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1CLIMATE TECH FOR REAL ESTATETHE ELEPHANT IN THE ROOMStephen Rothstein March 2021kleinmanenergy.upenn.eduINTRODUCTIONpower to directly catalyze the inevitable transition tonet zero buildings, but also to most directly profit fromits realization.It is not an exaggeration to suggest that eliminatingreal estate’s 40% share (EIA Outlook 2017) of globalemissions will spawn the most significant technologicalshift in the history of modern buildings. And yet, thisfact is gravely underappreciated by both traditional realestate investors as well as prop-tech investors, the twopools of financial capital that not only have the greatestAnd it is not just the investment community that is underindexing climate tech for buildings in their portfolio ofinvestments or priorities. PWC recently listed the top13 disrupters to the real estate industry in its annual2021 Disrupters for Real Estate report. Climate techfor real estate was nowhere on the list (PWC 2021), aFIGURE 1: KPMG 2021 TOP DISRUPTERS FOR REAL ESTATESource: Emerging Trends in Real Estate 2021 survey

2 kleinmanenergy.upenn.eduFIGURE 2: SHARE OF GLOBAL EMISSIONS BY SECTOR Buildings: 28%Construction: 11% Transportation: 22%Other: 9%Industry (Non-Consolidated): 29%Source: New Buildings: Embodied Carbon–Architecture 2030.tremendous oversight if we consider how rapidly thebuilding decarbonization policy landscape is evolving,how costly it will be to building owners, and how muchnew venture funding is being raised to hasten thedecarbonization transition.In Q4 2020, the European Union passed its “RenovationWave” regulations—requiring a 60% reduction of carbonemissions in buildings over the next decade, along with an18% reduction in heating and cooling demand. Buildingowners that do not comply will pay substantial fines.Bloomberg New Energy Finance estimates that inEurope alone, this will cost more than 3 trillion (Coker& Champion 2021). The European Renovation Wave,which followed policy precedents from Los Angeles’s2019 Green New Deal and New York’s Local Law 97,pulled the real estate community into the epicenter ofthe climate change conversation.This digest analyzes why the real estate communityshould consider investing more capital into the ClimateTech for Real Estate ecosystem, and where currentpolicy may be falling short in promoting this capital influx.Furthermore, we will map out the eight largest categoriesemerging in the Climate Tech for Real Estate subsector,and develop a framework for assessing how participantsacross the real estate ecosystem could profit from thisonce in a generation wealth creation opportunity.REAL ESTATE OWNERS SHOULDBE CLIMATE TECH INVESTORSExisting “low hanging fruit” climate technologies andenergy services such as LED lighting, on-site solar andstorage, and HVAC upgrades can help landlords reducepart of their emissions and offer positive return oninvestment. In fact, in 2019 the best performing publicREIT, Hannon Armstrong (HASI), was not a traditionalreal estate owner/operator, but a lender on such energyefficiency projects. The explosive growth outlook in theenergy retrofit market for real estate caused its stockprice to appreciate 2.5x since 2019, outpacing anytraditional public real estate company since that time.Such preferential capital allocation toward greener realestate is only beginning.Fully meeting the regulated decarbonization targetshowever, in addition to getting to net zero—are not yeteconomic—and require greater reductions in technologycosts. The opportunity for continued cost reductions,combined with the scale of the problem and the politicalurgency to solve it—make this an enormously compellinginvestment opportunity. Counterintuitively, real estateowner/operators, are the most highly incentivized sourceof capital in the financial system to participate in suchinvestments—not only traditional energy efficiencyretrofits—but also high risk, high reward technology R&D.The notion of real estate owners investing capital intotechnology R&D sounds strange, but in truth, it is thehighest and best use of a landlords capital expenditureswhen a longer term time investment horizon is taken.Let’s examine a practical example. If for instance asolid-state battery storage venture announces thatit has successfully doubled the storage capacity ofresidential or commercial batteries, and real estateinvestors had invested in such a venture, the landlordwins in three ways: 1) from its venture investment, whichis now significantly higher in value 2) from its abilityto drive energy cost reductions within its portfolio viadeployment of the improved battery technology and 3)from the avoidance of taxes on carbon emissions thatgovernments are increasingly imposing.

