Build-For-Rent: Why ESG Is So Important For Institutional Investment Acquisitions
By Jeff Cline
CEO of SVN | SFR Capital Management.
September 7, 2022 at 09:15 AM EDT
ESG initiatives have risen to the forefront of how consumers and SFR rental home investors evaluate possible business investments.
Demand for rental housing pre-pandemic was already growing and in high demand. Shifting U.S. demographics showed people migrating to regions like the Sun Belt. What Covid-19 did was accelerate these shifts in the housing marketplace. The switch to renting single-family homes in purpose-built communities across the U.S. versus owning a home has occurred for a variety of reasons, including lifestyle desires, reduced cost of living, tenuous economic climate coupled with rising interest rates, lack of down payment, inventory challenges, overheated home prices, hassles of repairs and maintenance and pandemic health safety, among others. Renters today want more living space, a garage, a yard for pets and kids, community amenities and home offices, especially with the onset of remote working. John Burns Real Estate Consulting (JBREC) recently reported the average cost of renting a home is $839 a month less than owning a home.
Another major, unexpected shift in commercial real estate (CRE) is the amount of capital and interest from institutional investors that want in on the build-for-rent (BFR) asset class. BFR is defined as a segment of the single-family residential (SFR) rental market. These are communities of detached, single-family or attached townhouse-style dwelling units that are specifically built to be rented rather than purchased. Typical rental targets are Baby Boomers downsizing and millennials wanting to move from an apartment to a home but who can’t afford to purchase or don’t know where they will live in three to five years.
According to JBREC, since the beginning of 2022, there has been over $10 billion of capital flowing into the SFR/BFR space. This number is an estimate, only including larger, publicly announced deals, but illustrates the continued interest in the sector that has historically stayed positive through recessionary periods. With the massive amount of capital being invested to bring newly built, single-family rental homes to market, institutional investors and operators have the strategic advantage of embracing green energy technology into these sizable portfolios of homes to drive net operating income (NOI). Due to future rent growth and large-scale pent-up demand, institutional investors have a real opportunity to reap environmental, societal and governance (ESG) benefits in the near term to realize long-term financial and branding rewards for their SFR/BFR portfolios. The larger the reach across a large portfolio of homes, the greater the energy and cost savings.
ESG initiatives have risen to the forefront of how consumers and SFR rental home investors evaluate possible business investments. ESG is now a corporate norm for reporting. It used to be “What is ESG?” Now the question is, “Why is ESG important?” At a strategic level, ESG is about de-risking business and the strategic decisions made now for the sustainable success of the company. ESG is important for four reasons: financial returns, climate change, investor insight and consumer preference.
Investors, CEOs and public officials want to know in report form what companies are doing from both a societal and environmental perspective. Businesses are being held accountable and need to have answers to these types of questions: What is the usage in your communities? What are clearly identified positive steps taken to address ESG and improve profitability? What information are you giving residents to help them save money and downward costs in energy? What are your solar plans?
It’s critical and beneficial to move the ESG conversation in institutional investment to include measurable, accurate and transparent data on energy consumption, energy production and energy savings. In the past, when asked what their ESG play is, CEOs might have been stumped. A plan is needed with commitment-based, data-driven strategies, as analysts will want to know about what their play is in ESG. According to Elevation Energy Solutions, 90% of companies with strong ESG profiles have equal or better financial performance than non-ESG companies.
Electricity is where there is an opportunity to make an impact and improve. When BFR communities are built and SFR rental homes are retrofitted with smart technology for energy consumption and savings, residents have measurable data and can see, in real time, what they are paying for. They are able to ask themselves what they can do that is best for their wallet and the environment. Operators can ensure the asset is being taken care of or see issues before they arise with equipment like the HVAC, pool pumps and water heaters. Savings are driven up for large operators when you monitor every home’s energy usage.
Being an ESG thought leader will make an impact. It’s a smart thing to do. This is an opportunity to tell a great story and build your brand. Take ESG one piece at a time. Make someone in charge of ESG and focus on the energy segment, as it will yield big impacts. Educate and engage your executives. Think of the effect with a large portfolio of homes. ESG contributes to the bottom line and helps businesses with measurable strategies to thrive.
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