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Greening the Commercial Real Estate Industry
By: Joan Pino
overv i ew
11150 SU N SET H I L LS ROAD, SU ITE 300 | RESTON , VA 20190
500 N WEST SHO RE B OULEVARD , SU ITE 605 | TAM PA , FL 33609
M ID -ATLAN TIC 7 FOX D EN PLAZ A , SU ITE 100 | M CH EN RY M D 21550
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TABLE OF CONTENTS:
CommercialRealEstate&theGreenBuildingMovement
WhatIsBuildingGreen?
GreenBuildingClassificationPrograms&RatingSystems
GreenBuildingPerspectives&BottomLineBenefitso Developerso Ownerso Tenants
GreenLeases
GovernmentIncentives&MandatesforPrivateCommercialBuildings
GreenBuildinginaDownEconomy
SuccessfulCommercialGreenBuildingProjects
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COMMERCIAL REAL ESTATE & THE GREEN BUILDING MOVEMENT
Themuchanticipatedgreenbuildingmovement,whichstartedwithdedicatedgrassroots
environmentalactivists,hasfinallyreachedthecommercialrealestateindustry.Globalcorporationsaswell
asfederal,state,andmunicipalgovernmentsareseeingtheneedforinterventionontheirbehalftogreen
buildingsfor
anumber
of
reasons.
Currently,
buildings
use
immense
amounts
of
key
resources
and
produce
anexcessivequantityofwasteandpollution,whichisdetrimentaltothesurvivalofourplanet.Untilthis
pointintime,theadjustmentinconventionalpracticesrequiredbyprofessionalsintheindustrycoupled
withwidespreadspeculationregardingthegreencostpremiumcurtailedthedevelopmentofsustainable
buildings.Growingnumbersofsuccessfulnewgreenbuildingsandexistingbuildingretrofitssupplyevidence
thatconfirmsfeasibilityofsustainable,costeffectivebuildings.Withrisingenergycosts,existingand
loominggovernmentmandates,andsocialresponsibilityattheforefrontofconcernforcorporations,the
shifttobuildingnewandupdatingexistingbuildingswithsustainabledesignandhighenergyefficiency
standardsisheretostay.
AstudyreleasedbyCoStarGroupin2008statednongreenbuildingsaregoingtobecome
obsolete.1Thisstatementmayseemexaggeratedandimpracticable,yetitisaneverimpendingtruthwhich
thecommercialrealestateindustrymustconsider.Anindustryprofessional,LeeArnold,CEOofColliers
Arnold,saidinarecentinterviewonTampaBaysStudio10daytimetalkshowyouwillnotseecommercial
officebuildingsthatarecompetitiveinthefutureiftheyarenotgreen,itwillimpacttheircapratesand
value.2Althoughsomeleadersintheindustryareembracingthemovement,othershavebeenslowto
realizethatsustainablebuildingsarenotjustatrendyfad.Theyprovideampletangibleandintangible
benefitstoallwhoareinvolvedwiththem,fromdeveloperstotenants.Whetheritsincreasedassetvalue,
significantlydecreasedoperatingcosts,oraboostinemployeeproductivity,everyonehassomethingtogain
fromthetransformationofcommercialrealestateintoasustainableindustry.
1 Miller, Norm, Jay Spivey and Andy Florance. Does Green Pay Off? The Journal of Sustainable Real Estate (8 July 2008). 29 June 2009
2 Commercial Development Turns Green. Studio 10. Gannett Broadcast Station. WTSP-TV, St. Petersburg.
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U.S. Buildings Account For...
14%
30%
4 0%38%39%
72%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Electricity
Consumption
Energy Use CO2
Emissions
Raw Materials
Use
Waste Output Potable Water
Consumption
WHAT IS BUILDING GREEN?
Currently,conventionalbuildingsintheU.S.haveanenormouscarbonfootprint(seetable1)1
whichcanbepreventedandreversedthroughtheconstructionofnewandretrofittingofexistingbuildings
tobeenvironmentallyfriendly,orgreen.2Greenbuildingsaredesigned,constructed,andoperatedto
maximizeoperational
efficiency
and
minimize
environmental
impact.
There
are
several
different
green
elementsthatcanbeincorporatedintoabuildingthatnotonlyreduceenvironmentalimpactbuthavealso
proventobecosteffectiveinvestments.
1 The numbers in the chart are representative of the impact of all buildings in the U.S., including commercial, residential, industrial, and infrastructure
construction, on the U.S. environment.
2 U.S. Green Building Council. 2008. U.S. Green Building Council.
Table 1
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Thewidelymisunderstoodcostofgreenbuildingmaterialscontinuestodeferdevelopmentand
constructionofenvironmentallyfriendlybuildings.Intheearlystagesofthegreenbuildingmovement,it
wasinfactmoreexpensetobuildagreenbuildingratherthanaconventionalbuildingduetotheextracost
ofgreenmaterials.However,asindustryprofessionalshavebecomeinformedonandexperiencedwith
greenbuildingpractices,thegreencostpremiumhasbeguntodisappear.Thiscouldbeattributedsimply
todemandduetoincreasedmarketadaptation,whichstimulatedavailabilityandthusloweredprices.
Comparativecoststudieshavebeenconductedtoshowthatgreenbuildingsdonotrequireanincreasein
capitaloutlay.Forexample,DavisLangdon,aglobalconstructionconsultancyfirm,releasedastudyin2007
thatfound:
Thereisnosignificantdifferenceinaveragecostsforgreenbuildingsascomparedtonon
greenbuildings.Manyprojectteamsarebuildinggreenbuildingswithlittleornoadded
cost,andwithbudgetswellwithinthecostrangeonnongreenbuildingsandsimilar
programs.
Thisparticularstudyalsoexaminedandconsideredtheabilitytoachievegreenbuildingstandardsthrough
lowercoststrategies,3whichisbecomingapopularcosteffectivemeanstocertificationandrecognition.
