Pairing ESG assessments with due diligence saves multifamily investors time and money

Commercial real estate due diligence is nothing new. Investors use property assessments to make informed decisions about whether or not to make a purchase. With the rise in popularity of environmental, social and governance criteria (ESG), owners are taking due diligence to the next level—hiring conservation experts to lead the physical due diligence process. When multifamily property owners combine the structural and physical examination with potential sustainability enhancements, they can leverage the buying process to save time and immediately increase their investment’s value.

What’s driving the rise of ESG initiatives in multifamily markets?

The popularity of ESG in commercial real estate circles is steadily growing as demand for eco-friendly communities increases. Owners and investors want sustainable assets, and tenants prefer living in units that reduce their environmental impact. 

While ESG has become a considerable component of determining the value of a property, historically, ESG assessments have often been considered after the sale—integrating ESG evaluations into the due diligence process is a relatively new trend. Combining an ESG assessment with the physical and structural due diligence process gives owners standard benefits like indicating the building’s condition and any physical improvements needed on the site. However, with an ESG lens, they’ll also have an opportunity to underwrite sustainability improvements with the original loan, allocate capital more efficiently, see a quicker return on investment, and earn higher rents and tenant satisfaction.

Benefits of bundling ESG and physical due diligence

  • Know exact costs upfront. An ESG expert who understands implementation can provide cost estimates for all conservation projects, from water efficiency improvements and lighting upgrades to adding solar and EV hookups to electrifying HVAC systems. No need to guess at budgets or track down an expert later.
  • Wrap sustainability enhancements into the initial property business plan. By efficiently allocating their resources, owners have more control over the retrofit timeline resulting in a higher NOI in less time.
  • Understand available tax incentives and rebates. There are loads of financing options available for green projects at the city and state levels, and with the passage of the Inflation Reduction Act, at the federal level. Performing an ESG assessment and due diligence simultaneously gives owners a clear picture of available funding options.
  • Start benchmarking for ENERGY STAR on day one. Many cities require multifamily property owners to benchmark their energy usage annually to reach carbon emissions targets. By partnering with an ESG expert during the due diligence process, owners and investors can set up benchmarking programs that start as soon as they acquire the property, saving themselves hassle and time.
  • Build a sustainability team. The best ESG experts are also conservation implementers. Partnering with an efficiency firm means that the same firm that does the due diligence assessment can also do the sustainability work. Hiring the right partner early on reduces costly downtime—work begins the day the owner acquires the asset.

How to incorporate ESG into due diligence

Owners ready to lean into ESG should partner with an efficiency expert at the earliest possible point in the purchasing process. The right partner can oversee the entire physical due diligence process and start planning for upgrades and improvements before the property is even purchased. 

When the ESG assessment is submitted simultaneously, buyers can assess the property’s potential and fit for various conservation programs—they can also work with an expert to identify risks and remediation costs and begin designing and implementing improvements quicker. Adding ESG to due diligence is often a lower-cost investment—the price varies depending on the property’s size and the assessment’s scope. 

Contact EcoSystems today to learn how a due diligence and ESG assessment can unlock funding and underwrite your property improvements.