• David's LinkedIn
• Avanath Capital Management's Website
• Avanath Capital Management's LinkedIn
• Aqua Mizer's Website

Note: This transcript was auto-generated and may contain minor errors.

Sean Swentek: Hello. Welcome to another episode of The Future of Commercial Real Estate Sustainability. Today, I’m speaking with David Natt, Senior Vice President of Asset Management and Sustainability at Avanath Capital Management. David Natt, thank you so much for joining me here today.

David Natt: Happy to be here.

Sean Swentek: Talk to me about the big trends you’re seeing today in ESG and sustainability in both multifamily and affordable housing.

David Natt: Great question. I think the going trend is everyone is trying to fall in line with the standards that are set out by the 2015 Paris Environmental Accord. Specifically, the standards that are set is to reduce our carbon emissions by 50% by the year 2030 and be carbon neutral all the way up to 2050 and somewhere between then.

I think what’s happening with us is that we’re a private equity company, so a lot of our decision making is not only being made internally by ourselves and owners of our company, but as well as our investor base. A lot of our investor base is coming from Western Europe. As well as, since we specialize in affordability, we also attract a lot of investors that are in the social impact space. So combined between the Western Europeans as well as the social impact investors, they’re holding us to a certain standard.

That’s one of the reasons why it wasn’t the only reason, but it’s one of the reasons why we have really built and executed a very robust, in my opinion, a very successful ESG platform that we are quite proud of.

Sean Swentek: Can you talk to us at a high level about what Avanath’s ESG report looks like today?

David Natt: I think the good way of answering that question is to discuss our GRESB score. Everyone in the industry, I won’t say everyone, but a lot of the operators and investors in the industry, not only for multifamily but for commercial office, retail, industrial, maybe even hotels, they’re all using this scoring methodology. It’s called GRESB, Global Real Estate Sustainability Benchmark, I believe. Think of that as a report card. It’s basically you’re filling out a very detailed survey about what you’re doing as well as it also has to be validated. Everything has to be documented. So it’s giving you a score.

When we first started out in 2020, and our first filing I think was 2021, 2022, we had a score in the 40s, which is basically, I would say, probably typical for an earlier filing. We’ve taken in a very short period of time, four years, we’ve gone from the 40s. Now we are in the very, very high 80s.

Another scoring methodology they have is stars. Associated with the 40s, we got one star. Now that we are in the mid 80s to the upper 80s, 85 to 89 to be exact, our scores for our three funds are in the fours, and one of them is in a five. So we’ve done a really great job in getting our scores up.

Again, that is a reflection of our commitment to ESG, our policies and procedures, our data collection, because this whole thing is all about data. If you don’t have the data, you don’t have anything in my opinion. As well as we’re being scored on what I refer to as doing the work at the property, reducing our carbon emissions. So if you’re reducing your carbon emissions, you’re reducing your electric consumption. You’re also reducing your natural gas consumption and also throw in, even though it’s not carbon related, but we are being measured on water reduction and water efficiency.

In a very short period of time, we have done a great job, and we are well ahead of our original plan for ESG when we embarked on this in 2020, 2021.

Sean Swentek: For a business owner who might be back where you were in 2020 and 2021, how can they build a business case internally for investments in sustainable improvements, whether they’re in multifamily or any sort of sector of CRE?

David Natt: You need to understand first what is your goal and what are your goals, and what’s driving those goals. I can’t speak for other operators. I could talk about for us. As I mentioned before, for us, a lot of our institutional European investors as well as some of our domestic investors are asking this for us. Also, within the space, you also have to think about investor returns. ESG is not a black hole. I think some of the people who are approaching it that way, I’m not sure how sustainable it is financially sustainable, not the other sustainable.

I approach it or we approach it from financial sustainability standpoint because we’re still a private equity for profit organization. We still need to provide the distribution to our investors on a quarterly basis. When we’re looking at implementing some sort of a change to our property from an ESG standpoint, making an investment, we actually have it boiled down to what is my return on investment? What’s my incremental ROI on there?

Going back to your question in a very long winded way is that I would offer anyone who wants to do this, think about what is your goal then as well as you want to put your best foot forward. I would really highly suggest you think about hiring an ESG consulting company if you don’t have the expertise in house.

Additionally, what you’re going to still need to have is the data capability. You need to figure out who’s measuring your data? How do you measure it? Are you using Yardi? Using RealPage? How is the data coming about? Because if you don’t have the data in place, I think you’re really kidding yourself because you’re not going to be able to measure the consumption. You’re not going to be able to really file the GRESB survey accurately.