3 Matthiessen, Lisa Fay and Peter Morris. 2007 The Cost of Green Revisited. Davis Langdon, 2007.
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LEEDCertificationProcessOverview
DecideifLEEDisalignedwithoverall
goalshttp://www.usgbc.org/Displa
yPage.aspx?CMSPageID=1718
RegisterprojectwithUSGBC&
assembleprojectteam
https://www.leedonline.com
Prepareapplication(utlizetemplates/forms
andtools)
Projectadministrator
submitsprojectforreview
Formalapplicationreview
conductedbyGreenBuildingCertification
Institution
Certification
projectteamcaneitheracceptorappealdecision
GREEN BUILDING CLASSIFICATION ROGRAMS & RATING SYSTEMS
Classificationprogramsandratingsystemshavebeencreatedin
ordertoeducateprofessionalsandsupporttheirgreenbuilding
aspirations.At
this
time,
the
two
most
common
classification
systems
are
theU.S.GreenBuildingCouncils(USGBC)LEEDGreenBuildingRating
SystemandtheEnvironmentalProtectionAgencies(EPA)ENERGYSTAR
forBuildingslabel.
USGBCcreatedLEED,whichstandsforLeadershipinEnergyand
EnvironmentalDesign,withthegoalofprovidingacomprehensivesystem
fordesigning,constructing,andoperatinghighperformance,sustainable
buildings.USGBChighlyrecommendsandencouragesimplementationof
LEEDintheearlystagesofaprojecttoavoidcomplicationsandpotential
addedcosts.Tobegintheprocess(seetable2),aprojectteammust
registertheirprojectwithUSGBCwiththeintentofachievingcertification
fortheirproject(registrationis$450formembersoftheUSGBCand$600
fornonmembers)4.Onceregistered,USGBCprovidestheprojectteam
withavarietyoftoolsandresources,includingreferenceguidesand
templatesfordocumentation.Uponcompletionofthegreenbuildingand
projectapplication,USGBCsGreenBuildingCertificationInstitute(GBCI)
awardsoneoffourlevelsofLEEDtorecognizethebuildingsdegreeof
achievementandperformanceinfivekeyareas:sustainablesite
development,watersavings,energyefficiency,materialsselectionand
indoorenvironmentalquality.
4 Process Overview. 2008. Green Building Certificate Institute. 10 July 2009. www.gbci.org
Table 2
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100 base points plus 6 possible Innovation in Design and 4 Regional Priority
points:
Certified:4049Points
Silver:5059Points
Gold:60
79
Points
Platinum:80+Points
Applicable LEED Rating Systems for Commercial Real Estate:
NewConstruction
ExistingBuildings:OperationandMaintenance
CommercialInteriors
o Insupport
of
the
tenant
improvement
market
CoreandShell
Retail
o Addressesthespecificanddistinctiveneedsofretailspaces
Healthcare
o Addressesthespecificneedsofhealthcarefacilities
ThefeeUSGBCchargesforcertificationisdifferentforeveryprojectbecauseitisdeterminedbased
onavariety
of
factors,
such
as
size
and
type
of
building,
credits
selected
to
complete,
level
of
certification,
andUSGBCmembership.Thiscostisacontributortothegreencostpremiumandaddsonaverage$2,000
tothetotalcostofabuilding.5ThecostofLEEDdoesnotincludesoftcostssuchasthetimeandexperience
neededtocompletetherequireddocumentationforcertification.Inanattempttofurtherencouragethe
developmentofgreenbuildings,USGBCmadeLEEDfreeforprojectsthatreceivethehighestlevelof
certification,platinum.
TheoveralltotalcostdifferenceofbuildingtoLEEDstandardsversusconventionallyhasbeena
sourceofdebateamongmanyexecutivesinthecommercialrealestateindustry.Understandably,people
arenotwillingtoincreaseinitialcapitaloutlaywhentheyareseekingshorttermprofitsandmaynotrealize
thekeylongtermbenefitsgreenbuildingsoffer.TheDavisLangdonfirmconductedastudyon600buildings
in19statesinordertoaidprofessionalsinunderstandingthetruecostofLEEDcertifiedbuildingscompared
totraditional,nongreenbuildings.ThestudiesmainfindingswerethatconstructingabuildingtomeetLEED
silverstandardsaddsonaveragelessthana2%premium.Thestudyfurtherstatedtherewasnostatistically
5 FAQ: LEED Green Building Classification System. U.S. Green Building Council. 2008.
'LEED' and related logo is a trademark owned by the U.S.
Green Building Council and is used by permission.
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significantcostdifferencebetweenaLEEDcertified(thelowestlevelofcertification)andanongreen
building.6AlthoughLEEDcertificationisntnecessarytoconstructagreenbuilding,itsuppliesthirdparty
verificationthatabuildingismaximizingoperationalefficiencywhileminimizingenvironmentalimpact,
whichmaybeimportanttoperspectivetenantsandclients.
AsaU.S.federalgovernmentagency,theEPAhasseveralmonetaryandeducationalresources
availabletoutilizeintheadvancementofitsoverallgoaltoprotecthumanhealthandtheenvironment.The
EPAcreatedtheDesignedtoEarntheENERGYSTARandtheENERGYSTARforBuildingslabelprogramsto
guidetheU.S.inmeetingaggressiveenergyperformancetargetsneededtocombatglobalwarmingwhile
boostingbusinessesbottomlines.Theseprogramsprovidequality,freealternativestoUSGBCsLEEDGreen
BuildingRatingSystem.TheENERGYSTARprogramratesbuildingsbycomparingthemtoanationwide
industrydatabasemadeupofanalogousbuildings(typeandsize)andscoringthemonascalefrom1100.
Buildingsmustscoreaminimumof75points(top25%)toqualifyfortheENERGYSTARlabel.
