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Spencer Levy
The knock on green investing has been that it doesn't focus enough on, well, green. And some of you won't even want to hear this topic, but don't touch that dial. On this episode, we'll hear from a firm that's delivering solid commercial real estate investment returns while focusing on the theme of green.
Joe Sumberg
I think that if we were to look inward or at a mirror as a real estate industry, I'd say we sort of got it wrong over the years, putting sort of this broad category together called ESG, which didn't mean a lot to a lot of people, and maybe that was the point.
Spencer Levy
That's Joe Sumberg, Head of Real Estate at Galvanize Climate Solutions, an investment firm that’s devoted to sustainability as the investment opportunity of our time. Joe spent 15 years at Goldman Sachs, where he co-founded the U.S. Real estate investment platform and was an early adopter of incorporating sustainability initiatives into the firm's strategies. In 2022, he joined Galvanize to help lead its focus on seeking economic opportunities with a climate imperative.
Rob Bernard
And the technologies to actually drive profitability have always been there. And I think what's happening is, in a way, it's refocusing the conversation.
Spencer Levy
And that's Rob Bernard, CBRE's Chief Sustainability Officer, who's been focused on sustainability in business for over 15 years. Rob now advises CBRE’s clients on driving returns through that lens. He also oversees the company's own operational efforts in this area, including the goal to achieve net zero emissions by 2040. Coming up, funding sustainability and finding profitability. Featuring Galvanized Climate Solutions. I'm Spencer Levy, and that's right now on The Weekly Take.
Spencer Levy
Welcome to The Weekly Take and we are talking about the funding of sustainability with an old friend of ours, Rob Bernard, the Chief Sustainability Officer at CBRE. Rob, welcome back to the show.
Rob Bernard
Thank you for having me back.
Spencer Levy
And Joe Sundberg, Managing Partner and Head of Real Estate Galvanized Climate Solutions, an old friend of the firm and I'm delighted to have you on air, Joe.
Joe Sumberg
Yeah, it's good to be here, first time caller, long time listener.
Spencer Levy
Well, thank you, Joe. And the jokes that we had before we got on air is like, Joe, we've been talking about getting you on air now for three years, and here we are. So, with that intro, Joe, we're talking about sustainability issues. If it doesn't make money, it's hard to persuade our real estate investors to do it. I think the world around us is looking at sustainability a little bit differently. How do you see it, Joe?
Joe Sumberg
100%. I think that if we were to look inward or at a mirror as a real estate industry, I'd say we sort of got it wrong over the years, putting sort of this, this broad category together called ESG, which didn't mean a lot to a lot of people. And maybe that was the point. We could hide a lot under it. I think people care about making money. I think people about decarbonization as an investable theme. And I think we at Galvanize are quite specific about that. And for us, that's authentic because at the end of the day 40% of carbon emissions come from commercial real estate. In the US, 20% of our carbon emissions come from just operating existing commercial real estate. So, I haven't figured out the technology for developing net zero, but we're pretty sure that there's technology that's tried and true and extremely profitable. That's been around for decades, if not half a century that allows for us to profitably decarbonizing existing assets. And, so, I think people just need to focus on what they're and what they're doing, rather than sort of trying to check a box with respect to a category that we collectively had defined over the years and I think there's a lot of pushback about it.
Spencer Levy
So Rob, you were on the show about a year ago, this is your second visit, but times have changed, as Joe just described it. In the last year, how have things changed?
Rob Bernard
Well, clearly things have changed from a geopolitical standpoint, and I think we're going to see change coming in regulatory frameworks and things like the IRA and other areas. But I'd say, and Joe sort of highlighted this, which is if you think about a regression line through kind of what we're trying to do, and there's a lot of variability around it, it's like the ideas and the technologies to actually drive profitability have always been there. And I think what's happening is – in a way, it's refocusing the conversation. You know, I've been at CBRE for two years, but I've been in sustainability since 2008. Throughout the 15 plus years I've been doing this, I have been focused on like – sustainability is a proxy for efficiency, and it's also a way to create capital and competitive advantage if you think about it through the commercial lens first.
