The idea of achieving impact through real estate investments has taken many iterations or “flavors” over the years, from public-policy aligned opportunity zone investing to green real estate and more, all touting sustainability and community and economic development. However, “impact real estate” only accounts for about 10 percent to 15 percent ($27 billion to $40 billion) of total reported impact investing assets under management despite the progress in this sector. Many investors remain unaware of its full potential.
At a time when capital is vastly needed across the country to support small businesses, improve and develop underserved, disadvantaged communities, and help the public and private sectors progress to achieve critical climate goals, impact real estate can prove to be an increasingly attractive asset class for the rare blend of quantifiable impacts, portfolio diversification and access to consistent yields.
There are manifold opportunities to enter the impact real estate space, such as equity and debt fund investments to drive community redevelopment, C-PACE (commercial property assessed clean energy) lending, joint ventures and more. In 2022, we expect to see a lot of impact real estate investment opportunities and investor demand for responsible investing and consistent yields. We want to help investors to understand the different flavors of impact real estate.
IMPACTS ON SUSTAINABILITY
Impact real estate is often associated with sustainability, supporting carbon mitigation and transitioning to a clean energy economy. These projects develop, repurpose or retrofit properties for energy efficiency improvements, environmentally conscious construction, and remediation utilizing clean-energy initiatives. Implementing these improvements can offer property owners lower operating costs, shorter payback periods, increased asset value and other financing benefits.
The building sector accounts for nearly 76 percent of electricity use and 40 percent of all U.S. primary energy use and associated greenhouse gas emissions. Thus, implementing energy efficiency and renewable energy improvements — including across the many neglected, disadvantaged rural and metropolitan areas across the United States — can directly contribute to generating significant environmental benefits that support a more economical energy landscape. A byproduct of this green development includes supporting a constellation of small businesses across the country, including many that are woman-, minority-, or veteran-owned that provide green energy efficiency and renewable energy improvements. For example, the 2020 U.S. Energy and Employment Report shows that solar energy companies employ 248,000 employees.
Additionally, the sustainable impact of repurposing obsolete buildings eliminates the need to produce millions of pounds of construction materials by reusing what is already in place. Concrete is the most used man-made material in existence and second only to water as the most-consumed resource on the planet. Cement, the key ingredient in concrete, is the source of about 8 percent of the world’s carbon dioxide, and the iron and steel industry is responsible for 11 percent.
IMPACTS ON COMMUNITY DEVELOPMENT
Impact real estate also addresses critical social needs that positively contribute to local neighborhoods and economic vitality. These projects often include historic preservation and redevelopment for commercial, municipal and mixed-use buildings. Positive impacts from these projects can include construction and full-time job creation or new neighborhood resources. Since the program’s inception in 1976, the National Park Service has certified the rehabilitation of more than 45,000 historic properties, and the Historic Tax Credit has leveraged more than $173.7 billion in private investment in historic rehabilitation, creating over 2.8 million U.S. jobs.
An example of a repurposed building and a community and sustainable redevelopment is the historic Copley Hospital in Aurora, Ill., which received financing through the C-PACE and State Historic Tax Credit programs. Copley Hospital was abandoned in the 1990s and subject to damage, vandalism and mold. It is finally being restored and revitalized into senior housing, educational facilities, apartments and healthcare offices. The improvements anticipate energy savings of nearly 13 million kBtu (kilo-British thermal unit) per year and operational cost savings of $126,000 per year. Nearly 500 construction jobs and more than 220 direct full-time jobs will be created from the project.
IMPACTS ON AFFORDABLE HOUSING
Low-income and affordable housing is another sector of impact real estate. Providing better quality housing and services at affordable prices leads to profound community impacts. These projects create support and stability within vulnerable populations, build economic opportunities and reshape our communities’ physical and socioeconomic landscapes.
For example, in Louisiana there is demand for 102,785 affordable and available rental units for persons at or below extremely low income, according to the National Low Income Housing Coalition. In addition to struggling with a 40 percent poverty rate, Monroe, La., is also recovering from the loss of many homes from a severe flood in 2016, elevating its need for affordable housing. The Miller Roy Building in downtown Monroe was built in 1929 by two black doctors and served as an economic hub for black-owned businesses, and it became a crumbling, vacant landmark after years of neglect. To revitalize the building and provide services to an area that has been blighted for years, it received financing through the Louisiana Historic Tax Credit program. The restored Miller Roy Building and the adjacent property will provide 52 apartments to households earning 20 percent to 80 percent of the area median income and a community resource center that will offer job training and workforce development services, community services, and an onsite health clinic.
ROLE OF PUBLIC/PRIVATE PARTNERSHIPS
When local municipalities lack access to funding for community developments that can be difficult to finance, creative public/private partnerships with dedicated lower midmarket and impact-focused investors can play a valuable role in providing necessary capital. Many buildings in communities around the country do not have the same profile as well-known local landmarks such as Copley Hospital, and local municipalities struggle to secure the capital for updates to buildings that may be of historical significance and cultural importance to specific local groups.
KEY BARRIERS TO DRIVING IMPACT
Given the complexity and diverse needs of communities, there are many ways to scale and measure the social impacts of real estate development. Part of what makes impact real estate projects so valuable to communities but challenging to track is the ripple effect of social and economic impacts. For example, providing capital to a project that supports job creation enables more people to buy goods and services and recirculate capital into the local economy.
What’s critical is accurate information collection and analytics to ensure credibility in collecting and measuring impact data. For example, tracking project sustainability, sustainable development goals, full-time jobs created, poverty and unemployment rates, and whether the business is woman-, minority-, or veteran-owned, among other statistics.
The overlooked impact real estate sector deserves broader recognition for coupling steady, attractive returns with a solid impact investment focus.
Michael Korengold (mkorengold@enhancedcapital.com) is president and CEO of Enhanced Capital.