DesignedtoEarnENERGYSTARisaprogramforthedesignofnew,energyefficientbuildingswhich
confirmstheyaremeetingstrictenergyperformancestandards.Althoughthisprogramisonlyfornew
buildings(definedbytheEPAasoneswhichhavenotgeneratedutilitybills),thesestandardscanbemetby
existingbuildingsthroughvariousimprovementsandincorporationofproductsthathaveearnedthe
ENERGYSTAR.ExistingbuildingsthatmakethenecessarychangescanearntheENERGYSTARforbuildings
label.Currently,over1billionsquarefeethavequalifiedfortheENERGYSTAR.7
6 Costing Green: A Comprehensive Cost Database and Budgeting Methodology. Davis Langdon, 2004.
7 Spring 2009 ENERGY STAR Snapshot. Measuring Progress in the Commercial and Industrial Sectors. 2009: 1-2. ENERGY STAR.
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ENERGY STAR for Buildings Space Types Applicable for Commercial
Real Estate:
Offices
Retailstores
Hospitals
Hotels/motels
Supermarkets/grocerystores
Banks/financialinstitutions
Medicaloffice
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GREEN BUILDING PERSPECTIVES & BOTTOM LINE BENEFITS
Thequestionofwhoseresponsibilityitistotransformcommercialrealestateintoasustainable
industryhasbeeneagerlydebatedoverthepastdecade.Whilesomefeelitisataskfordevelopers,others
assertthatifownersandtenantsdemandit,greenbuildingswillbecomereadilyavailableinresponse.
Althoughall
sides
of
the
debate
have
valid
grounds,
the
reality
is
that
the
responsibility
of
greening
the
industryrestsinthehandsofeveryoneinvolved.
Developers
Speakwithanydeveloperandtheywilltellyouthattheirgoalistodelivertotheirclientthebest
buildingaspecifiedbudgetandadefinedtimeframewillallow.Someclaimthatgreenbuildingsarevirtually
impossibletobuildasaresultofthesestrictlimitations,especiallyintougheconomictimeswhenclientsare
watchingeveryextradollaraprojectrequires.Whilethisjustificationmayhavebeenrelevantinthepast,
whengreenconstructionmaterialshadapremiumduetothelackofknowledgeandavailabilityinthe
industry,itisnolongergermane.Nowthatthecostsofgreenbuildingmaterialsarebecomingcompetitive
withconventionalmaterials,developerswhopreviouslydismissedgreenbuildingsshouldtakeasecond
look.Greenbuildingshavebeensustainablydesignedandconstructedwithinroughlythesamebudgetsand
timeframesasconventionalbuildingprojectsacrossthecountry.Decreasedmaterialcostscoupledwith
costsensitive,strategicchoicesofintegratedsustainabledesignelementshavemadegreenbuildingsa
superiorinvestment.
Althoughdevelopers
must
make
an
initial
investment
to
learn
green
building
techniques,
they
can
gainafairlycompleteunderstandingfromcompletingasingleproject.Itishighlyrecommendedtoseek
assistancefromagreenbuildingconsultantorhavesomeoneknowledgeableaboutgreenbuildingonthe
projectteam.Afterthisinitialobstacleisaccomplished,greenbuildingpracticeshaveproventobeeasily
adaptableandasstraightforwardasconventionalapproaches.Theinvestmentineducationcanbequickly
recoveredthroughprofitsmadefromanincreaseinthenumberofprojectsacquiredsimplybecauseof
greenbuildingknowledge.Studieshavealsoshownawillingnessofcompaniestopaymoreforgreenspace.
A2007studyconductedbytheJonesLangLaSallefirmsurveyedcorporatecommercialbuyersdemandfor
green
space
and
found
that
77%
would
pay
more
for
green
office
space.
8
Additionally,
a
2008
CoStar
Group
studyfoundbuildingsthatearnedtheENERGYSTARsellonaveragefor$61persquarefootmorethan
comparablenongreenbuildings.9
8 This survey was preformed again in 2008 to update for changes in the economy. The results show that 40% of corporate real estate executives will pay
up to 10% more to rent or occupy a sustainable building.
9 Miller, Norm, Jay Spivey and Andy Florance. Does Green Pay Off? The Journal of Sustainable Real Estate (8 July 2008). 29 June 2009
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Developerswhohavetakenthetimetoeducatethemselvesingreenbuildingtechniquesand
practicesareproudoftheirmodernapproachtodesignandnoteworthysuccess.Companiesare
increasinglyseekingoutdeveloperswhoareknowledgeableaboutgreenbuildingandcanoffera
comprehensiveservicethatwillensuretheirbuildingmeetshighenvironmentalandenergyefficiency
performancestandards.Greenbuildingsofferadegreeofqualitysimplyunattainablebynongreen,
conventionalbuildingsandthisfactisbecomingmoreapparentasthenumberofgreenbuildingsgrows.Ina
recentinterviewwithMHN,MarnieAbramson,principalofTheTowerCompanies(arealestate
developmentcompanybasedinRockville,MD),said
Therearenomoreexcusesfordeveloperstoignoresustainabledesign.Iftheydo,their
propertieswillbedingeddowntheline.Youjustcantcompeteanymorewithoutagreenand
sustainablestrategy.10
TheTowerCompaniesisanexampleofoneofmanytopcommercialrealestatedevelopmentcompanies
thatholdthisview.Asemphasisoncorporateresponsibilitycontinuestoincreaseandgovernmentsacross
thecountrymandategreenbuildings,theflighttofirmsfamiliarwithsustainabledevelopmentwill
undoubtedlysoar.
Owners
Intheslowyetnecessaryprocessofconstructingandconvertingbuildingsintoenvironmentally
conscious,
sustainable
operations,
owners
net
leasing
their
buildings
may
feel
as
though
they
are
incurring
thebulkofthecostwhiletheirtenantsreaptheevidentfinancialbenefits.Althoughthisistruetosome
extent,ownersofnetleasedpropertieshavetheopportunitytorealizekeybenefitswhichmakegreening
theirbuildingsfinanciallyandeconomicallysensible.Ownersthatmakethedecisiontogreentheir
propertiessoonerratherthanlaterhavethepotentialtobenefitfromsomegovernmentincentivesanda
clearcompetitiveadvantage,bothofwhichwillinevitablyslowlydissolveasmorebuildingsaregreenedand
exceedinglyfeasiblegovernmentmandatesareimplemented.