Spencer Levy
One of the big changes that's happening in our business today is from 2012 to 2022, most of the returns in real estate were from cap rate compression. Going forward with interest rates staying high, most of our returns in the next decade are probably gonna be coming from operations. So, given the fact that we're running a tighter, better ship is going to be the key to success, maybe now is sustainability's time.
Joe Sumberg
So, look, I think as an investor, at the end of the day, what do we look for? We look for thematic investing, we look for trends, we look for the signal and the noise, we look for an ability to create alpha and generate value where others can't or usually don't through active management, right? And at the end of the day for us – and honestly the reason that I left fantastic organization in Goldman Sachs where I had a wonderful career and we were able to create a ton of value within our commercial real estate – was because I saw sustainability and decarbonization specifically as an area where we could add even more value, but we needed to resource ourselves differently. We needed a different governance model and we needed it to basically blow up our whole investing process and structure and build some proprietary tools. I bet my career on it. I convinced nine other people to bet their careers on it and they're at Galvanize because we think we can outperform our peers for the same risk profile. So, at the end of the day, I believe very strongly that every organization, every real estate manager needs to be fixing a problem that others are not, right? Why do we exist? We exist because we think we can outperform everyone else by adding this framework of sustainability with our resources to be able to make these assets perform better, as Rob said, operationally, which will add to the total returns. That is the problem we're solving. We think we're one of the few dirty-to-green strategies in the U.S., but honestly, I thought that everyone would be doing what everyone in real estate does exceptionally well, which is copying good ideas. So, I thought we'd be having more competitors by now, but I think the political narrative, the geopolitical situation, and some of the language that's being used has caused for people to retrench in this area a little bit. And, so, for better or worse, the moat has gotten a bit wider and a bit deeper with our strategy.
Spencer Levy
One of the things you mentioned a moment ago, Joe, is solving a problem. That was the phrase you used as well. Rob, let me just ask you that direct problem. What problem are we solving?
Rob Bernard
Well, it depends on the starting condition. So, depending on where you come to us, I think number one is, what's your – or first thing is, what's the diagnosis? Where are you when you're continuum for – I'll call it maturity in an evolving world, right? And then we often, I mean, we always find this, that there's like 20% to 30% inefficiency in most portfolios right off the bat. Systems that are antiquated, people have realized that there is end of life equipment that they've got to replace, modern technologies, resizing of that equipment allows for efficiency gains. And, then, if you want to start from a much more mature standpoint, where you've optimized a lot of that, there's also, and we talked a little about this the last time I was here, which is, how do you think about things like energy strategy and supply chain strategies to both decarbonize your investment, but also to accelerate your profitability? We talked about this last time also, we purchased the renewable energy brokerage and advisory business from NRG because we think there's massive opportunity. And just thinking about energy strategies, putting aside all the physical things you may or may not do in your building. So, it's really, where are you starting on this continuum of let's call it health or economic health? And then what's the right play based on where you wanna go over the next five, ten years?
Spencer Levy
Joe, let's pull the lens back for a minute, I don't think we asked a specific question of what is Galvanize? Tell us about what the company is, what they do, how you're funded, that sort of thing.
