Kennedy Associates: Investing Responsibly Without Compromising Financial Returns
Table of Contents A Framework to Help Better Define and Track They've Started to See How These Factors Affect the Numbers A Fear of Obsolescence
A Framework to Help Better Define and Track
They've Started to See How These Factors Affect the Numbers
A Fear of Obsolescence
Kennedy Associates, a Seattle-based real estate investment advisor, has long understood that high performance buildings are not only the right thing to do - they're a business imperative. Responsible Property Investing (RPI) is an apt description of this approach, which Kennedy follows for the development and management of more than $13 billion in real estate assets.
RPI is a holistic approach to real estate investment that considers the environmental and social ramifications of property ownership, development, and management. Achievements in this area, in Kennedy's experience, can also improve financial returns. According to Christian Gunter (Kennedy's Assistant Vice President, Responsible Property Investing), "RPI is the manner in which Kennedy works on behalf of its clients everyday."
RPI and its organization, the Responsible Property Investing Center (RPIC), resulted from collaboration among academics, real estate owners, institutional investors, advisors, developers, lenders, associations, and the Socially Responsible Investing community. When the group met in 2006 and 2007 to discuss the burgeoning concept of RPI, longtime Kennedy executive Ron Roberts was present.
The RPIC developed criteria for responsible investments, which Kennedy classifies into three broad categories - sustainable development/redevelopment, responsible property operations, and economic fairness and worker health. Criteria run the gamut from energy efficiency to affordable housing; from wetlands protection to insisting that contractors pay a living wage. "Our goal is to encourage anyone responsible for real estate stewardship to consider those metrics every day," says Roberts.
Over the next year, the RPIC will research the quantifiable data behind RPI and define specific metrics to measure properties' performance, while building an RPI network. Kennedy is serving as a test case for the approach; as it plays out in their portfolio, they'll evaluate their successes and report back to the RPIC.
Kennedy's clients are supportive. "We're asked to take the lead on behalf of our clients," says Gunter, "especially with areas that create value, such as energy efficiency." Kennedy has also been able to create value for clients and their communities by working exclusively with companies that honor fair labor laws and foster positive work environments. A recent survey estimates that activities on behalf of its largest client created 84,330 jobs and $9.9 billion in local economic activity from 1982 though 2005.
A strong internal commitment and frequent communications ensure that employees keep RPI in mind in everyday decisions. "We want everyone to know that we're putting a lot of energy behind this. It's not only front of mind in every investment we make - it's also on the front page of our Web site, at the bottom of our emails, and in corporate marketing material," says Bob Ratliffe (Executive Vice President, Portfolio Management).
A major group of activities on Kennedy's path to a responsible portfolio centers on how existing assets are managed. Naturally, energy efficiency plays a big role, along with water efficiency, waste management, and indoor air quality. Long before RPI, Kennedy realized that energy use is one of the most costly components of building operations - but a controllable cost.
Kennedy benchmarks all eligible buildings' energy use with Portfolio Manager, from the EPA's ENERGY STAR program. Eligible buildings include 89 office buildings comprising over 11 million square feet. During 2006 and 2007, 28 Kennedy office buildings have earned the ENERGY STAR for superior energy performance. The company has also set out to earn Leadership in Energy and Environmental Design (LEED) certification for 45 of its existing office buildings - a major component of which is the ENERGY STAR rating - under a USGBC pilot program. By benchmarking, Kennedy has been able to show a 41.7 million kBtu reduction for its office portfolio, with consumption 2.1% lower than a year ago.
In 2007, Kennedy expanded benchmarking to its industrial portfolio, of which four buildings have earned the ENERGY STAR. The industrial portfolio presents a challenge due to the triple-net structure of industrial leases. In both the industrial and office portfolios, Kennedy can't control tenants' energy usage outright, but are persisting where they can impact it. Measures have included providing weekend HVAC only upon request, optimizing start up times and sequencing, and installing energy-efficient lighting. In their own office space, Kennedy is pursuing LEED-Commercial Interiors (CI) certification, purchasing ENERGY STAR appliances, improving lighting efficiency by an estimated 35% through retrofits, and reducing water use by an estimated 40% through water efficient fixtures.
Kennedy relies on its third-party property managers and engineers to implement these strategies on site. "These companies are well aware of the 'green wave.' RPI is just a framework to help them better define and track their efforts," Ratliffe says. Kennedy asset managers communicate regularly with building operators about RPI activities, incorporating RPI standards, achievements, and plans into their annual property business plans and budgets.
In addition to existing buildings, responsible new developments and redevelopment projects are key to the program. Kennedy targets LEED Silver certification for all new developments - a goal that their experiences tell them is often achievable at a 1% or lower cost premium over typical projects. Currently, their portfolio includes two LEED-certified projects in the New Construction and Core & Shell categories, with an additional 14 in development and pre-development stages, valued at over $1.3 billion.
LEED is highly compatible with the components of RPI that pertain to new construction. However, RPI's holistic approach takes care not to overlook properties that may never qualify for LEED, but that perform well against RPI criteria and make continual improvements.
Acquisition officers are encouraged to pursue due diligence within the context of RPI and consider the lower operating expenses of highly efficient buildings in both acquisitions and dispositions. In client investment briefs, Kennedy includes a discussion of the relevant RPI components of a possible acquisition - the criteria it already meets, and possibilities for improvement. Thanks to frequent internal communications and education, says Gunter, "Acquisition officers know what RPI is, and they've started to see how these factors affect the numbers."
The Northwest boasts several Kennedy assets that exemplify RPI. Block II of Portland's Brewery Blocks, which Kennedy developed with Portland-based Gerding Edlen, achieved LEED Gold certification despite the age of the original building, which dates back to 1908. In fact, structural reuse and historic preservation contributed significantly to both the LEED certification and the building's performance against RPI criteria. Brewery Block rents are up to 20% higher when compared to other Class A office projects in the area.
Portland's Rivergate III is Kennedy's first green industrial project, with strategies such as sustainable tenant improvement guidelines. Seattle's Pacific Place Mall is an example of an extremely successful retail investment taking innovative steps to meet RPI criteria. For example, its restaurants partnered with a local waste hauler to recycle cooking grease, which will be reproduced into biodiesel.
2008 will be a big learning year for Kennedy, as they further develop their methodology, expand its application, and identify and replicate best practices. At the same time, the firm must pay attention to how the market evolves - for example, will responsible buildings be more in demand? Kennedy's executives think so. "It's driven by a fear of obsolescence," Gunter says.
Whatever happens in the market, RPI has to make economic sense to be adopted on a large scale. RPIC activities this year will include research on some of the metrics that don't seem to make economic sense - and an analysis of how they might be fixed. For example, the RPIC might work with vendors to mitigate costs of expensive green building components.
Kennedy's experiences contribute insights to this effort, as they evaluate and compare costs in different markets and situations. Their position as a fiduciary to retirement systems such as the Multi-Employer Property Trust, as well as public and corporate pension plans, also adds a real-world perspective to the RPIC's academic research. Says Gunter, "We're focused on maximizing our clients' returns first and foremost. We'd be out of work if we didn't. But our clients agree, this is the right approach - doing good while doing well."
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