Tenantsacrossthenationarebeginningtodemandthegreeningofspacetheyleaseduetothe
economic,environmentalandhumanhealthbenefitsgreenbuildingsoffer.Asurveyoftenantsconductedin
2008byCoreNetGlobalandJonesLangLaSallefoundthat76%considerenergy/sustainabilityamajorortie
10 Russo, Mike. Top 10 Rules for Green Success. Multi-Housing News Online. (5 May 2009). 20 July 2009
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breakerfactorintheirlocationdecisions.11ForwardthinkingtopU.S.companies(andexcellenttenants)
whichhavestartedtooperateoutofUSGBCLEEDcertifiedorENERGYSTARlabeledbuildingsinclude:
Walgreens PizzaFusion Starbucks
REI PNCBank Subway
ChipotleMexicanGrill BestBuy McDonalds
WholeFoods OfficeDepot Staples
Commercialrealestateownersofgreenbuildingscangainacompetitiveadvantagebysecuring
andretaininghighquality,desiredtenants.Recentstudiesshowthatgreenbuildingsgenerallyhavehigher
occupancyratesandrents.Forexample,a2008CoStarGroupstudy(seetable3)12
foundthatLEEDcertified
buildingshavea4.1%higheroccupancyrateandrentfor$11.33persquarefootmorethanconventional
buildings.13
Green Office Buildings v. Non-Green Office Buildings
Building Type Occupancy Rate Rental Rate ($/ft)
ENERGY STAR Labeled 91.50% $30.55
Non-ENERGY STAR 87.90% $28.15
LEED Certified 92% $42.38
Non-LEED 87.90% $31.05
Althoughtenantdemandservesasthepivotalreasonforownerstogreentheirproperties,
increasedasset
value
and
risk
aversion
are
other
distinct
advantages
of
green
buildings.
Using
the
income
approachtoassetvaluation,assetvalue=NOI/capitalizationrate,theNOIearnedbytenantsisanimportant
factorincalculatingthevalueofabuilding.Netleasetenantsoccupyingenergyefficientbuildingshave
higherNOIsduetoavarietyoffactorssuchasincreasesinproductivityandsignificantsavingsonenergy
costs.Buildingsupgradedwithefficientsystemstypicallysavebetween10and2opercentonoperating
expenses.14
ThissavingsisdirectlyreflectedinNOIsinceNOI=revenuecosts.Forexample,alimitedservice
restaurantoperatingoutofabuildingthatachievesa10%reductioninenergycostscanincreasenetprofit
11 The Green Phoenix: A Flight to Quality in Challenging Times. Perspectives on Sustainability. April 2009. Jones Lang LaSalle. 22 July 2009
.
12 This study compared all USA based ENERGY STAR rated office buildings (many of which are LEED certified) to a large sample of non-ENERGY
STAR rated office buildings.
13 Miller, Norm, Jay Spivey and Andy Florance. Does Green Pay Off? The Journal of Sustainable Real Estate (8 July 2008). 29 June 2009
14 Commercial Real Estate: Looking For Energy Solutions. U.S. Environmental Protection Agency. 24 July 2009
.
Table 3
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marginsbyasmuchas4%.15
Therefore,ownersofgreennetleasedbuildingscanbenefitfromincreased
assetvaluethroughtenantsattaininghigherNOIsviaenergyefficiency.
Ownersofnetleasedpropertiesareessentiallylookingforalowrisk,fixedreturnsimilartothatof
acertificateofdepositorgovernmentbond.Fundamentally,greenbuildingsaremoresecureinvestments
thanconventionalbuildingsbecausetheyarelesssusceptibletomarketvolatility,acentralcomponentof
riskininvesting.Thiscanbedistinguishedfromstudieswhichhaveconfirmedtheirhigherrental,
occupancy,andretentionrates.Theyarealsorecognizedforexcellenceinquality,whichmitigatesseveral
healthrisksassociatedwithconventionalbuildingsheldtolowerstandardsofindoorenvironmentalair
quality.Forexample,SickBuildingSyndromehasbeenthesourceofanumberoflawsuitsagainst
unsuspectingbuildingownersoverthepastseveralyears.16
SickBuildingSyndromecanbeavoidedingreen
buildingsbecausetheyadheretostrictindoorairqualitystandards.
Commercialrealestateinvestorsdebatingwhetherbuyinggreenbuildingsorretrofittingtheir
currentpropertieswillpayoffshouldregardtheundertakingasawaytoensurecompetitiveassetsinthe
future.AsmorebuildingsconstructedandretrofittedtostandardssuchasLEEDandENERGYSTARproffer
competitiverents,tenantswillcertainlychoosetooccupythemovernongreenpeerbuildings.Allthings
considered,greenbuildingsoptimizelifecycleeconomicperformance,17
establishingthemashighquality
realestateinvestments.
Tenants
Greenbuildingsofferanidealspaceforalltenantstooccupy.Occupantsofgreenbuildingsareable
toenjoymanyadvantagesunattainableinnongreenbuildingssuchas:
Reducedoperatingcosts
Improvedworkingconditionsandindoorairquality(IAQ)
o Reduceabsenteeism
o Boostproductivity
o Increaseworkersatisfaction
o Higheremployeeretention
Enhancedpublicimage
Governmentfinancialincentives
15 ENERGY STAR for Retail. Environmental Protection Agency. 24 July 2009 .
16 Hochman, Bonnie Y. and Laurence S. Kirsch. Protecting Occupants and Owners From Indoor Air Problems. Building Operating Management. Oct.
1990: 42.
17 U.S. Green Building Council http://www.usgbc.org
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Theseadvantageshavebeenconfirmedbyoccupantsofgreenbuildingsacrossthecountry.Greenbuildings
achievethesebenefitsthroughsustainabledesignandefficientsystemswhichsaveenergyandcreatea
healthierspacetooccupy.