Joe Sumberg
When I decided to leave Goldman Sachs, I went in search of someone who was doing this who I could plug into. I couldn't find anyone. And because of the differentiation that I felt needed foundationally be done at the outset to be able to accomplish something that I think no one really was doing the right way, I thought I was going to have to do it on my own. So, I set out on that crazy idea and I was very fortunate that a friend put me in touch with Tom Steyer and Katie Hall. Tom and Katie founded, coincidentally, Galvanize Climate Solutions on the idea that this is a tremendous investable opportunity that no organization is doing with the institutional backing and scale that needs to be done. So, they started this investment manager in 2021. They started with a venture capital arm. They started secondly with a long only equity arm and we are the real estate arm. This is the only pure play, energy transition, climate-focused organization that's an investment manager that I was aware of that was going to add to the scale and expertise and resourcing that I focused on as part of Galvanize Real Estate. And what I think is critical about it is that Tom and Katie are investors. They're not not-for-profit donors. They're now focused on foundations. They have identified this as an investable opportunity and something that others are not resourcing their selves appropriately to be able to execute on. And, so, that's why they started this organization. They were extremely focused on fixing the human nature element of this. And, I think, we deal with a lot of people in commercial real estate who might be hesitant towards some of the stuff we're talking about. One of the things that we're doing from a governance standpoint that I think is unusual, is we're tying a third of our long-term incentives to getting to operational net zero, as I said earlier. I think some people who are less convinced about the opportunity of outperformance as a result of accomplishing that goal might be a little less enthusiastic. Tom and Katie were all in. And we have since, I should say this, we have since added Secretary John Kerry as a co-chair alongside Tom and Katy. And his path to Galvanize is reinforcing and interesting in a different way. He spent his entire career of, I think, 40-plus years in politics and led some of, I think the most ambitious endeavors relating to the environment and climate for the U.S. and possibly the world alongside some others. And he has moved over to the private sector because he realizes that there isn't enough money that a single or group of countries can throw at this problem. The only thing that is going to solve this problem is capitalism. And the only thing that is going to make capitalism move on this is if we show that it is profitable. That's what we're doing at Galvanize.
Rob Bernard
This is where our movement, if I'll call it – and I'll use air quotes which you can't see on the, on the radio here – I’ll change that, on the podcast – hate myself. The mistake that a lot of groups have made is that they see sustainability and the misnomer of ESG as somehow antithetical to capital. And I actually have never felt that way. If we look at the volume of money being spent, and I would actually say misspent in some ways on the journey towards net zero and decarbonization, right, it is one of the, I mean – lots of studies have showed this. It's one of the biggest capital opportunities of our generation. And, so, the question is, are we getting ourselves too distracted in our geopolitics of this thing and go like, well, what are we talking about? Outside returns, I said before efficiency gains, arbitraging energy disruption, which is absolutely gonna happen, right. Like you can't have massive growth in energy demand for the first time in our generation and not actually have arbitrage opportunities if you understand energy and energy strategy. So, like, I think what Galvanize and you guys are trying to do is brilliant because it's not an overcrowded space, it's not even crowded. And, so, like if you're thinking about this in a multi-dimensional way, like think about all the assets we can line up here to help people make outsize returns.
Joe Sumberg
Private equity venture capital is all over this, right? They see what Rob just mentioned very clearly and they are investing heavily in it, right. And, so, I think there's something like over 140 venture capital firms that are focused on or have vehicles that are focussed on climate tech. And, so, when I talk to people in climate, they're like, well, how many people are doing what you're doing in real estate? I think the answer is zero, but certainly less than one handful, certainly in the US. I think some are doing some very interesting things globally, and I don't know them as well, and so I can't speak to that. But, it's a really interesting thing that there's so much reinforcement for this thematic within other sectors, in asset classes. But it isn't in real estate when it's, I think, one of the more obvious things. So, for instance, we were talking to an endowment yesterday who is putting over $900 million into their properties in the next year for their fiscal plan for sustainability initiatives. And, they're not doing it because they want to be able to say they're net zero. They're not doing it because they want it to be more green. They're doing it because the ROIs are good and that is where the conversation needs to go. And, so, I think focusing on the positive with the disruption of the language and narrative that's being used, the focus on profitability is emboldening a lot of these groups to just do the stuff that makes a whole lot of sense.
Spencer Levy
I was just writing down the ROI's, the focus on profitability. It's like music to my ears because I've used this phrase before on the show and I'll use it right now. For something to be sustainable, it needs to be sustainable. And, what's sustainable is a well-run for-profit business. The main question really is this, is the shift of focus from green is good to green is green.
