions)

– Regional demand (job growth)

– National market (NCREIF index)

– Property (age, size)

– Region

– Environment (crime)

– Government (effective property tax rate)

Walk Score• 0 to 100 index based on distance to desired

destinations (education, retail, food, etc.)

• High score if 1 establishment of each desired

type is within ¼ mile; Low score if greater than 1

mile

• Disadvantages:

– All destinations weighted equally

– Ignores barriers

– No attention to other correlates of walkability

• Advantages:

– Uses best predictor or walking: proximity

– Nationwide coverage

San Marco, Walk Score 80

Normandy Estates, Walkscore 20

All Types

Walk Score™ .004***

cemp123 .075***

sta123 -.026***

npitotret 11.2***

age -.003***

sqft -2.14e-07***

proptaxmsa -.088***

propcrime -9.16e-06***

personsSqMi -5.93e-06**

transitH .33***

ttime -.014***

P type dummies not shown

CBSA dummies not shown

observations 27,320

R-squared 0.33

27,000 observations

(buildings x quarters)

All controls significant

with expected signs

1 unit increase in Walk

Score = 0.4% more

value

Property with 80 Walk

Score would be worth

about 25% more than

one with 20

20% less crime = 1.3%

higher property value

Market

value,

all

types

Office Retail Apartment Industrial

Walk Score™ .005*** .008*** .000 .006***

cemp123 .068*** .026*** .132*** .056***

sta123 -.018*** -.038** -.193*** .011

npitotret 7.97 *** 13.7*** 10.0*** 6.87***

age -.006*** -.0003 .002 -.004***

sqft -7.73e-08*** 1.24e-07*** -1.52e-06*** -1.75e-07***

proptaxmsa -.070*** -.103*** -.029 -.030***

propcrime -.00002*** -.00004*** -.00003*** -.00005***

personsSqMi .00001*** -5.57e-06 -.00001 9.16e-06***

transitH .018 .317*** 1.10*** .056**

ttime -.016*** -.017 .030*** -.012***

stype .045**

CBSA dummies not shown not shown not shown not shown

n 8399 2898 6650 8413

R-squared 0.62 0.63 0.31 0.61

Market value by type

Office

+30%

Retail

+48%

Industrial

+36%

Apts.

Neutral -Disamenity

Effect?

Walk Score™ -.00003

cemp123 .0153***

sta123 -.002**

npitotret 3.91***

age -.0001*

sqft 1.03e-08***

proptaxmsa -.021***

propcrime -6.01e-07**

personssqmi 1.06e-06***

transit .015***

ttime -.0002

Prop type dummies not shown

CBSA dummies not shown

Number of obs 22567

R-squared 0.24

Appreciation returns, all types

Walkable properties did

not appreciate faster

More Demand increases

appreciation, more

Supply reduces it.

Lower appreciation with

higher crime

Faster appreciation near

transit

Office Retail Apartment Industrial

.0004*** -.0005** -.0002 -.00005

Appreciation returns by type

Effects more mixed when viewed by type

More walkability offices appreciated faster, walkable

retail appreciated slower, and walkable apartments and

industrial appreciated the same as less walkable

80 v 20 Walk Score:

Offices: 2.4% faster per year

Retail: 3.0% slower per year

Apartment and Industrial: no difference

Walk Score™ -.0000638***

cemp123 -.001207***

sta123 .000141***

npitotret -.49351***

age -.0000217*

sqft -7.52e-10**

proptaxmsa .0016323***

propcrime 1.47e-07***

personssqmi -3.23e-.08

transit -.001146*

ttime .0001838***

Prop Type dummies not shown

CBSA dummies not shown

Number of obs 22932

R-squared 0.2064

Income returns, all types

Lower by 0.6 basis points

(0.006%) per year for 1+

Walk Score

Equivalent to lower cap

rate; income from walkable

properties was valued

more

80 Walk Score = 0.38%

lower income return per

year than 20 Walk Score

Suggests 25% higher m.v.

is from 20% higher

income & 5% lower cap

rate

Office Retail Apartment Industrial

-.000028 -.00015*** -.000052*** -8.75e-06

Income returns by type

Lower for all types, but only significantly for retail and

apartment

Suggest willingness to pay more due to expectations of

lower risk or faster income growth and appreciation

80 v 20 Walk Score:

Retail: 0.90% lower per year

Apartments: 0.31% lower per year

Office and Industrial: no difference

Office Retail Apartment Industrial

Total

Return

. 0004** -.0006*** -.0002* -.00007

Total returns by type

80 v 20 Walk Score:

Office: 2.4% higher per year (higher AR)

Retail: -3.6% lower per year (lower AR & IR)

Apartments: -1.2% lower per year (lower IR)

Industrial: no difference

Average NCREIF Total Return, 98-08

Office 11.3

Retail 12.1

Apartments 10.8

Industrial 11.3

Results Recap

• Market value more than 25% higher for all types

• Appreciation return higher for office, lower for

retail, neutral for apartments and industrial

• Income return lower for retail and apartments,

neutral for office and industrial

• Total returns higher for office, lower for apartments

and retail, neutral for industrial

Overall ConclusionsRPI is a rapidly developing business strategy seeking triple

bottom line performance

For developers, there can be an RPI property value premium. If

added costs or risks don’t exhaust it, developers could find RPI

more profitable

For investors, RPI can be neutral or positive for returns but

there can be cases of underperformance as well

Potential returns and profits may be insufficient to generate a

substantial shift toward RPI without more supportive regulations

and incentives

Since RPI can produce social and environmental benefits while

fulfilling fiduciary obligations, it would be economically irrational

in social welfare terms and ethically unjustifiable for investors not

to engage in Responsible Property Investing