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| 8/18/2008 - Orange County Business Journal |
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| Commercial Real Estate Owners Derive Green Benefits |
by Ian Bress, President, CEO, Pacific Building Care
 There are many compelling reasons to go ‘green’. Tenants, buyers and investors are calling for it, and they are the raison d’etre for Commercial Real Estate. With vacancy rates at 13.1% overall and 17.6% in Class A buildings in Orange County, everyone should be looking at differentiators in their space. Right now, the demand for ‘green’ space has outstripped supply.
The government is mandating it and laws will be laws. Witness Title 24, Assembly Bill 32 and Assembly Bill 1103. The environment is crying for it, and this is the world we must live in. We are experiencing climate change, drought, wild fires and a dependence on fossil fuel which is draining our bank accounts. Yet sustainability advocates ‘triple bottom line’ benefits in a balanced scorecard approach. Thus, the focus must not only be on the social and environmental aspects of the movement. The financial aspects of the sustainable movement should also be addressed.
Direct Benefits
The greening of commercial real estate is driving higher rental rates, higher retention of tenants and provides for an attractive occupancy proposition to the growing list of ‘triple A’ tenants seeking environmental best practices in the buildings they occupy. It is also a key driver in creating improved appreciation in buildings that can demonstrate LEED certifications or sustainable practices and operations.
There are now comprehensive studies that show improved sales and lease up of green buildings. These reports have been a while in coming, as the data pool was sparse in the recent past. However, enough green buildings are now being built and occupied to paint a pretty picture. Substantive proof is now available that dollar savings from sustainable actions that benefit a CRE company’s property economics are being realized.
A new study by the CoStar Group has found that sustainable “green” buildings outperform non-green buildings in key areas such as occupancy, sale price and rental rates. This is leading to higher revenue through top of the market rents, faster lease up relative to market and lower re-leasing expenses due to higher tenant retention. LEED buildings command rent premiums of $11.33 per square foot and have a 4.1% higher occupancy. They are selling for $171 more per square foot.
LEED is the Leadership in Energy and Environmental Design program developed by the U.S. Green Building Council that establishes standards of excellence in building design and operation, and these guidelines have proven to have merit.
The Energy Star program is an energy benchmarking tool and a flag for the nation’s most energy efficient properties and is implemented and monitored by the Environmental Protection Agency (EPA).
Energy Star certified buildings also command a premium, renting at $2.40 a square foot higher with a 3.6% higher occupancy rate. Energy Star buildings sell for an average of $61 per square foot more than buildings that are not so rated.
Meanwhile, with tenant demand for green building at a peak, the occupancy rate is expected to increase by another 3.5% and rents in green buildings are expected to increase by an average of 3% across the industry, according to the research cited by UBS.
CoreNet Global has reported that 90% of Senior Executives surveyed consider sustainability a near-term critical business issue and 80% of them would be willing to pay more for green Real Estate.
It can be safely said, then, that green buildings are clearly achieving higher rents and higher occupancy. They also have lower operating costs while achieving higher sales prices, and due to their energy efficiency, the spiraling costs of energy is mitigated.
The benefits of energy savings have become well established. Green buildings can reduce energy costs by up to 30% with existing energy-efficient technology, according to the U.S. Department of Energy. The California Air Resource Board estimated those savings up to 40%. A McGraw-Hill study found an average expected decrease in operating costs of 8% to 9% across the industry, a predicted average increase in value of around 7.5%, and average return on investment for sustainable improvements expected to rise 6.6%. Also, such actions will lower replacement reserves and result in reduced maintenance costs.
Green buildings also provide strong financial incentives to both owner-occupants and (net) lessees to adopt energy-saving technologies in order to reduce utility bills and have lower exposure to a volatile energy market and the resultant rising costs. A RREEF Research report published in November of 2007 documented energy savings for green buildings to be an average 30%-40% over conventional buildings, which equates to annual savings of approximately $135,000-$150,000 for a typical 200,000 square foot office building.
Indirect Benefits
Among the less tangible but no less important benefits of green buildings are their appeal to socially responsible investors. Responsible Property Investment (RPI), the practice of selecting only sustainable properties for financial consideration, is becoming especially common with public pension funds, which account for a large share of Real estate ownership in the country. Two of the largest & most widely respected pension funds – CALPERS-California Public Employees Retirement System and CALSTRS-California State Teachers Retirement System – have promulgated guidelines advocating green policies (Green Wave). The less sustainable a building, i.e. the more obsolete, the less chance there is of monies being derived from the property. Sustainability addresses the future in more ways than one.
Many firms also believe significant goodwill benefits derive from adopting green business operations. Showing civic responsibility and ‘doing the right thing’ is having a major impact on how companies are perceived. Corporate facilities, and especially headquarters buildings, can represent the public face of a company’s environmental policies and efforts. A business that operates with a strong environmental stance can use such a program to serve as an enhancement of the company’s image and marketability. Many companies are taking advantage of their path to sustainability. They have taken great strides in reporting these efforts. Eighty-six percent of businesses on the Standard & Poor’s 100 Index have corporate sustainability websites, compared to 58% three years ago. The Dow Jones Sustainability Index lists the top corporations with sustainability statements and this has proven to be a determining factor in more and more stock trades and purchases.
Sustainability refers to the concept that current activities should be planned to meet the needs of the present without compromising the ability of future generations to meet their own needs. From a business sense, it also serves to enhance the ability of a corporation to prosper in the future. Such actions contribute to the better health of tenants & occupants, the better health of the environment and the better health of business. Good things come in threes. Achieving success in the triple bottom line will lead to a future to which we can all look forward.
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