How Sustainability Pays Off in Real Estate

Aviva (00:00)
This week's listener of the week is Tammy Sells Tampa. Tammy, thank you so much for leaving us a five star review. And for those of you listening, if you leave us a five star review below, you might be next week's listener of the week, week, week. This week on Commercial Real Estate Secrets, we have Sam Adams. Sam, thank you for being on the show. Yeah, so Sam.

Sam Adams - Vert Asset Management (00:24)
Thanks for having me.

Aviva (00:27)
is the CEO and co -founder of Vert Asset Management. Sam, can you tell us a bit about Vert Asset Management, who you are and how you got here?

Sam Adams - Vert Asset Management (00:40)
Yeah, so Vert Asset Management, we're a dedicated sustainable investment manager and we have a sustainable real estate fund. It's actually an ETF. We invest in public real estate companies that are listed on the stock exchange that are owners and operators of real estate. So real estate investment trusts effectively. And how we got here is kind of interesting. I'm a climber and a skier. I spent my years growing up very passionate about the mountains and I saw climate change

change kind of upfront and personal because of that, right? We have a lot less ski days than we used to. And so I've always been kind of an environmentalist and I contributed to charities and did what I could around climate change. But I'm also a capitalist. I've worked in investment management for my entire career. And so I really believe in markets and the power of capitalism to lift all boats and all those things. So it felt like my, you know, my personal

personality and my career were at odds with each other, but I read a couple books that said there's ways to make sustainability profitable, right? There are ways to address problems like climate change in a way that is actually good for companies, their bottom lines, and I got really excited about that. So long story short, I quit my regular finance and investment management job and started Vert Asset Management two years ago.

shift capitalism towards getting companies to focus on the opportunities and sustainability. So that's how he ended up here.

Aviva (02:16)
I was really excited when I was reading your information because it's, and I'm sure I'm not gonna be saying anything you haven't heard before, they're sort of counterintuitive to the average investor. I remember here in Denver, they had a green roof initiative.

for what seemed like five minutes, where they said any building over X square feet moving forward is going to need to have a green roof. And property owners went berserk. And it just, it didn't, there was no synergy. But so tell me about the synergy of real estate investing and environmentalism.

Sam Adams - Vert Asset Management (02:52)
Hmm.

Well, here's the thing. It's actually easier to understand the opportunities in real estate and in buildings in particular for most people than it is in like regular public companies. If you told me that Coca -Cola was more sustainable than Pepsi, I'd be like, what does that mean? Like they use less water. I don't even know what that would look like, right? But if you said to anybody, right, this building is more sustainable than another one, they're like, it probably has better insulation. It

probably that maybe it doesn't burn as much, you know, fuel. It probably has more efficient HVAC. I mean, it probably has LED light bulbs instead of incandescent ones. Like most of us have changed the light bulb. Most of us have paid a utility bill so they can kind of quickly see that if you reduce energy use, for example, or water use, you're going to reduce your utility bill and it's faster to get to that part where sustainability is profitable. Now, there's all kinds of pitfalls, right? Things you can get in trouble.

around that. My wife and I built or I should say renovated a mountain

the cabin and we wanted all the sustainability toys. We're like, let's put in solar panels, let's put in geothermal, let's put in solar thermal, we did all that. Well, the geothermal, if I really wanted to calculate whether it's gonna pencil out, yeah, it would, but it would be over 57 years. So this is now a toy rather than a profitable, sustainable investment. And when I was

working with some academics to try and figure out what are the things to look at in properties and in property owners that makes them more sustainable and more profitable. One of the things that kept coming back, kind of this quote that kept coming back to me was, every building is a snowflake. And I'm sure you've heard that, Aviva, right? Like, a green roof might work here, but it probably might not work over here. And that might be just across the street.

Right, so when Denver says everybody needs a green roof, like hold on, hold on, that might not actually work, right? And just like every house solar isn't gonna work, some houses geothermal is gonna work, some houses not, this is the kind of thing where you need the owner of the property to do that analysis themselves and figure that out or get some help in to do that. You can't just do blanket statements like this is a good idea, right?

Aviva (05:24)
So how do you incentivize property owners to take that step?

Sam Adams - Vert Asset Management (05:30)
Well, at this point...

