Value add investor. That’s what a lot of real estate firms call themselves. The term is used to describe the strategy of buying underperforming buildings and putting money into upgrades. Done right, this can be a very defensible business model. Many property investors don’t have the expertise, patience, or capital to make significant upgrades to a building. There are lots of ways that real estate companies add value to their portfolio properties. Some remodel interiors, and others change the building’s use altogether. But recently, a new type of value add property firm has emerged, one that buys properties that have not kept up with energy efficiency and decarbonization upgrades and enhances them by making them more sustainable.
One of the early pioneers of this strategy is Galvanize Climate Solutions. The climate-focused global investment firm’s real estate arm, Galvanize Real Estate, will invest in “well-located, high-quality real estate to reduce the property’s carbon footprint, improve cash flow, and increase asset value,” according to its website. They have made a big bet that decarbonizing buildings is a profitable enterprise. “We target 100 percent emissions reduction in 3 years of ownership,” said Joseph Sumberg, Head of Real Estate at Galvanize. If they are not able to hit that target, there are even consequences; a portion of the team’s compensation is tied to doing so.
To figure out how to decarbonize a building in three years, Galvanize employs full-time, in-house climate experts. This is an advantage for Galvanize over many of its competitors; developers are often able to hire consultants to calculate carbon emissions, but property companies often don’t have projects big enough to justify the expense. The climate experts support the real estate team to help focus on a path forward for every building, analyze the energy landscape of the local grid, and calculate the often tricky emissions associated with key upgrades. The SEC has already proposed requiring emissions to be reported by many large public companies, so being able to do so is also an advantage for certain properties.
It isn’t just the retrofits that can be difficult to coordinate. Finding capital, both from lenders and governmental incentives, also takes a good amount of engineering. “If we can bring a building from energy obsolete to energy independent in a few years, that asset could become more desirable at scale,” said Sumberg. There are also the murky waters of governmental incentives that many companies struggle to navigate. The Jobs Act and the IRA alone have created dozens of incentive programs, all with their own agencies and application processes. Galvanize has even partnered with government affairs firm Boundary Stone Partners to create a tool to help take advantage of federal incentives called SCALE, which is a clever acronym for Scaling Communities’ Ability to Leverage Energy Efficiency & Electrification.
The low hanging fruit for many buildings is often efficiency. Better insulation, electrification, and smart building systems all can bring the carbon a building produces down quickly and relatively inexpensively. But that can only go so far. For buildings to be carbon neutral, they need to either procure energy from renewable sources like wind and solar or produce renewable energy of their own. “I believe that, unfortunately, the grid probably isn’t going to go to renewable fast enough,” Sumberg said. That means that to be fully renewable, buildings may need to find ways to create green energy on their own. Galvanize plans for many of their real estate projects to include an energy generation component of some sort.
Using carbon reduction as a metric for success also creates some complications. One arises thanks to our transition to electric vehicles. Promoting electric vehicle usage is in line with Galvanize’s mission but could also make them responsible for coming up with even more green energy. “We don’t think we should take the hit for the extra footprint that comes with EV charging,” said Sumberg. His stance is that Galvanize, or any other real estate owner for that matter, should not get punished from a CO2 measurement perspective if someone charges their electric car at one of their charging stations. But, on the flip side, that also means that they shouldn’t be able to get energy credits if that same person uses some of the green energy they produce.
Galvanize believes that decarbonization could be a significant value add for buildings. This is particularly true for buildings that will soon start to be fined by their municipalities for poor energy performance. But regulations aside, there is always value in energy resilience. The rising price of energy is a constant reminder that it can be hard to estimate a property’s future expenses; the increasing threat of power outages is a testament to the importance of energy independence. If Galvanize is able to make the profits and find the investment that they hope, it could serve as an example for other companies to do the same. I would like to think that we can rely on regulations and altruism to help decarbonize our buildings, but the fact of the matter is that we need it to be profitable. Soon, we might see decarbonization as one of the most valuable value adds, one that supports itself while helping us create a better future.