StudieshaveshownthatIAQdirectlyrelatestoemployeeproductivity,whichaffectsbusinesses
bottomlines.AccordingtotheEPA,buildingrelatedillnessesaccountfor$60billioninlostproductivityin
theU.S.annually.18
AgroundbreakingstudyconductedbytheRockyMountainInstitutequantifiedindoor
airqualitybenefitsofgreenbuildingsanddemonstratedthatthebenefitsofgreenbuildingsarefarmore
thanjustenergycostsavings.Intheeightgreenbuildings(retrofittedornew)examinedinthestudy,
improvedairqualityfosteredimprovementsinproductivityofupto20%andreducedabsenteeismbyupto
25%.19
Thesenumberscouldpotentiallycontributetoreductionsinotherindirectcostssuchashealth
insurancepremiums,offeringtenantsseveralcompellingreasonstooccupygreenbuildings.
Researchhasshownastrongpositivecorrelationbetweentimeandmoneyspentbyconsumersin
storeswithincreasedlevelsofnaturallight,akeydesignelementinalmostallgreenbuildings.Astudy
conductedbytheCaliforniaEnergyCommissiononananonymousretailerconfirmedthiscorrelation.The
retailerexperiencedincreasesinsalesofupto40%instoresthathadnaturallighting.20
Thisisjustone
exampleofstrongpositiveconsumerresponsetogreenbuildings.Consumersgenerallyexpectcompanies
toupholdhighenvironmentalstandardsaspartoftheirsocialresponsibility.Onesurveyfoundthat75%of
consumersthinkitisimportantforcompaniestoprovideinformationonenvironmentalimpactand73%
thinkitisimportantforcompaniestohaveagoodenvironmentaltrackrecord.21
Inviewofthis,companies
thatchoosetooperateoutofgreenbuildingsenhancetheirpublicimageinamannerexceptionally
appealingtoconsumers,demonstratingyetanotheradvantageenjoyedbygreenbuildingtenants.
Differentleasestructuresfurtherenhancetenantbenefitsgarneredthroughoccupancyofgreen
buildings.Whether
tenants
are
responsible
for
taxes,
maintenance,
and/or
insurance
costs
of
their
buildings
willlargelyaffecttheirabilitytoacquirekeyquantifiablefinancialbenefits.Forinstance,NNNleasetenants
occupyinggreenbuildingsacquireasignificantadvantageovercompetitorsthroughdecreasedutilitycosts;
asavingswhichdirectlyincreasestheirprofitsandprovidesprotectionfromunstableenergyprices.With
energycostsincreasingatarateof68%peryear,22
tenantsneedtoseriouslyevaluatedifferencesinenergy
efficiencyamongbuildingstheyoccupy.TheNewBuildingsInstituteconductedastudyonenergy
performanceofgreenbuildingsandfoundthataverageenergyuseofLEEDcertifiedbuildingsis2530%
betterthanthenationalaverage.23
Furthermore,tenantsofgreenbuildingswhoareresponsibleforpaying
realestatetaxesareeligibleforfinancialincentivesofferedbysomemunicipalgovernments.
18 Fisk, William J. Health and Productivity Gains from Better Indoor Environments, The Role of Emerging Energy-Efficient Technology in Promoting
Workplace Productivity and Health. Lawrence Berkeley National Laboratory, Feb. 2002.
19 Browning, William D. and Joseph J. Romm. Greening the Building and the Bottom Line. Rocky Mountain Institute, Dec. 1994.
20 Daylight and Retail Sales. California Energy Commission, Oct. 2003.
21 Boston Consulting Group Global Green Consumer Survey, 2008; BCG Analysis.
22 Conserve Solutions for Sustainability. National Restaurant Association. 2009. 28 July 2009 .
23 Turner, Cathy and Mark Frankel. Energy Performance of LEED for New Construction Buildings. New Buildings Institute. 4 March 2008.
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GREEN LEASES
Acquisitionsoftriplenetleasedbuildingshavebecomeextremelypopularaspassiveinvestors
lookingforbondlikereturnsincommercialrealestatecontinuetoenterthemarket.InaNNNlease,several
oftheidentifiablebenefitsofgreenbuildingssuchaslowerutilitycostsandimprovedoccupantproductivity
flowdirectly
to
the
tenants
bottom
line.
Many
owners
of
NNN
leased
buildings,
content
with
their
existing
nongreeninvestmentsandunconvincedbyotherbenefits,consequentlyfindlittleincentivetoincur
greeningcostsfromwhichtheydonotdirectlyprofit.Greenleaseshavebeensuggestedasaremedyfor
thevalidapprehensionofownersregardingthedisproportionatefinancialburdeningreeningtheir
buildings.
Althoughgreenleaseisafairlynewtermincommercialrealestate,itissomewhatcomparableto
theconceptoftenantimprovement,1arecognizednotionintheindustry.Greenleasesarestructuredto
createincentivesandflexibilityforbothownersandtenantsingreeningcommercialbuildings.2Theyallow
ownersto
pass
on
some
or
all
of
the
costs
incurred
in
retrofitting
their
properties
to
achieve
green
building
standardssuchasLEEDtotenants,whichovercomestheaforementionedownerpredicament.Tenantshave
readilyacceptedgreenleasesasameanstogreeningbuildingstheyoccupybecauseoftheirconsiderable
savingsinoperatingcostsandotheradvantageousbenefits.Asforowners,greenleasesenablethemto
increasethevalueoftheirinvestmentthroughsustainableupgradespartiallyorfullypaidforbytheir
tenants.Inaddition,greenleasesaddressseveralspecificgreenmeasuresofwhichtraditionalleases
commonlypresentbarriers.Forexample,mosttraditionalleasesrequiretenantstouseonlynewmaterials
intenantimprovementsorinitialfitouts.3Thiswouldpossiblyexcludetheuseofrecycledmaterials,
presentinganeedlessbarriertotenantintegrationofsustainablematerials.
PassiveinvestorsinNNNleasedbuildingsshouldrecognizegreenleasesasasavvyapproachto
greeningtheirportfolios.Theyeliminatetheneedforextensiveownercapitaloutlayandensuretenant
satisfaction.Giventhatleasesoftenrepresentlongtermagreements,ownersandtenantswhooptfor
greenleaseswillbenefitfromresiliencyduringthedevelopmentofanticipatedgreenbuildinggovernment
mandatesinthefuture.