Climate Tech for Real Estate: The Elephant in the Room 3No other capital provider in the world outside of realestate owners has this many synergistic value creationopportunities for such a clean energy technology. Otherexamples of R&D investment opportunities which driveimmense value to real estate owners include electricand geothermal heat pumps, next-generation distributedsolar and storage, and next generation insulation andbuilding materials.Just as there is opportunity to invest in asset heavy,deep technology R&D, there is opportunity to investin asset light, software solutions to help facilitate netzero buildings. Such investment opportunities spanacross categories including demand response, energyanalytics, renewable energy trading, and carbonmeasurement. Real estate venture investors are in aunique position to accelerate new software adoptiongiven their expertise and strategic LP relationships withbuilding owners.Many climate tech investors are betting on a futureworld where large office buildings with on site powerand storage can sell excess power back to the grid orto nearby buildings—turning what was previously anoperating expense into a revenue source.Such a fundamental change to the nature of the officeasset for example, is a unique instance of technologydisruption actually improving the economics of a legacyreal estate asset. As revenue within office buildingsbecome increasingly pressured by work from hometrends, landlords should find new ways to drive growthin their buildings, with reducing operating expensesbeing the most compelling option.There is a strong argument to be made that a betterpolicy framework is needed to align real estate ownersand municipalities in the joint mission to decarbonizebuildings. One such policy solution is to mandateclimate tech R&D in proportion to an owners emissions,rather than a flat tax which will go into the pocket of thelocal government and spent on unrelated issues whichdo not accelerate the transition to carbon zero buildings.I’ve argued for that here in this post. The more landlordsunify in their approach to prioritize capex into climatetech R&D, over say cosmetic upgrades, the larger thepie for the entire real estate community. Solving thiscollective action problem is challenging but doable, solong as policy is improved.Famed technology investor Chamath Palipatiya recentlywent on record tweeting “The world’s first trillionairewill be made in climate change.” Building owners andventure investors would be wise to be part of the capitalstack of that future trillionaireHOW WE GOT HEREBefore jumping into the quickly evolving landscapeof climate technology for real estate, it’s important tobriefly reflect on how we got to this point—in order toappreciate how early this opportunity is. If 2019 hasbeen heralded as “the year that the world woke upto climate change,” it is perhaps even more so, theyear that real estate, the worlds largest asset class,became thrown into the mix. Several forces including1) new regulation 2) changing tenant preferences and3) preferential allocation in capital markets towards“greener” real estate all combined in 2019 to createwhat one real estate technology investor, Fifth Wall,described as a “watershed moment for the industry.”Amidst this sea change, Fifth Wall was one of the firstto articulate why the convergence of these forces is themost significant event to ever affect the commercial realestate industry. In response they announced the firstever climate venture fund for real estate, and dubbedthe mission to decarbonize real estate as the “moonshotof our time.” The below graphic summarizes the threeunique mega-trends that combined in 2019 to catalyzethe beginning of such an unprecedented moment forreal estate.

4 kleinmanenergy.upenn.eduFIGURE 3: GLOBAL MEGATRENDS CATALYZING MASS BUILDING DECARBONIZATIONThe confluence of several key forces have created the greatest technological challenge in the history of real estate.Global Mega Trends:A)Increasingly Strict Regulations at the Local Level 2 019 NYC Local Law 97—requires a 40% drop in GHG emissions by 2030 and an 80% drop by 2050(applies to buildings over 25 square feet, or about 50,000 buildings across NYC). L os Angeles Green New Deal—New buildings must be net-zero carbon by 2030, zero-emissiontechnologies by 2050 for remaining building stock. E U Renovation Wave—passed in 2020, requires a 60% emissions reduction by 2030, and an 18%reduction in heating and cooling demand. Estimated to cost 3 trillion in energy efficiency retrofits.B)Changing Tenant Expectations M ajor tenants from a variety of industries such as Microsoft, Amazon, and BP have all announcedsignificant carbon reduction goals over the coming decades. G oogle, one of the largest tenants in New York City, has aggressive carbon-neutrality goalsfor its offices.C) Preferential Allocation in Capital Markets B lackrock’s CEO Larry Fink announced its funds will consider carbon emissions when evaluatinginvestment decisions; Real Estate is the largest asset class in the world, valued at over 50 trillion. Standard ESG and carbon footprint reporting is beginning to enter the national conversation.THE INVESTABLE UNIVERSEThe investment opportunities within the intersection ofreal estate and climate tech are vast. Furthermore, thetechnologies and underlying companies paving the wayin each of these subsectors range drastically along thespectrum of R&D and technology risk. Accordingly, thispaper has bifurcated the universe of real estate andclimate technology into eight distinct categories, andthen overlaid each segment with a two-dimensionalmatrix plotting the most promising companies in eachsector based on its level of deep technology exposure(i.e. asset heavy vs. asset light) by its overall potentialto reduce emissions (a direct proxy for the size of themarket opportunity). We believe that real estate investors should commit morecapital into upstream, high R&D companies with thehighest emissions reduction potential while prop techVCs should focus on the more traditional venture backedbusinesses, the asset light, low R&D software enabledmodels that offer the most potential to reduce emissions.