Rob Bernard
So, if you take all of these capital funds, quarter of a trillion dollars in lighting and HVAC, which is – we can actually drive massive outsized economic returns. And this is really more for Joe to comment than us, but I agree with this thesis 100%, which is push the capital into areas that drive efficiency and drive economic returns, and they will also be sustainable by and large, right? When we think about all the innovations that have happened over the last decade in renewables, battery storage – and I think we're just on the cusp of a lot of stuff on batteries, right – these things have a double payoff. They have economic value, and they also happen to have sustainable outcomes. So, again, this is another thing, and you use the word entrenched before, like entrenched behaviors. Behavior change is difficult and it takes time. And, I think, what we're seeing is people who are moving earlier in this market are going to get the advantage of being early movers. They're going to outsized returns. And we know this is the case because we're starting to see it in Europe. We've done studies at CBRE where the delta between buildings that are – I'll use sustainable, right, but are more efficient, outperform over time. They get better rents, they get better tenants, they get better cap rates, they get better financing. And I think what we're gonna see and we haven't talked about it yet, which is think about physical climate risk and what's gonna happen to the insurance markets. You gotta be thinking about where do I operate in a changing dynamic that's both economics changing and physical changing and energy changing. All three of those variables are going to drive, we're going to be sitting here in 10 years and people will look back and be like, wow, those three ingredients drove significant value differentiation over the last decade.
Spencer Levy
We taped an episode of this show on January 7th. That was the day the fires really blew out in Los Angeles. And that episode was on property and casualty insurance. And, where did the episode go? Before we knew the scale of the calamity in LA, it went, well, we can't rely on insurance anymore as being our security blanket. We need to look at it differently. And, differently means not just different types of insurance, maybe self-insurance, maybe having your own insurance company. Maybe building a more resilient building, which seems so obvious, but most of our investors don't do it. The question is, will we change? So, Joe, I’ll look you right in the eye. I've looked you in the eyes before 100 times trying to give you investment advice, and I've said this to you. I said, I could not make the investment case for doing certain things because I couldn't make you money on the back end. Is that still true, or are we changing?
Joe Sumberg
It's absolutely more profitable to focus on this. And, I think it's a foundational element of Galvanize Real Estate and why I bet my career on this, just talking about human nature. I did not bet my career that any investor would ever be interested in anything that is concessionary. The only thing that matters is profits. And investors have a fiduciary responsibility, and so do we, and as real estate investors in most cases. And that is an underpinning, sort of foundational element of what we're doing. I will say, as for anyone who's listening to this saying, like, oh, this sounds really easy. Why isn't everyone doing this? It is – certain parts of it are easy. Certain parts are obvious. Whether or not you say it's 15%, 20%, 30% efficiency measures at a property can be easy. Even though this technology has been around for a while, it has not become ubiquitous. There are processes, there are priorities for people, and in my experience, is that people generally do what they're economically incented to do. Um, and they have not been economically incented to try to figure out which, uh, um, technologies, which initiatives are profitable at certain properties in the aspect of sustainability, they have been encouraged to do certifications. They've been encouraged to chase certain ratings that don't necessarily align with what we're talking about because they've been focused on this green is good sort of concept. Uh–
Spencer Levy
Focused on counting, not necessarily results.
Joe Sumberg
Yeah, accounting and reporting. And I'd say if you've ever talked to a person in ESG about the thing they're most frustrated about, it's that they can't actually do sustainability. They're too busy counting and reporting for measures that aren't directly applicable. They spend all their time doing certification reporting and ratings reporting, and at the end of the day, they don't know their carbon footprint. And, I believe wholeheartedly, you can't manage what you don't measure. That's anti into the ballgame and something that just has to be put out there. But it is absolutely profitable. It is not profitable to get to operational net zero in every single building, in every single market, in America. But, I tell you, there's a whole lot of them where you can do it extremely profitably and that is the direction that we're coming from. In the five target markets that we've identified for the two top property types, it's a two to three trillion dollar market.
Spencer Levy
Can you identify those markets and property types?