Aresourcethatcouldbeextremelyhelpfultoownersandtenantslookingtomakegreenupgrades
toexistingbuildingsistheENERGYSTARBuildingUpgradeValueCalculator.Thisfreetoolprovidedbythe
EPAallowsuserstoanalyzethefinancialvalueofcapitalinvestmentsinenergyefficiencymeasuresin
commercialreal
estate.
Even
though
it
was
originally
developed
for
office
properties,
the
majority
of
the
1 Changes made to a commercial or industrial property by its owner to accommodate the needs of a tenant. Who bears what portion of TI costs is
negotiated between the lesser and the lessee and is usually documented in the lease agreement.
2 Brooks, Michael. Green Leases and Green Buildings. 1 May 2008.
3 Brooks, Michael. Green Leases and Green Buildings. 1 May 2008.
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functionalityisapplicabletoallbuildingtypes.Belowisanexampleofusingthetooltoevaluateenergy
efficientupgradesinahypotheticalcasualdiningrestaurant:4
Property Information
Property Name Casual Dining Restaurant
Square Footage 6,500 +/-
Annual Utility Bill $63,600
Energy Project Information
Energy Efficiency Measure Cost Annual Savings
Demand Defrost Controller $500 $150
Tankless Water Heater $1,500 $1,700
Commercial Kitchens Ventilation System $3,000 $4,000
Replace Pre-Rinse Spray Valve with Energy Efficient Low
Flow Pre-Rinse Spray Valve
$50 $500
Replace Incandescent Blubs with CFLs $50 $400
Sub Total $5,100 $6,750
Additional Annual Savings for Labor and Supplies
Rebates (if any)
Financial Information
Analysis Term (years) 10 years
Discount Rate 8%
Capitalization Rate 8%
Financial Summary
Net Investment Cost $5,100
Net Investment Cost per SF $0.78
Simple Payback Period (SPP) .84 years
Return on Investment (ROI) 118%
Net Present Value (NPV) $35,425
Internal Rate of Return (IRR) 118%
Potential Impact on Net Operating Income (NOI)* $6,039
Potential Impact on Asset Value* $75,493
*Specifictoofficepropertiesandthereforemaynotberelevanttothisexample
4 Everything the tool is capable of calculating (such as loan financing) is not shown in the example. The tool can be accessed at:
http://www.energystar.gov/index.cfm?c=comm_real_estate.building_upgrade_value_calculator
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GOVERNMENT INCENTIVES AND MANDATES FOR PRIVATE
COMMERCIAL BUILDINGS
Ultimately,governmentmandateswillendtheongoingdebateovertheoptiontodevelop,own,
and/oroccupy
green
buildings.
Although
the
federal
government
does
not
currently
have
green
building
mandatesforprivatecommercialbuildings,severallocalgovernmentsacrosstheU.Sdo,including:
AlbuquerqueCity,NM AlexandriaCity,VA AnnapolisCity,MD BabylonCity,NY BaltimoreCity,MD BatteryParkVillage/Town,NY BostonCity,MA BrisbaneVillage/Town,CA CalabasasVillage/Town,CA ChambleeCity,GA CutlerBayVillage/Town,FL DallasCity,TX DoravilleCity,GA FayettevilleCity,AR GaithersburgCity,MD HealdsburgCity,CA
LakewoodCity,
OH
Long
Beach
City,
CA
LosAngelesCity,CA MontereyCity,CA MontgomeryCo,MD MountainVillage/Town,CO NapaCity,CA NormalCity,IL PaloAltoCity,CA PasadenaCity,CA PleasantonCity,CA RohnertParkVillage/Town,CA SanAntonioCity,TX SanFranciscoCity,CA SanJoseCity,CA SanRafaelCity,CA SantaCruzCity,CA SantaRosaCity,CA SonomaCity,CA StocktonCity,CA TaosVillage/Town,NM WashingtonCity,DC WestHollywoodCity,CA WindsorVillage/Town,CA
Alloftheabovecity,townandcountygovernmentsrequireprivatecommercialbuildingstomeet
specifiedgreenbuildingguidelinesorachievegreenbuildingcertification,eitherthroughUSGBCoranother
approvedstandard.5Manystates,citiesandlocalgovernmentsthatdonotyethavegreenbuilding
mandatesforprivatecommercialbuildingsofferincentiveswhichcanonlybereceivedthroughgreen
buildingcertification.Theseincentivesincludetaxabatement/credits,bonusdensity,expeditedpermitting,
grants,technicalassistance,permit/zonefeereduction/waiver,andrebates.
5 The requirements for private commercial buildings differ based on square footage and whether it is new construction. For example, the Taos
Village/Town, NM ordinance requires all new private commercial buildings greater than 6,000 sq. ft. to achieve LEED certification, whereas the green
building mandate in Baltimore, MD requires private commercial buildings of 10,000 sq. ft. or greater to a achieve a minimum of LEED Silver.
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Virginia Incentive Programs:
State
HB239(July1st,2008)
o
Declaredenergyefficientbuildings(definedasmeetingtheperformancestandardsof
LEED,EnergyStar,GreenGlobesorEarthCraft)tobeaseparateclassoftaxationfrom
otherrealproperty;Providesforlocalitiestolevyequalorlessertaxesonenergyefficient
buildings
Arlington County
GreenBuildingDensityInitiativePolicy(March14th,2009)
o Allowscommercialprojectsandprivatedevelopmentstodevelopsitesathigherdensity
levels
.05FARforLEEDCertified,.15FARforLEEDSilver,.35FARforLEEDGold,and.45
FARforLEEDPlatinum
Thereisalsoaheightbonusdensityofupto3stories
o Allprojectsmustcontributetoagreenbuildingfund6
Thecontribution($0.045persq.ft.GFA)isrefundedtoprojectsthatearnLEED
Alexandria City
GreenBuilding
Policy
(April
18th,2009)