I think the first thing I would be thinking about is hiring an ESG consultant. That’s something we did early on, and that was the best decision that we’ve ever made because we did not have the expertise in house. I come from the business side. My background is on the deal side. My background is development. My background is asset management. This kind of fell into my lap where I took it to another level. I had some experience in my prior company because I was exposed to a lot of ESG, but I took that exposure as a means to basically make my portfolio more energy efficient, which to me, that was all about an ROI or improving my NOI across my entire portfolio.

Sean Swentek: For a listener who might be surprised to hear that there’s real financial ROI on these sustainable and ESG investments, can you share a real world story where you saw maybe unexpected returns in your portfolio and what sustainable improvement drove that?

David Natt: Oh, 100%. I’m going to basically talk about a couple products that I love, and I’m going to be shameless in promoting that. I’m not sure if neurotic is the right word, but I focus on the water. A lot of our properties are located in California or in other areas that are impacted by the drought. So I look at how much water do you consume.

You have your commode or your toilet. You have your showerhead. You have your sink. Typically you would have if it’s a one bedroom apartment, you would have a sink in the kitchen, a sink in the bathroom, and then you have the tub shower, then the bath toilet. You can get a device called the Aquamizer, and the Aquamizer will take a gallon flush. Most toilets are typically around one and a half gallons in this day and age. Some might a little bit higher. Some the older ones can go all the way up to three gallons.

You can take the Aquamizer. That would actually reduce your flush from about one and a half gallons basically down to less than one gallon. Pigment level point seven of the flush. As well as, because of the way it’s designed, the Aquamizer itself will prevent runny toilets. So if you have an old flapper or whatever and you hear the water running, that uses up a ton of water. From an ROI standpoint, I’m getting roughly about a 30% on my money. Payback degree is less than two years on the Aquamizer itself.

Another thing that I’m really proud of is what we’re doing from an electrification standpoint. We are looking to get rid of the hot water heaters at a number of our properties. We swapped out the inefficient hot water heaters as well as the HVAC units with higher SEER level HVACs and as well as electric heat pumps.

If we look at that, because these properties are garden style, our use for natural gas is fairly low because we don’t have the giant boilers and whatever. The incremental ROI on that gas, basically converting the gas to heat pumps, it was low. It’s roughly around a 3% ROI.

Part of the challenge that we have is that we’re affordable property, so we don’t have a ton of capital to make this investment. We rely very heavily on rebate dollars from either at the local, at the state, or even at the federal level to help subsidize this. In this case, with these properties I’m talking about in Southern California that we swapped out these water heaters for heat pumps, we were able to get some sort of grants to basically cover, I would say, maybe 75% to 80% of our total cost, maybe a little bit higher. So that 2% or 3%, that equated to basically 15% on our money.

Additionally, what we’re doing is to help subsidize the additional electric load, we are now, we have a program in place to install solar on top of these apartment buildings, not only these two properties I’m talking about. In California, we have an agreement in place to install solar on 18 properties. That, again, is not going to cost us any money.

We have arrangements. We’re working with another company called Sunrun, which is a large, I think it’s the largest solar REIT where they’re going to come in, and we’re working with another program in California called SOMAH, which is Solar on Multifamily Affordable Housing in California. It’s basically funded through the various different utility companies in California. They help provide us with the equity. Sunrun’s putting up the rest of the money. We enter into a long term lease. We, the property, get the benefit.

As part of SOMAH, a disproportionate amount of the electricity, so call it about north of 55% of that electricity will go directly to the residents that live in our property. So if you, Mr. Jones, lives in unit 1A, if your electric bill is $100, and throwing numbers out, you’re going to basically get maybe like a 50% or a $50 direct credit that’s worth what we believe we’ll get. So that’s freeing up something like $50 a month. That’s basically some real disposable income for folks that in the affordable space, that’s material.

We are going to be looking to roll this thing out across 18 of our properties in California. We’re looking to do some stuff in Washington state and elsewhere in the country utilizing funds at the federal level from the Inflation Reduction Act or solar for now. That’s basically going to be our mapping for our game plan for hopefully for 2025 and 2026.

Just to get going back to where this all comes in from a strategic standpoint, I mentioned earlier on, part of our goal when we started out was to adopt the standards set out by the 2015 Paris Environmental Accord. Part of that is to reduce our carbon emissions by 50% by the year 2030. How am I going to do that? Part of that is through solar. Those 18 properties, that equates to basically, on an annual basis, about 15% to 18% of my current total emissions at my property.