It's a most of it is awareness, right? So you find a good property owner who's figured out how to make more money or to save money, you know, have less costs or less risks in their buildings through some sustainability initiative. And let's be clear, there's a there's a learning curve there that can be painful, right? Like I learned that the geothermal system didn't pencil out in my building. Maybe it doesn't work in some instances. So but once you figure it out, you're like, OK,

this I can deploy in these circumstances and you can put that across all your buildings in your portfolio. And then what we do as investment managers, we point companies to those other companies that have figured it out and say, hey, look, they're doing it, they're making it work and look at the money that they're banking as a result of that. So that's practically how we do it. But you know,

There are myriad of technologies from smart sensors and better glass and insulation and drainage and roof technologies and all kinds of stuff that can help your buildings. But like I said, it doesn't work in every case for all people.

Aviva (06:39)
do say every building is like a person and they all have different quirks and it's the same thing as buildings are like snowflakes.

Sam Adams - Vert Asset Management (06:47)
I like yours better. Like, you know, we know more people than we know snowflakes, so usually.

Aviva (06:52)
Unless the person is a snowflake, but so is there a product type with your fund that you focus on in the space?

Sam Adams - Vert Asset Management (06:56)
Yes.

Right, good question. Well, so we're trying to do two things. One, we're trying to deliver the competitive market rate of return in public real estate, right? And that means we need to be diversified across countries and across geographies and across sector types and across building and asset types. So we're not having a niche like we're doing, you know, just warehouses or we're just doing residential or what have you. So we own all of them.

And, but what that brings up is that the sustainability metrics of what's important and what's material and what changes the financial dynamics of the property are different for different building types. And my, my example I always use is, you know, the energy footprint of a data center is vastly different than another type of warehouse or commercial facility like that, or, you know, a multifamily, residential property. And so it's really unfair or actually impossible to compare the

like for like and this is a this is something that a lot of general investors do they just start comparing people companies on the same metrics and you can't do that right I like to say in multifamily residential there's human beings in there you're really concerned about the air quality and and the the noise levels and those types of things in a data center not many people in there you don't really you know you really care about the energy that they're using.

Aviva (08:23)
Yeah.

curiosity when you say market rate of return in May of 2024, what are you finding to be the market rate of return that's attractive to your investors?

Sam Adams - Vert Asset Management (08:36)
Yeah.

Yeah, well, I mean, you know, we're investing in public equities, right? The listed companies that are real estate companies. And for that...

That's a long -term investment proposition which matches up with sustainability. Let's be honest, a sustainability initiative like putting solar panels on the roof or replacing your HVAC system is going to take years to pay off, right? The economic value of that accrues over five, seven, 10 years. And for most people buying equities in their retirement portfolios or what have you, that's a long -term proposition as well. So that matches up great, right? And in that case,

what we want from equity REITs is a 10 % average return over the long term. But I mean, it doesn't feel like that year to year, right? In the six years we've been running the firm, it's minus 30, it's plus 20, it's minus 20, it's plus 10, right? It's very volatile. And part of our job is to help investors kind of make it through that.

Aviva (09:27)
Hahaha.

Sam Adams - Vert Asset Management (09:42)
without chopping and changing their portfolio too much.

Aviva (09:46)
Yeah, I always think of the concept of short term, midterm and long term and how short term to you might mean something different than short term to me. Long term, you know, for me, long term is, I think long term, I think generationally. I know some of my friends think long term, it's a year. And so I just, I find investing and terms just to be a fascinating.

intricacy.

Sam Adams - Vert Asset Management (10:15)
I used to think all real estate investors were long -term investors from the illiquid nature of the asset when you're holding it directly right. But I see buildings being, you know, homes in my neighborhood being bought and then three months later, you know, they're flipped in there. So I'm like, okay, there are different strategies here. You know, we see the TV shows, they do that. But I need to be reminded that there are people who do think that short -term.

Aviva (10:39)
Hey, my old man always says there's a million ways to make money in real estate. So that's just one of them. So let me ask you, when you are adding, you talk about adding value to a property with the climate and sustainability in mind, what are you doing? What are the high level steps or yeah, the high level steps you take to ensure that?

Sam Adams - Vert Asset Management (10:44)
Yeah.