o RequiresallnewcommercialbuildingstoachieveaminimumofLEEDSilvercertification
6 The money collected goes toward county-wide education and outreach activities.
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Florida Incentive Programs:
Hillsborough County
UpdatetoDevelopmentReviewProceduresManual(January1st,2008)
o
ExpeditesplanreviewsforprojectswithacompletedscorecardfromeitherUSGBCor
FGBC
Jacksonville City
JacksonvilleSustainableBuildingProgram
o OffersincentivestonewcommercialbuildingsthatachieveLEEDcertificationorother
recognizedgreenbuildingclassificationsystem
Fasttrackdevelopmentreview
Designation
Refundofcertificationexpenses
Miami Beach City
GreenBuildingOrdinance(April22,2009)
o Establishedincentivesforprivatecommercialgreenbuildingprojects
Expeditedplanreviewandbuildinginspections
Developerscanreceivearefundoftheapplicationandreviewfeesfor
certification
Designationandacknowledgementofachievementoncitywebsite
Miami Lakes Village/Town
TownofMiamiLakesGreenBuildingProgram(July10th,2008)
o Permitfeereductionforcommercialapplicantsthatproveminimumcompliancewith
LEEDstandards
Sarasota County
Resolution#2006174
o Fasttrackbuildingpermitincentiveand50%reductioninthecostofbuildingpermitfees
forprivatecontractorsusingLEED
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Tampa City
CityofTampaSustainabilityOrdinance(June26th,2008)
o Offersdevelopersofcommercialbuildingsa2080%rebateonbuildingpermitfees,
dependinguponthelevelofLEEDcertificationearnedbythebuilding
Incentivesand
mandates
for
private
commercial
buildings
in
other
parts
of
the
county
have
thus
far
beenmoreaggressivethanthoseinVirginiaandFlorida.MunicipalitiesinCaliforniacurrentlyhavethemost
mandatesforprivatecommercialgreenbuildings.Thesemunicipalitiesfosteredthegrowthofgreen
buildingsbyintroducingandencouragingdevelopmentwithincentives.Theincentivesweresubsequently
replacedwithmandates,apatternthatwillundeniablymaterializeinotherstates.Mandateshavealso
continuedtobecomemoreprogressive.Forexample,theSanFranciscoBuildingCode,establishedinAugust
2008,currentlyrequiresnewcommercialbuildingsover5,000sq.ft.toachievegreenbuildingcertification
ordocumentationofcompliancewithgreenbuildingstandards.Italsooutlinesfuturemandates,
designatingLEED
Gold
or
equivalent
as
the
minimum
certification
level
achieved
by
2012.
GreenbuildinglawmaysoonbreaknewgroundinPortland,Oregonwithaproposedgreen
buildingprogram.Theproposedprogram,dubbedthefeebateprogram,wouldallowthecitytoassessa
feeagainstdeveloperswhoconstructbuildingsthatonlymeetstatebuildingcode.Thefeewouldbewaived
fordeveloperswhoconstructbuildingsthatmeetaminimumofLEEDSilver.Furthermore,developersof
buildingsthatmeetLEEDGoldorPlatinumstandardsreceiverebates.
Federal Incentive Programs:
TheEnergyPolicyActof2005 CommercialBuildingTaxDeduction
o Establishedataxdeductionforexpensesrelatedtothedesignandinstallationofenergy
efficientbuildingsystems
Buildingownersortenantsareeligibleforataxdeductionofupto$1.80persq.
ft.fortheinstallationofsystemsthatreducetotalbuildingenergycostsby50%
ormorecomparedtoareferencebuilding
Partialdeductions
of
$0.60
per
sq.
ft.
are
available
for
improvements
to
one
of
threebuildingsystemsthatreducetotalheating,cooling,ventilation,water
heatingandinteriorlightingenergyusebyspecifiedpercentages
Thedeductionsareonlyavailabletobuildingscoveredbythescopeofthe
ASHRAEStandard90.12001andbuildingsorsystemsplacedinservicefrom
January1st,2006throughDecember31st,2013
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Proposed Federal Legislation:
TheAmericanCleanEnergyandSecurityActof2009(H.R.2454) Section201
o Requiresnewconstructionandrenovationprojectstomeetstringentnationalenergy
efficiencystandardswhichexceedtheexistingenergycode(ASHRAE90.1)by30%
immediatelyand50%by2015
o Theproposedactprovidesfor5%increasesevery3yearsthrough2030,resultinginan
eventual75%reductionovercurrentstandards
DepartmentofEnergycanincreaseordecreasereductiontargetsbasedon
feasibility
Stateandlocalgovernmentcodesmustmeetorexceedtargetsestablishedby
theact
Thebill
passed
in
the
U.S.
House
of
Representatives
on
June
26th,
2009
and
is
expected
to
reach
thesenatebymidSeptember
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GREEN BUILDING IN A DOWN ECONOMY
Despitethecurrentdowneconomy,theoverallgreenbuildingmovementcontinuestoexperience
growth.Onecandrawthisconclusionbysimplylookingatthenumbers.Forexample,Greenbuild,the
worldslargest
conference
and
expo
dedicated
to
green
building,
had
more
than
28,000
attendees
in
2008,
whichisanincreaseof25%fromGreenbuild2007.Moreover,inAprilof2003,amere84buildingshad
receivedLEEDcertification.ThemostrecentnumberofcertifiedprojectsreleasedbytheUSGBCwas2,878
inMayof2009.Thisnumberwillonlycontinuetogrow,evidencedbythe21,252projectscurrently
registeredseekingLEEDcertification.Thesustainedgrowthinthissectormaybebafflingtothosewho
believeinstickingtowhattheyknowduringhardeconomictimes;however,departurefromconventional
buildingsmaybeexactlywhatisneeded.