Joe Sumberg
Sure, New York, Massachusetts, Maryland, New Jersey, California – industrial and multifamily. And critically, and I think this part has really been missing within the conversation of sustainability, those markets are markets that we've identified as being interesting from a real estate investment perspective. So, all the traditional metrics that you would expect an institutional real estate for you to focus on – where there is also an intersection of profitable decarbonization – that is where we live, which is somewhat niche-y, and I think part of the concern for a lot of folks is, yeah, but isn't this going to be limiting? Isn't it going to be tough to tell your acquisitions person that they can only buy certain types of assets? It is a $2 to $3 trillion market for us.
Spencer Levy
So, profitable decarbonization. And, I listened to those markets and having a lot of work with CBREs entities that deal with solar panels. I know that many of those markets, Maryland being one of them, have specific incentives in place for certain types of greening of your assets, solar panels or otherwise. Is that part of the incentive to go to those five markets?
Joe Sumberg
Not really – it can make it more profitable, but really for those markets, the cost of energy is appropriate. The utilities are not litigious towards our efforts. But also, I mean, look, I'll sort of identify maybe what you were insinuating or alluding to without saying it directly. We're not in the growth markets. We're not in the southeast. Uh, and someone who is from Miami, Florida – I was just there visiting my parents, um, and loves Florida, loves the southeast, loves these growth markets, bet my career on it in 2011 through 2020 – I'm not as bullish on those markets generally for the strategy that we're pursuing. And, so, that is the primary reason that we are not in those markets. It is not because of a lack of incentives from solar, as an example.
Spencer Levy
Rob, in very basic terms, give us two or three things that we're trying to do right now to help our clients.
Rob Bernard
Yeah, I'll give you two things and one is value creation. And this is what this whole podcast is about, which is can we help our clients understand through this multivariate almost assessment of what levers they can pull and push, how to drive more profitability for their portfolio on the investor side. And, then, on the client side for occupiers is how do they get better experiences, lower operating overhead costs. And, also, meet whatever sustainability goals they might have for their organization when they don't own these buildings. So, I'd say, it's value creation and we talked a little bit about it when we started to talk about insurances. Increasingly, we want to, especially for our investor clients, help them understand risk mitigation, right. And there's multiple dimensions of risk mitigation but first, think, the climate models and the climate resolution is getting so much better, that it is now to a point where we can say, hey, even in a place like New York City where we are today, there are different parts of Manhattan which have different kinds of climate risk. How are you thinking through that, especially if you're a long-term holding investor? What are the implications that might happen in 2035, 2045, 2050? So, it's value creation and risk mitigation is two core themes that we're pushing very aggressively to all of our clients.
Spencer Levy
Joe, I'm going to rewind the tape here for a minute. We used to put together a publication years ago, it was called the Green Building Adoption Index. And when we put together that index, we used to rank cities based upon who had the greenest footprint for office. And believe it or not, when we did it, and I think the last time we did it was like five or six years ago, was Chicago – 70% of their buildings were green certified. But, then, we did it for multifamily and we found out the number one city for multifamily having green buildings was Denver and they were about 7%, so 77. And I think that may speak in part to what you're suggesting here, because while I think office is much further along than the other real estate asset types on greening, because tenants have demanded it, the other asset types are at the beginning, because tenants haven't demanded it. Is that part of the reason why you're focused on multifamily and industrial?