Sean Swentek: 15% to 18%. Incredible.

David Natt: I’m on my way. Going back to my earlier point about data, if you don’t have the data, you can’t figure any of this stuff out. Anyone who really wants to start in this, have a really good effective ESG, first building block is data. Data, data, data, data. And then have a really good ESG consultant that we have. We work very closely with a company called Retech Advisors. We’ve hired them. I used to work with Retech earlier on in my prior company, and we have a wonderful relationship. They’ve been advising us and actually learned the business from their expertise.

Sean Swentek: I appreciate you mentioning all those things you did, David Natt, because things like the IRA and then tax credits that it enables and Solar for All and Solar on Multifamily Affordable Housing, SOMAH. All these programs, we’re trying to get people educated on this because, really, it’s a resource to them. It lowers your cost of electricity. It helps you with your ESG. To your point, I mean, the payback period is really short, and it’s a huge reduction in your carbon.

David Natt: If you’re able to look at this thing as we are, as I look at reducing our energy consumption, I refer to as doing the work. If you’re looking at us from a GRESB performance, my goal is to be in the 90s. My goal is to hit my goal for 2030 of lowering carbon emissions, of which we are well on our way there. But I still look at this as making money. I am not, as I said, a typical ESG person. I’m an asset manager. I’m a deal guy. I’m a real estate guy, and I look at everything from an ROI standpoint.

If I’m throwing money away, one, I’m not going to be able to get buy in from either my colleagues or the partners or the owners of my company. I have to demonstrate how I’m going to do this and how do we make money and what is the true benefit not only to our investors, but more importantly to the residents of our property. That is a fundamental part of our ESG. I look at everything on an incremental basis where we have to make money.

Sean Swentek: Speaking of investors, how are institutional investors reshaping expectations around ESG in affordable housing, multifamily, and other sectors?

David Natt: They’re driving it. Certain ones are driving it. A couple years ago, we were in the 60s, and we thought we were great because in a very short time, we went from a 40 up to a 60. Mind you, we just started this then. 2021, 2022. That’s when we really started to get on the strategy. And they told us, you have to be in the 80s. And we’re saying, what? You have to be in the 80s.

I said, there is no way we can because, one, the GRESB, how great it is, it also has its shortfalls. I know they are aware of this, and they are looking to change their scoring methodology or adapt. They’re going through a lot of changes right now. But as an affordable player, there is a bias against us. The GRESB was originally designed for commercial office or retail. With multifamily, particularly with affordable, most of our properties are older in nature.

The GRESB caters to companies for newer product. If you have a LEED certification, you get some additional points. I think we have maybe two properties, maybe three, possibly four properties on our total portfolio that has that’s LEED certified. We had to come up with alternative ways where we could substitute the scoring there.

So that’s a real problem that we face with the GRESB methodology.

When we went from people asking us, hey, you gotta go from 60 to 80, we said, whoa. It’s a little bit harder for us here. I think it’s a little bit unfair, and the reasons why. And they said, we understand. We’re in complete agreement. We’re not going to debate or argue against you. But our sub portfolio managers, they’re telling us if you don’t hit a certain score or if you don’t have these stars, we won’t consider you or we will pull our money out of your funds.

Sean Swentek: Wow.

David Natt: For us, that was a real sobering moment where we doubled down on our efforts. I doubled down. Before I had two jobs, at that point, they asked me, we want you to strictly focus on ESG and further building out our platform with the goal to go from the 60s to the 80s, and we did it. I mean, we were pleasantly surprised. We put a lot of work into it, but we satisfied. Then for the next year, this past year, we scored even higher.

To answer your question, our investors are driving this as well as us, obviously, myself. I’m pushing the envelope to the idea where I want to separate ourselves from the rest of the industry. Because when Avanath set out with this goal of creating an ESG platform, we have certain goals in mind. One of it was to be a leader within the space, even though a lot of it is sort of like lip service. You can say that. But we want to be a leader not only in the multifamily space, but especially in the affordable space.

This is something that is part of our ethos. It’s our mission statement: lifestyles within reach for our residents. We want to advocate not only basically raise more money within the space for us, but for us to invest and acquire more multifamily and for us to acquire, for example, market rate and convert to affordable, which is what we do with a lot of our properties. There’s a huge philosophy behind this where, again, we could separate ourselves from the rest of the industry, even within the ESG space now where people are calling us up and they’re saying, how are you doing this? How are you able to put solar on 15 or 18 properties?