Greenbuildingspavethewayforbusinessestoprosperthroughatriplebottomlineencompassing
financial,socialandenvironmentalgoals,whichhasprovenanendearingstrategyduringhardeconomic
times.Someindustryprofessionalshaverecognizedthiseconomicclimateastheperfectopportunityto
greenbusinessandusetriplebottomlinebenefitstosavemoneyandgainacompetitiveadvantageas
otheroptionsarelessobvious.ArecentstudyreleasedbyA.TKearneyfoundthatcompaniesfocusedon
sustainabilityoutperformedindustryaveragesby15%duringthecurrentfinancialcrisis.7Thegreenbuilding
movementwillcontinuetogrowasmorecompaniesrecognizethatasmallupfrontinvestmentingreen
canassistinretainingvalueandprovideprotectionfromavolatilemarket.
7 Green Winners: The Performance of Sustainability-focused Companies in the Financial Crisis. A.T. Kearney, 2009.
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SUCCESSFUL COMMERCIAL GREEN BUILDING PROJECTS
PNC Bank LEED Certified
Currently,PNCFinancialServicesGroup,Inc.hasmorecertifiedgreenbuildingsthananyother
companyonearth.8AsofJune2009,thecompanyhadachievedUSGBCLEEDcertificationfor66buildings.
WaysLEEDcertificationhasbenefitedPNCsbottomline:
AccordingtoGarySaulson,PNCscorporatereal
estatedirector,PNChasbeenabletobuildgreen
branchesfor$2.6million,whichisapproximately
$100,000lessthansomecompetitorsare
spendingoncomparablenongreenbranches.9
o Morethan50%ofeachbranchismade
fromrecycledmaterials,includingflooring,
wallcoverings,andcarpet.Manyoftheserecycledmaterialscostlessthannonrecycled
products.
EnergyusageinPNCsgreenbranchesisreducedby50%ormorecomparedtonongreenbranches
duetohighefficiencysystemsandinsulationandmaximumuseofnatural
light(whichhasalsobeenassociatedwithpositiveconsumerresponse).
Waterusageingreenbranchesisreducedby6,200gallonsayear.
Enhancedpublicimage
o Consumers want to do business with socially responsible
companies and PNC is leading the way in the banking
industry.
Neil Hall, PNCs head of retail distribution
Our commitment to significantly reduce our impact on the environment has enabled us to lower
costs, increase efficiency and productivity as well as enhance the communities where our customerand employees live, work and play
-Gary Saulson
8 Patrick McMahon, PNC News Release
9 Roth, Mark. The Thinkers: PNCs Saulson finds its easy being green. Pittsburgh Post-Gazette. 8/25/08.
Photos byPNC Green Branch
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Walgreens LEED Registered
Walgreens,thelargestdrugstorechainintheU.S.,openedtheirfirst(andthefirst)environmentally
friendlydrugstoreonJune24th,2009inMiraMesa,California.IthasregisteredwiththeUSGBCandexpects
toreceiveLEEDcertificationwithin4to6months.ThecompanyhasplanstoopenthreemoreLEEDcertified
locationsby
the
end
of
2009,
oneofwhichislocatedin
Chicago.In2007,Walgreens
begantakingasustainable
approachtoreducetheir
carbonfootprintandsave
moneybyinstallingsolarpanel
systemsatselectlocations.10
Theperusal
of
green
building
certificationfurthersolidifies
thecompanysseriouscommitmenttopeople,theenvironment,andachievingeconomicadvancement
throughefficientmeasures.
AsthegreenMiraMesaWalgreenslocationjustopenedafewweeksago,specificquantitativefinancial
benefitsachievedhaveyettoberevealed.Thecompanyhasstatedthatthestoremanagedtoreduce
lightingrelatedenergyuseby50%throughtheuseofskylights,solartubes,LEDlightsandhighlyefficient
coolersand
freezers.
The
buildings
white
roof,
11
another
green
feature,
will
significantly
reduce
cooling
relatedenergyuse.Furthermore,alllandscapingwasdonewithnativeplants,whichwillrequireno
wateringwhatsoever.Theenvironmentallyfriendlybuildinghasalreadygeneratedagreatdealoffree
publicityforthecompany,yetanotherreasonWalgreensmadeanexcellentdecisiontobuildtoLEED
standards.
Inthecompanys2008socialresponsibilityreport,financialsavingsrealizedthroughalreadyinplace
environmentallyfriendlymeasureswerediscussed.Forexample,thecompanysaved$5.7millioninenergy
costsbyusinghighefficiencyfluorescentlightinginover6,000stores.Thecompanysgreenbuildingplans
werealsobrieflytoucheduponandwillhopefullybeevaluatedfrombothafinancialandenvironmental
standpointinthe2009report.
10 63 locations have solar panel systems
11 Studies show that white roofs can reduce air conditioning costs by 20% or more
Photo by Walgreens LEED-registered Walgr eens in Mira Mesa, CA
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Pizza Hut Energy Star Labeled
EightPizzaHutlocationsinGainesville,FloridahaveearnedtheENERGYSTARlabelfor
Buildingsthroughtheinstallationofeconomicalandefficientsystems.
Property Information
Size +/- 16,000 sf
Annual Savings from Upgrades $2,820
Payback Period 0 Months
Together,theeightlocationsaresavingmorethan$20,000annually.
Someupgrades
to
the
stores
include:
T10lampsreplacedT12fluorescentlamps
LEDexitsigns
o Servicelifeis100,000hours;incandescentexitsignsservicelifeis1,0003,000hours.LED
exitsignsalsorequirefarlessmaintenancecomparedtoincandescentones.
Somelowcost/nocostbuildingtuneups
calibratedthermostat
replacedcoils
and
filters
reducedhotwatersettings
scheduledamaintenanceprogram
Allofthelightingretrofitswerefinancedinterestfreeonmonthlyutilitybillpaymentsthroughcollaboration
withGainesvilleRegionalUtilities(GRU).Theretrofitswereessentiallyfreeofcost,sincetheenergysavings
weregreaterthanthepayments.
This ENERGY STAR partnership promotes a market-based approach to energy conservation and
environmental protection that allows businesses to be more competitive and more apt to change
the way industry views environmental awareness from a burden to a competitive point of
difference.
-Bill Stasiewicz, Pizza Hut of Gainesville Managing Partner