Joe Sumberg
Well, we're focused on multifamily and industrial because we think the fundamentals are really interesting. I will say we've invested in only industrial to date because multifamily, in our opinion, hasn't reset from a capital market standpoint. We hope and expect it will in the next 12 to 18 months. But, the way that we evaluate transactions is from a profitable decarbonization standpoint. What are the ROIs? How much value can we create? How much additional profits can we create from the initiatives in a dispositively profitable way. So, you know, energy reduction measures, energy generation that increases revenues, things like that, we are not going after what I think everyone had been chasing, which is a green premium, right. So, what you were alluding to, office tenants demanding it because they need it, whether or not that leads to a green premium or a dirty discount is debatable. But, there's a price differential if you have a building that's desirable versus not desirable. Our view is that we are going to make assets more resilient through our efforts. We are going to make them more cost-effective with lower op-ex, and we're going to offer something differentiated to the tenants where they can potentially procure energy directly from us in a more resilient way and lock in pricing, which is very attractive to them from an energy perspective. Now, if something does change and residential tenants, logistics tenants actually demand, and want, and show that they're interested in something that is more sustainable for the sake of being sustainable and having a smaller carbon footprint – you know, they choose the box of water over single use for a single use plastic water bottle – and they're willing to pay a few cents more, that will be a revelation within this space. That is our upside and at the end of the day for us if we're creating in our base case dispositively profitable and additional returning endeavors that then allow and create a better quality return – but then allow for an additional type of upside outside of beta or the traditional metrics of commercial real estate. We save money on capital program. We got the lease done a little faster, higher rent. Maybe we got some cap rate compression. This is stuff that any good real estate investor might do. That's beta. The other upside that actually comes from creating a differentiated asset that might be desirable because 70% of residents in the U.S. actually prefer more sustainable choices at home. And there are still many corporations that are trying to be net zero by 2035, 2040, 2050. Then for us, that's an absolute grand slam, home run.
Rob Bernard
One thing that I'd like to press on is this idea of charging clients or occupiers a discounted rate on energy, right. This is something where we don't see a lot of this yet. I'm curious how you're approaching this and then what the reaction has been from tenants?
Joe Sumberg
The market has no language for it, no expertise in it. And, so, if there are – we do a lot with CBRE. We do a lot on the equity capital market side, we do on the debt capital market, we do on the leasing side, we do a lot on property management side. And I'm sure there's some additional tentacles that CBRE has and does that I'm not aware of. There are very few folks who are on the ground actually interacting with tenants who understand and appreciate and know how to communicate this in a value creation more resilient way that will resonate with a facilities manager. We're talking about at a level that's really interesting for the CEO, the CFO, and the Chief Compliance Officer – and God bless them if they have a sustainability officer, but they probably don't. Um, that's great, it's never gonna even reach them. This conversation needs to be something that is digestible and doesn't sound like a bunch of elites from New York talking about how we're trying to achieve a net zero building. This needs to be at a level that makes sense for someone who is actually occupying and working on the property on a day-to-day basis. And, so, that is where we're spending a ton of time trying to make sure that we're using language and information and metrics that resonate with people who are at the initial decision maker level.
Rob Bernard
This is super interesting to me. I don't think in the mindset of many customers yet is price volatility, right. I touched on this a little bit before and with a tidal wave of data center demand coming, I think the things that people have thought about about energy for the last two decades will no longer hold true, which it's always there and it's basically the same price and it is commodity and I don' t think about it, right. So, that's why I was super interested, which is, how do we as an industry start to change the mindset of customers to go like, if you're not thinking about your energy strategy as a core part of your real estate strategy, like, oh my goodness. That's gonna be a world of hurt at some point because it's such a core component to everything that happens in that building every day and the market is changing incredibly quickly.
Spencer Levy
Well, let me throw out a statistic for you. One of the numbers when I talk about industrial is the percentage of cost associated with real estate occupancy versus the every other cost you got. And you mentioned one of them, the big one being energy. The biggest one is actually transportation. Transportation represents about 70, 70% of the cost of logistics, much more so than the physical space, much more than the energy and anything else. And, so, when we had Jamie Hodari on the show the other day, we were talking about how all real estate is operational. And by looking at it as operational, you can't just look within the four walls. You have to look at the totality of the business that's in those four walls and how you can make that business more profitable. Whether it's the rent, whether it's the energy, whether the transportation, whether it's the water. Is that a good summation of how you look at the world, Joe?
Joe Sumberg
Yeah, 100%, I'd add labor in there as well. If one of our properties is something that costs the tenant less, then it's going to be more desirable for them for a like kind of situation. Maybe they even pay us more in rent to sort of bridge that divide. I think – look, at the end of the day – and Rob said this at the beginning. We're just here to make assets work better, right, that is what we're doing. Now, if while doing that, we are able to actually create a differentiated product, God bless us. In a highly commoditized industry, if we can provide the market with something that is different, that they might actually want, that we believe strongly solves some of those problems that they don't even foresee yet around energy, as an example, or physical climate risk and resiliency, that will fare better – and it's not only defense, it's offense, to your point. So, if we can make the experience better for the tenant, they will demand the product.
