NAIOP New Jersey’s Annual Meeting and Commercial Real Estate Outlook, held Jan. 26, virtually explored economic impacts as well as Environmental, Social and Governance issues and the commercial real estate industry.
It also introduced the chapter’s 2022 officers and trustees, reelecting longstanding member Gus Milano, president and chief operating officer at Hartz Mountain Industries in Secaucus, as president.
In a discussion led by Bridge Industrial LLC Northeast Region Partner Jeff Milanaik, a panel featuring experts Kara Edmonson, senior director of ESG for Verdani Partners, and Kerry Reef, director of real estate at Liberty Mutual Investments, offered insights into the growing focus on ESG and how it’s shaping and influencing real estate valuation and investment.
“ESG is a global business consideration of increasing importance to commercial real estate, because investors are evaluating these non-financial factors as they analyze risks and growth opportunities,” said NAIOP NJ CEO Michael McGuinness, as he introduced the panel participants.
“When looking at the environmental impact a real estate portfolio has on the world, there are four big metrics that come into play,” said Edmonson, “energy, water usage, waste and emissions.”
Both Reef and Edmonson noted that tracking those metrics can be challenging and a wide variety of frameworks are currently being used to gather information and identify ESG issues.
“We have found that the SASB (the nonprofit Sustainability Accounting Standards Board) framework has gained a lot of momentum,” Reef said.
When first developing an ESG strategy, Edmonson advises doing a gap analysis. “Look at what policies you currently have in place versus what you need. Next, do a materiality survey to identify the stakeholders in the organization and what is of high impact to them. From there you can set goals and targets for where you want to be. A risk assessment is also a good thing to do early on, because it allows you to look at your exposure to climate-related risk and identify where you need to mitigate those risks. Along the way, it’s critical for companies to benchmark their progress.”
Edmonson said: “On a portfolio level, gathering the information is the biggest challenge in terms of looking at what constitutes a good score. Energy Star is one of the best programs for benchmarking energy usage. They rate buildings on a 0-100 scale based on energy efficiency.”
The panel concurred that ESG is gaining momentum and companies are taking positive action to integrate it into their investment processes.
Overall, Edmonson said, “There is a steady drumbeat of negative climate news and it’s easy to feel like you can’t actually do anything about it, but there are a lot of reasons to be hopeful. Just the fact that we’re having these conversations right now is evidence of how much the world’s focus has changed. For the last three decades, there were technical barriers but at this point we’ve overcome a lot of hurdles. The idea that you can’t make a difference if you’re just one company is not a reason to not get involved.”
The economy experienced a stunning rebound in 2021 and will continue to grow at a slower pace in 2022, according to CBRE Executive Director and Global Chief Economist Richard Barkham. Overall, Barkham presented a positive commercial real estate outlook for the new year.
“The U.S. economy is now almost fully healed. Headwinds emerging in 2022 include uncertainty from the omicron variant, geopolitics, inflation and interest rate hikes,” he said.
Nationally, as well as in New Jersey, real estate is in full recovery following the pandemic-induced recession. In 2021, the GDP grew by 5.5%, and is expected to continue to expand. Although still below pre-pandemic employment, the economy added 6.7 million jobs, according to Barkham.
“The real threat to the economy is inflation. Recovery in the housing market is a big driver of inflation and it will likely hit 8 percent,” he said. “It’s our view that inflation will diminish over the course of the year. This reflects a very profound demand side recovery.”
As a result, he predicted several interest rate hikes in 2022 and 2023.
Barkham addressed the direct impact on real estate with a look at year-end 2021 statistics. He pointed to positive net absorption in all four sectors, both nationally and in New Jersey. Office recovery took hold in the fourth quarter, with Manhattan being particularly strong. The New Jersey life sciences sector is highly active, with Boston-Cambridge, San Francisco Bay Area and New Jersey being strong markets. Data center inventory is forecast to grow by 13% nationally and 11% in the New York/Tri-State area.
“In New Jersey, industrial is super strong, but rising costs are an issue. The multifamily market also is in recovery mode,” he said.
Barkham’s data also revealed that supply chain costs are surging. Transportation costs, which typically account for 45-70% of logistics costs, are growing significantly faster than facility costs.