Yeah, well, let's walk through it from a little bit earlier from even the acquisition standpoint. We work with a lot of financial advisors. We're encouraging them to change the way they talk to their individual investor clients when they're thinking about retirement and those types of things. Like, hey, we want to buy a property on the coast in Florida to retire to. You're like, OK, hold on. Let's take a look at that. Our assumptions about what

weather was like, what storms were like for the past 20 years, might be what building codes and insurance rates are built on now, right? But going forward, we know they're gonna be different and they have been different in the last couple of years. So check your assumptions there that you might wanna retire in Arizona. Is it gonna be too hot to even golf there in 10 years, right? Or are the storms gonna be so disruptive in Florida that you won't be able to get home insurance? So if you're like,

just from the start, if you think about buying a particular property, think about that.

from a weather perspective and a location perspective and say, is that property still a safe bet from that perspective? And you might not get a complete answer. So the next question is, can you make it resilient? Like I would love to have waterfront property. Is there a way to make it resilient to this new set of weather patterns we have? Is the community around it going to be resilient enough to handle those types of things? And then,

look at it from not just a kind of a planet or climate perspective, look at it from a people perspective. Am I gonna wanna live there? Are people gonna wanna rent that from me? Is it attractive given the new dynamic with remote work? Is it gonna be attractive from kind of a health perspective when people want things in the future? And if you look at it through those lenses, you can see lots of opportunities.

to add value to a portfolio. Like who wouldn't like a waterfront property that is resilient to storms? Like that's that'd be a winner, right? Who wouldn't want a downtown office property that is resilient to remote from work? Maybe it's a like a headquarters type building where clients come in. You don't need all your staff there, but you want that showpiece property. When you look at it from that perspective, sustainability is more of a lens to say, let's make sure we

Aviva (13:25)
Hmm.

Sam Adams - Vert Asset Management (13:29)
we have the least amount of costs going forward from risks, from future regulatory costs, from energy costs, and let's have the most potential benefits for...

users of the of the building so that they have everything that they they need right you can shorthand it you could say let's let's just let's just tune it for climate risk and let's make it a green building so everyone's happy with it but again those overarching directives right hide a lot of pitfalls so

Aviva (14:01)
Hmph.

Sam Adams - Vert Asset Management (14:01)
Once you look into it, you could say, okay, this building is great, but it's subject to flood risk. So is there a way to increase the drainage? there is, great. This is an opportunity. This building is kind of brown and class B, but it would be easy to upgrade it, make it into something that's maybe it's still class B, but it's greener and people will find it more attractive. That's a great opportunity, right? So that's the kind of,

approach that we take now since we're not investing directly in properties were investing in the owners of those properties we look at it more at the corporate level and say has the reit figured this stuff out have they have they come up with a strategy and what we're trying to do differentiate to be frankly honest here is the guys who have figured out how to make money from sustainability

and the guys who are still trying to dress up their portfolio to look sustainable so that they look like nice people, right? I'll stop talking in a second, but I have this story for you, Aviva. Six years ago, when we were looking at companies to see if they had a real commitment to sustainability, you know, there's only a handful of them that had a sustainability section on their website. But now you look, and almost every public...

Aviva (15:02)
No, no, no, you're good.

Wow.

Sam Adams - Vert Asset Management (15:18)
company, especially in real estate, has a whole section of their website dedicated to sustainability. So it's no longer a differentiator, right? Everyone's had to do it. So there's some greenwashing hidden in there for sure.

Aviva (15:32)
Let me ask you, this is more of a question personally that I've just been wondering. Is solar efficient? Is solar energy really efficient for, you know, to help the environment?

Sam Adams - Vert Asset Management (15:51)
Yeah, it is. There's a lot of...

push back on it's not the greenest or the cleanest thing you know like that it takes a lot of energy to make those things but if you can put something on your roof that generates basically free marginal energy for 30 years it's a good investment right now there's some stuff that goes into those panels that isn't as nice as we like but a lot of that has changed in the last couple of years they're figuring out how to not put those chemicals in there so

Aviva (16:09)
Hmph.

Sam Adams - Vert Asset Management (16:24)
So it's getting better all the time. It's not, you know, just like an EV, it's not completely clean, right? But it is way cleaner than the alternative, right? You are going to have cheaper, cleaner, better, more efficient energy from solar panels than you are from burning wood in your fireplace. You're going to have a cheaper, cleaner, better car driving experience with an EV than you are with a gas car. That's just, you know, but...

the environmental guys go a little too far and they say, EVs are going to save the planet or solar panels are going to save the planet. Not quite. It's just a step in the right direction.

