Managing Director Brandon Sedloff sat down with Molly Bordonaro, one of the four owners and managing partners of the Green Cities Company, one of the leading ESG development companies on the West Coast, for an in-depth conversation what it means to commit to ESG, investor demands in a modern world, and real estate volatility in 2023.
Here is a portion of that conversation, edited for clarity. Watch an on-demand recording of the entire back-and-forth here.
Brandon Sedloff: Why or how did ESG become so interconnected to Green Cities? And what does ESG mean to you today?
Molly Bordonaro: As we rebranded the firm and bought out our retired partners in 2000, we deepened our commitment to ESG with our proprietary Green Cities Index. It has five pillars; the environmental footprint of each property, its resiliency, its carbon emissions reduction, health and wellness, and equitable communities. All these things drive the value of our assets.
ESG is very real when it comes to how people choose where they live, work, or play. With multifamily properties, we want to create a place for people to live that matches their values by committing to cleaner air, providing them with access to outdoor activities, or even just investing in EV charging stations, which at this point, are just practical.
It’s critically important for real estate investment managers to understand that if they do it right, they're driving value. If we install solar at one of our multifamily properties, we understand what the energy savings per kilowatt will be. And that's a direct impact on energy costs, which reduces our operating expenses and improves our NOI.
If we're doing something around improving air quality, we can market that to potential tenants, which drives both tenant retention and leasing occupancy.
Or if we're doing things around resiliency or certification, which encompasses everything, we're ultimately driving value on the disposition side because that is becoming incredibly desirous for other real estate owners, especially those who want to add a low-carbon emission building to their portfolio.
There's been a lot of movement in the marketplace towards wanting to be able to claim that you’re net zero by just talking about your corporate headquarters and doing it with carbon offsets. And that's not where we focus. We are focusing on the property level.
Brandon Sedloff: How of the needs of the investors you serve today changed over time?
Molly Bordonaro: There's no question that there is a growing demand for increased communication from investors, and rightly so. That's been driven by three things. One has been the ease of communication–which companies like Juniper Square have delivered–to give that type of real-time information, not just on the financial return side. We can email investors a direct update whenever something significant happens; a new transaction, a sale, the expiration of the investment period, those kinds of things.
The second thing is data and the amount of data that is now available. One of our deepest values is to use data to help make better decisions. We have a proprietary heat map that considers 20 different metrics in every market. We share that data with investors so they can see why we think it’s a good market to invest in. There is a deep interest on their part to understand the why of investment decisions and peel back the strategy.
And then the third is just the volatility in the marketplace. We certainly have seen so much volatility over the last 36 months, so being able to talk to them about how we're mitigating risk, what we're doing to address the changes in the marketplace, as well as our forward outlook and what we think is going to happen both in terms of the asset and the greater economy.
Brandon Sedloff: Let’s talk a little bit about some of the uncertainty that exists in the macro environment. Where are we today, and how do you see that changing over the course of the next 12 months?
Molly Bordonaro: The interesting thing is that there haven't been a lot of transactions to drive the comp data to do significant or even smaller write-downs. Now, a lot of funds will go through year-end third-party appraisals. And there's no question that cap rates have moved, so we will see that hit valuations this year. The good news is that investment managers that were focused on risk mitigation, have good communication with their investors, and can extend through this period–I think they're going to be fine.
But there will be investment managers who took on more risk, who took on more debt, who took on more unprotected floating rate debt. Those managers are going to be challenged.
In multifamily, we’re predicting we'll still see NOI growth. Not like we did the past two years, but we're predicting above 3% nationwide in terms of rent growth. Occupancies are still going to be pretty solid. We're still in a good place in terms of supply-demand balance in most markets. I'm pretty optimistic, and especially for investment managers who've paid attention to mitigating risk, I think they'll be fine.
Brandon Sedloff: Have you seen any changes in the leasing velocity or demand for any of your assets due to the degrading macro conditions?
Molly Bordonaro: That's a good question because there's a lot of discussion on whether or not rent growth is slowing or occupancies are going down. Nationally, vacancy is only 4.6%. So it's kind of reset to pre-pandemic levels. And we're still seeing positive rent growth on lease trade-outs across our portfolio. It's not double-digit like it has been in the last 18 months, but it's still greater than 3% on average.
There was a tremendous amount of unbundling of household formations, and that created significant demand over the last 18 months. Now, it's hard to tell whether or not that has just been absorbed and if we're moving towards more normalized rent growth and occupancy levels.
Multifamily has also become very seasonal. We are in the depths of that winter leasing season which is never as active, so it's hard to tell. Yes, we are seeing a slowing in demand, but we're still seeing positive lease trade-outs. And so it's too early to determine whether or not it's just seasonal or if this is the momentum we'll see after we move through the winter months.
Want to get the rest of the conversation? Watch a recording on-demand now.