Climate Tech for Real Estate: The Elephant in the Room 5FIGURE 4: MARKET MAP: THE INVESTABLE UNIVERSE WITHIN CLIMATE TECH FOR BUILDINGSThe opportunity set is vast and includes both traditional asset light venture backed business models and more deep technology high R&Dbusiness models that offer upside to real estate owners.Energy-as-a-ServiceBuilding Management & AutomationHeating & Cooling TechAdvanced Building MaterialsDistributed Energy SolutionsCarbon ReportingSmart Façade & WindowsLighting TechProp-tech venture investors and traditional real estate owner/operators should think critically about how they could invest in climate technologysolutions and drive adoption and cost reductions in the value chain.

6 kleinmanenergy.upenn.eduFIGURE 6: BUILDING MANAGEMENT & AUTOMATIONFIGURE 5: ENERGY-AS-A-SERVICEPROP TECH INVESTORSREAL ESTATE INVESTORSREAL ESTATE INVESTORSEMISSIONS REDUCTION POTENTIALEMISSIONS REDUCTION POTENTIALPROP TECH INVESTORSLEVEL OF R&D REQUIREDNote: market map limited to private companies onlyLEVEL OF R&D REQUIREDNote: market map limited to private companies onlyENERGY-AS-A-SERVICEBUILDING MANAGEMENT & AUTOMATIONGenerally speaking, the Energy-as-a-Service (EAAS)market consists of companies that are reducing abuilding’s energy footprint through some combinationof automation, internet of things, sensors, and softwaremanagement tools. It is estimated to be a 58 billionmarket and is currently serving on the front lines ofthe building decarbonization mission, with sourcesestimating a 15% compounded annual growth rate overthe next decade (Grand View Research 2020).Within the overarching energy services category wefind companies specializing in energy efficiency anddistributed energy and storage, as well as a hostof other products which we have grouped into thesubtopic “Building Management & Automation.” In ourmarket map, this category includes: demand response;property and equipment management, energy auditing,forecasting, billing, and overall systems automation.While this segment has traditionally been dominatedby large energy service companies (ESCO’s) such asSiemens or Ameresco, Silicon Valley is making a pushto bring the industry into the next generation. CarbonLighthouse is one such example. They’ve raised 70million in venture funding from notable investors CoxEnterprises and Tesla co-founder JB Straubel. Theyalso have a 65 million project finance balance sheetfrom Generate Capital, which they use to make upfrontinvestments in energy efficiency projects so that theircustomers (building owners) can have zero upfrontinvestment. Carbon Lighthouse is developing cuttingedge technology to improve their ability to underwriteand implement energy efficiency projects, their businessmodel predicated on taking a percentage of the utilitysavings (St. John 2019).Of course, separating out the pure energy efficiencyretrofit companies from the startups focusing onmore general building management is more art thanscience, and there is overlap. Enertiv, Acquicore, andLogical Buildings are some of the leaders in this space.PassiveLogic is newer to the scene and just raised 16million in their series A from RET Ventures—they aregenerating attention for their differentiated “physicsbased approach,” which relies on replicating thephysical building in the virtual world in order to simulatemore precise building management systems.

Climate Tech for Real Estate: The Elephant in the Room 7FIGURE 7: HEATING & COOLING TECHREAL ESTATE INVESTORSEMISSIONS REDUCTION POTENTIALPROP TECH INVESTORSLEVEL OF R&D REQUIREDNote: market map limited to private companies onlyHEATING & COOLING TECHFossil fuel based space and water heating in buildingsconstitutes 10% of global emissions, and nearly onethird of all real estate emissions (excluding construction).As a result, this investment category is drawingsignificant attention (Billmoria 2018). Air-sourced heatpumps and ground-sourced geothermal heat pumps aretwo technologies that are expected to lead the chargein helping buildings electrify, and eliminate their fossilfuel usage (assuming concurrent growth in clean energypenetration to the electric grid). Heat pump technologyis well positioned for rapid growth and adoption.Currently, just 10% of existing residential homes in theUnited States use heat pumps for space and waterheating, whereas 43% of new construction installedheat pumps in 2017. There is opportunity to invest innew business models that are helping buildings converttheir existing equipment to heat pumps, and there isalso opportunity to invest upstream in the company’smanufacturing heat pumps in order to expedite costreductions (Electric Power Research Institute 2018).Two technology startups in this space are Bloc Power,backed by Andreesen Horowitz, which offers no moneydown heat pumps to multifamily buildings in the U.S.,and Dandelion, an X (formerly Google X) spinoutinnovating within geothermal that is backed by thelargest single-family homebuilder Lennar, as well asGoogle Ventures.Expect geothermal heat pumps to be a prime beneficentof further cost reductions and innovations in tunnelingcoming from Elon Musk’s Boring Company. FervoEnergy is a Breakthrough Energy Ventures backedcompany, that is advancing the drilling technologies andother key components of the geothermal heat pumptechnology, and would be a good opportunity for realestate investors to invest long term capital.