Aviva (17:01)
not to put you on the spot, but do you drive an EV?

Sam Adams - Vert Asset Management (17:04)
We have one EV and we have one SUV that is not electric, right? And that's kind of where we are in, right? So EVs work for 90 % of our use cases, right? But then we go on a road trip and we're not quite there yet with the charging. So we need an SUV or we have a large family. So we need a gas car. I want that to be an electric car, but like, are we there yet? And this is a perfect example we talked about before. It doesn't work in all cases for every button.

Aviva (17:09)
Okay.

Sam Adams - Vert Asset Management (17:34)
right? So you need to just look at it yourself and say, you know what, solar's not going to work in my house, I can do an EV, or I can't do an EV, but I can do this other thing, or what have you.

Aviva (17:47)
I just bought an EV car and I love it. I don't think I could go back, but you're right. I don't do a lot of distance driving and I just love not going to the gas station.

Sam Adams - Vert Asset Management (18:00)
It's I mean, and then this our our our gas car, you're supposed to take it into the dealer every year or two for a checkup and an oil change and stuff like I've been honed EVs for five years now. I'm like, I forgot that that was a thing. And so there's all these problems with my gas car because it's just like, I now think of cars as having no maintenance. Like you change the tires every couple of years. That's all you do. And I have to be reminded that these these old timey gas engines actually need to.

Aviva (18:10)
Hahaha

Sam Adams - Vert Asset Management (18:28)
Need work.

Aviva (18:29)
Yeah, I know it was, my husband said to me, you know, you don't have to get your oil changed if you get an EV car. And I was like, whoa. So yeah, I love it. Now, before I let you tell our listeners where they can find out more information about you and Vert Asset Management, I wanted to know.

Sam Adams - Vert Asset Management (18:37)
Yeah. Yeah. Yeah.

Aviva (18:52)
How do you increase demand for a property with sustainability improvements?

Sam Adams - Vert Asset Management (18:57)
Hmm. Yeah. All right. So let's, it really depends on the tenant that you're looking at. Right. So for the REITs that we invest in, a lot of their tenants are actually big public companies. Right. So they'll, let's say a retail REIT says, you know, our, our largest tenant is Best Buy or our largest tenant is Microsoft or our largest tenant is, you know, Whole Foods or what have you.

Those companies.

Actually, two thirds of Fortune 500 companies and about half of all public companies have set a decarbonization goal, i .e. let's get to net zero or something like that by 2050. Okay, so let's take it on their word that they mean this. It's a dangerous thing to do, but let's say that these companies are saying we're going to try and reduce our carbon footprint, our emissions over the next 20 years. They're not going to rent a building that's not going to help them do that.

right? They're going to need to find buildings that are going to help them lower their carbon footprint. And so they're now looking out there for saying, okay, let's make sure that this this helps us in that regard. They're looking for buildings that their their employees will want to come to. That means that building has to have the amenities that they want. And these days, that's healthy, right? Air from COVID. It's remote friendly. It's all those things that we have. So,

Aviva (19:55)
Mm -hmm.

Sam Adams - Vert Asset Management (20:24)
Some of these things people don't call sustainable, they just call it like common sense, right? And there's a lot of overlap there, right? But that's the types of things that you want to do. Use a filter. Listen, is this thing going to be helpful for the planet or?

a painful for the planet. If it's painful for the planet, we might not be paying those costs right now, but the regulator might step in. You got New York Local Law 97. I know Denver has some benchmarking rules, right? There's more and more of that stuff coming. They might tell you to put a green roof on. You never know. And then look at it from a people perspective is like, is this the type of building that people want to be in in 10 years? And if you look at it that way, you say, look, and there's

evidence to bear this out, right? Green buildings, LEED certified, ENERGY STAR certified, have 6 % higher rents, 13 % higher sale values than their non -green counterparts. This stuff does create value if you do it correctly.

Aviva (21:25)
Well.

Wow, I think it's so fascinating and on behalf of Mother Earth, thank you for what you do. Sam, where can the listeners find out more about you and your company?

Sam Adams - Vert Asset Management (21:33)
Hahaha

So our website is vertasset .com, and my email if you want our email is sam @ vertasset .com.

Aviva (21:52)
Sam, thank you so much for being on the show and for everybody listening. We'll see you all next week.