This article is part of our Rising Star Portfolio series.
At first glance, I'd say investing in real estate stocks seems like a risky proposition these days. Economic uncertainty and the desire or ability of Americans to even attempt to become homeowners builds a shaky foundation for an investment thesis. That same economic uncertainty calls commercial real estate investment into question, too.
Just take a look at the beat downs that have been administered to homebuilder stocks like KB Home (NYSE: KBH ) over the past five years -- and recent developments don't look promising, either. Even if houses are "cheap" right now, many moving parts could negatively affect the entire industry. The sheer number of distressed and foreclosed-upon properties still blights the landscape and has hurt many Americans' sense of financial stability and well-being.
Still, just because an industry is fraught with uncertainty, that doesn't mean some interesting, innovative shifts aren't taking place while we fret. These shifts could even make investors money. For example, new-school green building is moving forward, and whether the concept's gone completely mainstream or not, the economics of this real estate innovation make perfect sense for a new, more sustainable world.
A recent Bloomberg report underlined how green building can save money while commanding premium housing prices. The article pointed out that rental property companies such as AvalonBay (NYSE: AVB ) , UDR, and Equity Residential (NYSE: EQR ) are planning to heighten their green building development. Eco-friendly technologies would save money and even make money over the long haul.
Think solar-heated water, energy-saving insulation, recycled construction materials, and smart usage of indoor light. Or how about this common-sense approach to water use: roof gardens that collect water for use in the lowly act of toilet flushing, which certainly doesn't require treated water.
Ironically, these companies can save money, lessen their toll on the planet, and potentially make more money by commanding a higher rent from eco-conscious consumers who will pony up for green housing. In New York City, LEED-certified rental buildings tend to attract tenants willing to shell out 5% more on rent when times are flush, and even in tough times, these rental properties have to dangle fewer concessions to attract new tenants.
Common good in commercial real estate
Green building is a growing force in commercial real estate, too. Forbes contributor William Pentland recently reported that in 2010, one-third of all new commercial space construction sprouted up green, adding up to a $54 billion market for this type of commercial building. By 2015, the number of eco-friendly commercial buildings is expected to triple, representing $120 billion to $145 billion in new construction and $14 billion to $18 billion in retrofits and renovations to existing structures.
Again, we get a lesson in customer demand: Premium, or Class A, commercial real estate increasingly incorporates the factor that the space goes beyond fancy to green. Again, tenants are willing to pay the higher prices, because in the long run, the economics make sense: lower costs to run their businesses and the important intangible asset of building a reputation for being easier on the planet.
Along these lines, Federal Realty Trust (NYSE: FRT ) recently hit my radar for its green initiatives in its top-tier retail projects. In December, it struck a deal to include electric-vehicle charging stations at its retail sites across the nation, and many of its properties incorporate recycling, use of heat-deflecting roof materials, and responsible landscaping methods. At its Bethesda Row development in Maryland, Federal Realty participates in a program through which restaurants' oil and grease are removed to make biofuels.
When it comes to environmentally responsible building overall, there are other, more grassroots ways to play these trends other than investing directly in real estate investment trusts and various housing stocks.
For example, Trex (Nasdaq: TREX ) provides "wood-alternative" decking, taking millions of pounds of recycled plastic and waste wood and transforming them into composite lumber for decking. If you ever wondered what happens to recycled plastic grocery bags, Trex recycles 1.3 billion of them every year.
This is only the beginning
Granted, the idea that consumers will pay premiums for green living poses the usual ethical considerations. The temptation for corporations to indulge in "greenwashing" grows considerably. Furthermore, there's something depressing about knowing that lower-income folks are blocked from greener housing.
Still, increasing consumer demand and the willingness to pay up for a more responsible roof overhead is the first step in a huge shift away from traditional building design and construction. Obviously, environmentally conscious attributes are fast turning into a major competitive advantage. If the marketplace continues to exercise its influence, such factors should become standard and far more affordable for all.
The sustainability megatrend is poised to make a huge difference in investors' portfolios. The Rising Stars real-money portfolio I'm managing for Fool.com intends to capitalize on these growing trends, too. That's why I have my eye on a sector that didn't originally jump out at me as all that hospitable. There may be far more shades of green in real estate than I'd previously believed.
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