Corporate Governance

Shearman & Sterling LLP 38 | Impact Investing in Commercial Real Estate Impact Investing in Commercial Real Estate Lisa M. Brill, Kris Ferranti, Malcolm K. Montgomery and John L. Opar Commercial real estate (CRE) is comprised of a number of varied sectors — office, industrial (logistics), multi-family, retail, hospitality and, increasingly, specialized uses, such as senior care, medical office and student housing. The industry also has a diverse investor base. Virtually all public real estate companies are structured as real estate investment trusts (REITs). They are a dynamic LEED CERTIFICATION AND ITS PROGENY As compared to other industries, the commercial real estate industry was early to the impact investing trend. LEED, or Leadership in Energy and Environmental Design, is a program begun in 1993 by the U.S. Green Building Council to establish a system for rating building construction. The program has evolved over the last 25+ years to reflect technological advances and to comprehend maintenance and operation, as well as design and construction, and now represents just one of a number of programs established to promote the goal of sustainability. Perhaps viewed initially by developers merely as an opportunity to market new properties against another criterion, LEED and similar indices are now accepted measures for assessing buildings for thermal and acoustic comfort of occupants and overall environmental impact and human benefits. The LEED Homes rating system includes categories for transportation access and reserved open space. LEED standards have been applied to approximately 70,000 commercial projects in the U.S., comprising approximately 1 billion square meters. 3 Promotion of LEED and equivalent standards can continue to be a means of impact investing on the part of not only developers and builders, but equity investors, lenders and tenants and other end users as well. Insights force in the industry, but REITs directly account for only 10% of commercial real estate investment in the United States. 1 Real estate investment funds are often privately placed but may be sponsored by publicly traded vehicles. Family offices predate, by decades if not centuries, both REITs and investment funds as significant players in the CRE space. Non-U.S. investors have come to play an increasingly important role and are estimated to have been involved in 8% of U.S. deal volume in 2019, having previously accounted for as much as 18% of U.S. deal volume in 2015. 2 However, each of these groups — REITs, investment funds, family offices and foreign investors — have had, and will no doubt continue to have, a significant impact on the growth of impact investing across the industry. 1 See Alexandra Thompson, "Total Size of U.S. Commercial Real Estate Estimated Between $14 and $17 Trillion," https://www.reit.com/news/blog/market-commentary/total-size-us-commercial-real-estate-estimated-between-14-and-17 (July 9, 2019). 2 See Real Capital Analytics, "Cross-Border Purchases of US Property Fall Below $50b," https://www.rcanalytics.com/us-cross-border-q419/ (February 19, 2020). 3 U.S. Green Building Council Country Market Brief: United States at https://www.usgbc.org/resources/country-market-brief. Numbers include registered (not yet certified) and certified commercial projects.

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