Rob Bernard
You're trying to create differentiated product, we're trying to create differentiated service. Like I feel like a lot of my team and our job is to make sure our clients are aware of what's coming around the corner on this stuff. So, it'd be really interesting to sit here three or four or five years around from now, but we have a pretty high confidence that there is a lot of disruption coming through sustainability. And again, right now, the big shiny bright object is people talking about regulation – and I actually agree with you. Like, I talked to an investment fund and the Chief Sustainability Officer there basically lamented how she spends 11 of her 12 months of the year working on either reporting or capital planning and one 12th. So, like, eight and a half percent of their time thinking about strategy. I'm like, okay, we got to invert that model. So, Spencer, when you ask me like, what are we trying to do? We're trying to invert that model for our clients so that they're spending 90% of their time thinking about strategy and value creation and 10% of their time just – okay, I got to check a bunch of boxes because I do need to actually be transparent about what I'm doing with my portfolio. But, like, this is the exciting stuff for us. Like, our market is transforming. People haven't really internalized that to the level that they're going to over the next few years. But there's no question that the market is changing incredibly quickly.
Joe Sumberg
One of the things that was really important to me when we set up Galvanize Real Estate was one, we have our head of sustainability be considered an investor, which is what she is. She is on the investment committee, which I think is highly unusual. In addition to that, we talked about the governance model with tying in economic incentives. What that does is that spreads that role and that job and that investing concept thematic across acquisitions, CIO, portfolio manager, asset management team, etcetera. Then the third thing we did was we have a team of scientists, climate technologists, policy experts. They're eight to ten people who focus on really helping us understand the new technologies. Now, the shocking thing for me was you don't even need the new technologies. There's technologies that have been around for decades that everyone's using. We just haven't really figured out how to incorporate them in a professional scalable manner, identify the use case and execute on it really well.
Spencer Levy
Give us, just for our listeners, give me one example of like old school technology if you just did this, it would be more operationally efficient.
Joe Sumberg
Anyone who has walked around an industrial property in some of the markets that I mentioned will probably recognize without a scientist next to them that these properties were built a lot of years ago and are highly inefficient. We're talking about single pane windows. We're talking about leakiness. We're talking about mechanicals that are dated. And what I think a lot of people do is they just, they take over assets, they're generally working and when the boiler goes out, the chiller goes out, the mechanical goes out – replace it. If it was a five ton, replace it with a five-ton. What we do is we evaluate the energy consumption on the front end and then come up with a plan for making the asset economically more efficient over time. And, so, that might mean that you replace mechanical out of the gate with something else, or you wait a few years and do it. Nobody is pretending that it's a good idea to take a brand new electric resistance cooling system and replace it with a heat pump, that doesn't make any economic sense. But, the really exciting, shocking thing for me is that insulation, caulking, making the envelope tighter – it is extremely profitable and it is something that I don't think enough people are doing. 75% of commercial real estate in the U.S. was built before 2000, 1999, I should say. And, so, there's a lot of really old buildings that are coming to the end of their useful life for everything that I mentioned.
Rob Bernard
I will say there's a lot of old technology and we haven't talked about AI, right. So, we're investing – that's a new technology for us, which is I could walk a bunch of buildings and I can see those things. But I can also use technology to see those things on behalf of our clients, right. So, you know, in the U.S., it's EUI and look at that based on building type anywhere in the United States and tell an owner, you know, we can sit with them and say, OK, here are assets that are more or less efficient compared to your peers in terms of building topology and location. Like that's an innovation which reveals where there's likely old mechanical systems, bad installation, all of the stuff you're talking about. So, I do think there is a lot of low-hanging fruit and things that have been well-established, but I also think there's this new frontier of intelligence at the intersection of structured and unstructured data and information that also is gonna reveal a lot of efficiency opportunities.