By the way, once we achieve this, which we’re on our way to do so, this will be the largest dedicated, or I was told at least, this is the largest dedicated portfolio of solar in the country.

Sean Swentek: Wow. That’s amazing.

David Natt: We’re on our way. Also to throw in the other mix, I’m tooting my horn here. We’re also as a leader within the industry, we were the first company to get approval by Fannie Mae to install solar. We were the first.

Sean Swentek: Incredible.

David Natt: By doing that, Fannie Mae designed a lot of their policies about putting solar on top of the roof around us. So that’s something else we’re very proud of, and that just happened earlier in 2024.

Sean Swentek: You mentioned tenants. What are you seeing as far as tenant demand or appetite for these sustainability related upgrades?

David Natt: Not so much. What we’re trying to do is because they’re tenants, we can’t tell them what to do or how they change their lifestyle. What we’re trying to do is kind of teach them about ideas of how they could save money or how they could do the right thing from a sustainability standpoint, but as well as with the ideas, hey, you can save money by doing this.

We’re encouraging them to, one, if you position your furniture in your apartment a certain way, you may be able to lower your need to either increase your AC or your heat or whatever. If you pull your, for example, your refrigerator away from the wall and you have more space for circulation, that itself will lower your electricity bill.

As well as what we’re doing from a water consumption standpoint, slowly we’re installing a lot of low flow showerheads as well as aerators. That itself, even though that bill is ours, it goes for us, but obviously it’s for the greater good. But for the residents themselves, we’re encouraging them with the benefits of recycling and what’s involved with recycling. How do we also deal a lot with organic trash itself, so we’re encouraging them to take advantage of that. So there’s different means, and also this is all about educating where they could, again, reduce their own energy consumption, their own electric bills.

Sean Swentek: The next lead in, how has your approach to property repositioning evolved with growing ESG demands?

David Natt: Great question. As part of our acquisition process, we not only look at each property for climate risk and transition risk, but as well as we do a desktop review. We kind of assess where are some of the areas and the improvements that the property can make from an ESG standpoint.

We’ll look at properties, say, okay, is there an opportunity to install LED lights to lower the electric bill or look at the water situation? Do we have a pool? Are there variable speed pumps in the pool? Can we swap that out? Working with our ESG consultant, Retech, we look at the property. They do sort of a desktop review of some of the more the larger or more complicated projects that we sometimes purchase, like in New York City or whatever, we’ll do a complete site walk with them. In this way, they’re able to tabulate different ways of where we can make the property more energy efficient as part of that is part of the overall repositioning of the property.

Sean Swentek: What’s changing in the ways you measure the success of your sustainability initiatives?

David Natt: That’s a great question. I’m looking at it two ways. I look at everything from an incremental ROI to see how this adds to individually. I look at individual projects. I also look at the overall utility spend. And I also look at it from a complete portfolio basis.

I looked at the entire portfolio. We have some 115, 120 some properties. And there, I basically did a mean variance analysis for utilities for all the utility spend. That would be on for electric separately, natural gas, and water. This way, I’m able to see figure out what my mean line is and figure out which properties were above or below. What I want to be able to do is to identify what I call the energy pigs, the properties that are consuming above the mean, and figure out what’s going on there and then start tackling those properties.

That’s really with also kind of focusing on how do I reduce the total spend on the utility standpoint to basically lower expenses, increase NOI, increase our overall profitability in our portfolio for our investors. You go back to what I was preaching earlier about looking at ESG from an ROI standpoint, we’re doing it. By the way, by reducing my gas and electric spend or consumption, that correlates 100% with my carbon emissions.

Ties back to where I’d be, where I become passionate. Some people accuse me of being neurotic, but how do I look at my goal of 2030? How am I going to get there? Because we just don’t put stuff out there. If we’re going to put something out there, we need to document that we’re doing it, getting the results, or how are we going to get there. That’s something that we do for our investors and for our own credibility within the industry.

Sean Swentek: How do you go about structuring sustainability improvements to make sure you’re maintaining long term affordability at these properties?

David Natt: To maintain long term affordability, that’s set by the regulation agreements that we have. You can’t mess around with that. I mean, if it’s affordable, it’s affordable. ESG or anything else, we can’t do that. We’re actually going the other way. We’re actually taking market rate units, so when we buy a property and we can set rents or whatever it is based on the market, we are saying no. We’re going to put in a LOURA or some sort of a restriction on the affordability with that particular unit, and we’re going to put that basically on title. We are actually doing the opposite. We’re actually increasing the number of affordable units within various different communities.