8 kleinmanenergy.upenn.eduFIGURE 8: ADVANCED BUILDING MATERIALSPROP TECH INVESTORSREAL ESTATE INVESTORSEMISSIONS REDUCTION POTENTIALREAL ESTATE INVESTORSEMISSIONS REDUCTION POTENTIALPROP TECH INVESTORSFIGURE 9: DISTRIBUTED ENERGY SOLUTIONSLEVEL OF R&D REQUIREDNote: market map limited to private companies onlyLEVEL OF R&D REQUIREDNote: market map limited to private companies onlyADVANCED BUILDING MATERIALSDISTRIBUTED ENERGY SOLUTIONSConcrete and steel, the two most widely used buildingmaterials, together account for roughly 8% of globalemissions. There are a handful of technology startupsusing lower carbon input and higher carbon utilizationprocesses in order to reduce emissions in theproduction of these materials. Bringing the costs downfor these technologies is necessary to achieve net zerobuildings for new construction. A few names leading thepack in this space include Boston Metal, CarbiCrete,Carbon Cure, and Solidia. Katerra is building a factoryto assemble pre-fab mass timber buildings, a far moresustainable building frame than concrete and steel.Distributed energy essentially refers to electricalgeneration or storage at the local building level, suchas solar panels or lithium ion batteries. While thishardware has come down dramatically in costs over thelast decade, there is still ample white space to investupstream in the next generation of battery and solartechnology such as Solid Power—a startup working onsolid-state batteries (an order of magnitude improvementfrom lithium ion), and Stem—one of the original andlargest private companies in the energy storage market.There is also a plethora of venture backable softwaresolutions that are being designed to help usher in anera where buildings are generating, storing, and oftenselling their own energy such as Blueprint Power andPower Ledger.

Climate Tech for Real Estate: The Elephant in the Room 9FIGURE 10: CARBON REPORTINGPROP TECH INVESTORSREAL ESTATE INVESTORSEMISSIONS REDUCTION POTENTIALREAL ESTATE INVESTORSEMISSIONS REDUCTION POTENTIALPROP TECH INVESTORSFIGURE 11: SMART FAÇADE & WINDOWSLEVEL OF R&D REQUIREDNote: market map limited to private companies onlyLEVEL OF R&D REQUIREDNote: market map limited to private companies onlyCARBON REPORTINGSMART FAÇADE & WINDOWSFast forward ten years and it is hard to imagine a worldwhere public real estate companies are not requiredto file their audited carbon emission scoring, much likethe way they are required to file accounting financialswith the SEC. The go-to carbon auditor and reportingcompany is going to reap immense rewards (howeverit’s worth pointing out that such auditors should work forcitizens and not private businesses, where there may beincentivized to be generous in their emissions audits).Some of the more frontier hardware and buildingmaterial technologies for maximizing energy efficiencyinclude the use of photovoltaic glass façade (Onyx,Physee), smart windows that feature automated tintingand blinds controls, and windows with the ability tocommunicate with indoor building lighting in order toreduce lighting demand during peak sunlight hours(View, Heliotrope, Kinestral). Danish companiesare also experimenting with prefabricated insulationimprovements for existing buildings.In September 2020, a leading sustainable infrastructureREIT Hannon Armstrong became the first REIT tojoin the partnership for Carbon Accounting Financials(PCAF). PCAF is a consultancy helping to create acoalition of companies to agree on consistent carbonaccounting frameworks. There is ample white space for

PWC recently listed the top 13 disrupters to the real estate industry in its annual 2021 Disrupters for Real Estate report. Climate tech for real estate was nowhere on the list (PWC 2021), a CLIMATE TECH FOR REAL ESTATE THE ELEPHANT IN THE ROOM Stephen Rothstein March 2021

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