Spencer Levy
And, as far out as – I always say crystal ball, five years, ten years from now, I'm like no, I'm abandoning that concept. As far as you want to look, Rob, where are we going as a commercial real estate industry now as far out as you want to look?
Rob Bernard
Let's take half a decade, right. So, it's enough time where whatever volatility we see in the short run will sort of level out over time. I think we are on the cusp of a couple of changes in our industry that will drive outsize returns for companies who are thinking about it in a sort of futuristic state, which is, and I've said this throughout today, which is energy will become a much more core ingredient to how people think about their commercial real estate and their operations and it has been historically cuz he advent of AI is gonna change the underlying condition of energy availability. So, I think that is one. The second thing I think that we’ll start to see is within five years, the emergence of this delta between let's use sustainability loosely but efficient green buildings and less efficient buildings start to really show up in the marketplace. And I think we'll have started a differentiation that's based on insurance and insurance risk and insurance premiums at a degree that we're just starting to see. You mentioned Los Angeles fires. I think there will be, unfortunately, several more events if we're looking at a five year time horizon, which will force that market to accelerate change.
Spencer Levy
Joe, same question. You've been at this new firm now for four plus years. So, go out as far as you're like, where are we going with sustainability in real estate, but where are you going with your company?
Joe Sumberg
We did all the hard work already. We have proprietary tools, we have the full team built out, and so for us it's execution mode. And I'm really excited about that because that's the fun stuff, right. Being able to invest and acquire old dilapidated buildings and make them more efficient, more resilient, more profitable. That's the proof case scenario that we're really excited about doing and executing on. I will say from a narrative perspective, I think we're in a bit of a moment of transition. I'm excited for ESG as a acronym to maybe fade out a little bit and the work that people do to really be noticed and acknowledged a little more. And, I think that we all need to do a little bit more listening within the sustainability space and less preaching. And I think it's okay if someone just wants to do Affordable Housing. I think it’s okay if someone wants to do, you know, decarbonization. I think it's okay if someone just wants to do Biodiversity. I think it's ok if someone just wants to do, you know, mechanical upgrades or lighting fixtures or they want to figure out geothermal – God bless their soul. It's okay if people want to do just those things and we shouldn't try to categorize them and put them into one page in a deck and sort of summarize their life. It sort of needs to be authentic to the group and I think that if I were to fast forward in a hopeful way, I'd hope that we get to a place where we have authentic sustainability executed in different real estate programs that is meaningful for people there.
Spencer Levy
Well, very well said, and I'll put a little bow on this. There's a lot of very interesting stuff we've discussed here. A lot of it has a good component to it. It's good to do this stuff, but that's not why we are here. We're here because it is a better way to do things. It is more operationally efficient. You will make better assets. You will make more money if you do this. It's not for those other reasons, though those other reasons are good too. Is that a good way to put a bow on it?
Joe Sumberg
100%.
Rob Bernard
100%.
Spencer Levy
So, on behalf of The Weekly Take, what a terrific discussion today with Joseph Sumberg, Managing Partner and Head of Real Estate, Galvanize Climate Solutions. So glad we finally got you on the show, Joe.
Joe Sumberg
It's good to be here. It was a lot of fun.
Spencer Levy
It was great. And Rob, thanks for coming back. Rob Bernard, Chief Sustainability Officer, CBRE, well done, Rob.
Rob Bernard
Thank you, Spencer. Good night and good luck.
Spencer Levy
With that nod to Edward R. Murrow, we hope you found those insights into the world of sustainable investing to be interesting and informative. For related content and more, please visit our website, CBRE.com/TheWeeklyTake. Make sure to subscribe, rate, and review the show wherever you listen. Subscribers can hear our Q2 economic outlook bonus episode – which comes out tomorrow, April 30 – with our new Head of Research, Dr. Henry Chin. Please share the show, too, and feel free to send us any thoughts or feedback you might have. We'll be back next week to keep you informed on the most important issues affecting commercial real estate. Thanks for joining us. I'm Spencer Levy. Be smart. Be safe. Be well.
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