Sean Swentek: Which sustainability improvements have you seen deliver the best ROI even during these last few years with all the economic uncertainty?

David Natt: The best ROI is water. To be honest with you, the best is literally it’s the showerhead. It’s a little tricky with the showerhead because if you put it at low flows, people will tend to take longer showers. People, they actually will replace it, and they should just say, I’m going to get another one and put my own in there. But for the most part, it’s a fairly inexpensive, and you get a lot of return on your money.

Also, LED lights, you’re getting around a 30% ROI on LED lights. And also, one thing that we’re really focusing on right now is putting in motion detection switches. All of our properties, a lot of them were built in the 90s, some the 80s, some even before then. We have some properties that were built in the 1920s in Boston. But what we want to be able to do is, some of these lights are kept on all the time. Bathroom lights in the common areas. Sometimes those lights never go out.

We want to be conscious of security. I mean, security in our properties are the most important thing. We want to provide the most secure places for our residents to live and for the safety of our residents. But we’re looking at that’s really low hanging fruit for us.

Sean Swentek: Looking ahead five to ten years, what sustainable strategies do you foresee Avanath pursuing outside of what you’re doing today?

David Natt: I think it’s just going to be a continuation. It’s going to be the continuation of installing solar and electrification. I think the technology will change. I think the solar technology will improve or maybe there may be another change in the industry, something I’m not completely aware of. But right now, if you’re asking me what’s my vision, is to take what I’m doing in California and do that in Texas, do that in Colorado, and bring it out east.

Sean Swentek: This show is called the Future of CRE Sustainability. What do you hope the marketplace overall will do? If we look to the future, what are you hoping people will really get into when it comes to sustainability and ESG as a whole?

David Natt: I think, and I often think about this now, especially given the fact there’s been a change of administration, and I’m not going to comment on politics. But I do hope that with the industry, we’ll continue because, obviously, I believe in global warming. I often am tired of having the conversation with my kids saying, when I was your age, we used go sledding on the streets and the snow used to be around for weeks at a time where we could continue going sledding or play ice hockey on the ponds. That doesn’t exist anymore, sadly.

I’m a firm believer that we need to improve our society and particularly from a global warming standpoint. As I get older, I get a little bit more philosophical. I think about this more often. It’s like, am I turning this thing over to my kids or if I ever have grandkids, which is important.

Right now, I’m not sure if the public sector will lead this, but I really hope is that this is the private sector. Hopefully the investors are saying, I come from an institutional investor world. I’ve always worked on the institutional side of this business from day one earlier on my career. I really believe is that if the institutional capital is saying, hey, if you want our money, you gotta do this. You have to provide the data supporting that you’re doing this.

I think by having companies like Avanath Capital who really have a real mandate aside from the capital, but if you’re being pushed by your capital base, I hopefully think that’s where the industry will go. I’m hopeful that as well as I hope that everyone will still be a firm believer in this, and actually everyone will take a true participation in this responsibility. We can’t do it on our own.

I’m a firm believer it was like, there is no secret sauce in ESG. My strategy, if I’m going to be having any proprietary strategy of what we’re doing and not telling everyone, what’s the point? We’re not that big. I’m not as big as my old company that I worked for, which is a very large institution. They can help push the market. They’re a little player, but I’m coming up with different ideas and share my ideas and some may work, some may not work. But the idea is collaboration versus competition. You can’t have that in the ESG space.

Sean Swentek: It’s going to take all of us pitching in to save the planet, I think is what you’re saying.

David Natt: And I guess if you’re one of those people who that’s not enough to what you said earlier, there is real financial incentive and real ROI to be had with ESG investment. The whole point is with ESG, I boil it down to either from an asset management standpoint and portfolio management standpoint to drive your utilities down. From doing this mean and variance analysis, yes, I was able to identify these various different outliers. But guess what? My mean, I can bring that down. I’m confident I can bring that down. So that’s all bottom line. Bottom line as well as also for the greater good.

Sean Swentek: David Natt, this has been an incredible talk. I really appreciate you taking the time to meet with me today. If people want to learn more about you, the work you’re doing, or more about Avanath, where should they go?

David Natt: Feel free to contact me at David Natt. You can find me at my company’s website at Avanath.com. But my email address is dnatt@avanath.com. Happy to speak to anyone. I can talk to you forever about the subject matter. Very passionate.

Sean Swentek: I can tell, and it’s lovely to have you on. Thank you all for tuning in to another episode of the Future of CRE Sustainability. We’ll see you next time. Thanks.

David Natt: Thank you very much.