Commercial real estate pros expand their knowledge of green building practices.
Green long has been corporate America's favorite color but not just
because it's the color of money. Industry giants ranging from General Electric
to Wal-Mart are experimenting with eco-friendly designs to boost their public
images and become more environmentally and socially responsible. While these
companies' energy-smart initiatives have catapulted sustainable design into the
spotlight, many in the commercial real estate industry think "going green"
is similar to trading in a gas-guzzling sport utility vehicle for a
fuel-efficient hybrid: Everyone is talking about it, but few people actually
are doing it.
But that's starting to change, some commercial real estate professionals
say. "The shift to green building is underway," says David McClatchy,
senior vice president of Scheer Partners, in Greenbelt, Md., who is leasing
class A office space in the 126,000-square-foot Bowie Corporate Center in
Bowie, Md. Upon completion later this year, the property is expected to earn
the U.S. Green Building Council's Leadership in Energy and Environmental Design
silver certification, says developer Steven P. Hubert, partner with Buchanan
Partners LLC in Gaithersburg, Md. Federal and state governments are helping
developers such as Buchanan Partners realize the short-term benefits of going
green. "Maryland's [energy-efficient building] tax credits were a big
factor in our decision," Hubert says.
But evidence is mounting that it's the long-range outcomes that make
these projects worthwhile. "Long term, green properties are going to have
a very distinct advantage," McClatchy says. However, the advantages vary
depending upon whom you ask. The operational cost savings these properties
provide are undisputed by most experts, but perceptions of green buildings in
the marketplace are somewhat mixed. Commercial real estate professionals who
understand what green buildings can offer tenants, as well as these properties'
costs and payoffs, are better positioned to work with the growing segment of
green product in the marketplace.
Photo caption: The National Association of Realtors' headquarters building in Washington, D.C., was constructed with state-of-the-art sustainable design features, earning the USGBC's LEED silver certification.
Leasing Energy-Efficient Space
Some tenants are becoming aware of energy-efficient strategies within buildings, commercial real estate
pros say. But right now the almighty dollar still rules most of their space
decisions. "A lot of tenants still don't care if the space is energy
efficient; their biggest concerns today are location and cost," says James
L. Helsel, CCIM, a partner with RSR Realtors in Lemoyne, Pa. The tenants who
are leasing space in green buildings generally have a more clear-cut
understanding of these properties' benefits.
That's why a large part of drawing tenants to energy-efficient space is
educating them about the potential payback. "It's primarily about
demonstrating two things - lower long-term operating costs, which means lower
long-term rents, and higher worker productivity levels," McClatchy says.
However, getting tenants to think past the here and now can be
challenging. "You have to get them to understand that energy-efficient
space equals fewer pass-throughs down the road, despite extra costs on the
front end," Helsel says.
Many tenants think green space equals more expensive space, and in most
markets, that is the case. For instance, in the Baltimore-Washington, D.C., market,
energy-efficient properties command about $1 per square foot to $2 psf more
than standard office space. However, "Most tenants feel the extra
productivity and eventual cost savings outweigh the extra dollar,"
McClatchy says. In the Milwaukee area, tenants pay a premium of about 50 cents
psf to $1.50 psf for space in Liberty Property Trust's LEED-certified building,
according to John N. DiVall, vice president of Liberty Property Trust in
Milwaukee. But rents shouldn't exceed the market's going rate if at all
possible, Helsel says. "You have to price the green space competitively
and count on the lower operating costs to make up the difference."
When marketing space to potential tenants at Bowie Corporate Center,McClatchy focuses on "employee-centered" features such as
improved indoor air quality, finishes that emit fewer volatile organic
compounds, and greater natural light, which lead to increased worker
productivity, he says. Though it's difficult to quantify those benefits,
studies have shown that worker productivity can increase as much as $700 per
employee per year in energy-efficient properties, which translates into about
$3 psf per year, according to "Green Building Costs and Financial
Benefits" by Gregory H. Kats, principal of Capital E, a Washington,
D.C.-based energy consulting company. "Even a 1 percent productivity
increase in [tenants'] workforce can dramatically improve profitability,"
What kinds of tenants want green space? Three major groups have led the
movement for the past several years. "Federal and state agencies that
understand the value of energy-efficient space, corporate users who understand
the long-term cost savings, and employee-centered companies that care about
their workers' well-being are the primary users," McClatchy says.
Photo caption: The energy-efficient heating and cooling system in Buchanan Partners' Bowie Corporate Center office building will reduce the property's energy consumption by 40 percent.
Pili Vision Studios
Companies with environmental-based missions, such as Green Mountain
Energy Co. in Austin, Texas, also have a vested interest in energy-efficient
space. The company leased more than 28,000 sf in an office that was developed
under Austin's local green building program. Moving into the property
"represents our commitment to living out our [company's] mission and
priorities," says Paul Thomas, Green Mountain Energy's chief executive
However, if the location is right, some tenants who fall outside those
categories will give green a try. For instance, Liberty Property Trust's
23-year-old rehabilitated office building in Brookfield, Wis., is one of only
nine buildings in the country to be pre-certified LEED silver. Though major
tenant State Farm "was primarily drawn to the redesign and the location,
the LEED component was a big bonus," DiVall says. State Farm's decision
makers inquired extensively about the property's energy-efficient features
during the negotiations process, he says.
In some regions, tenants pursue green space in the pre-construction
phase. Taurus Southern Investments in Winter Park, Fla., plans to build
Discovery Tech Center II in accordance with LEED's Core and Shell pilot
program, which certifies speculative buildings. Though Florida is not a leading
green building market, "tenants are quickly learning and appreciating that
green buildings increase worker productivity," says Albert S. Livingston,
CCIM, the company's director of development. In fact, "A real benefit in
our leasing efforts is that many tenants are specifying LEED-certified
buildings in their requests for proposals."
How Fast Will Green Grow?
Photo caption: Anchor tenant State Farm leased 35,000 square feet in
Liberty Property Trust's Brookfield, Wis., office building, which
underwent a $1.7 million renovation and achieved the USGBC's LEED silver
Photo credit: Liberty Property Trust
Environmental certification programs like LEED and the Environmental
Protection Agency's Energy Star are guiding property owners and managers down
the path to energy efficiency, and interest is growing - the USGBC says
certification increased 100 percent in the second half of 2005. As of late last
year, 359 commercial properties nationwide had achieved LEED certification and
more than 3,000 projects were working toward it. In addition, nearly 2,000
commercial buildings possessed the Energy Star rating last year, according to
the EPA. Other local programs, such as Austin's Green Builder Program, offer
guidance in their specific markets.
While these programs educate developers, owners, and managers about the
detailed criteria and documentation procedures required for certification,
"it's a fairly complex process that requires a lot of time and
consultation," Hubert says. Advisers have been guiding Buchanan Partners'
development team on all aspects of LEED certification, ranging from the
integrated design to the verification of processes to the proper operation of
the systems, Hubert notes.
Consulting company Green Shape LLC managed the LEED certification
process for the National Association of Realtors' new headquarters building in
Washington, D.C., which achieved silver certification last year. "The
consultants were invaluable. They knew every detail of the process and exactly
what we needed to do to achieve certification," says Helsel, who served as
chairman of NAR's real property operations committee and played an integral
role in guiding the building's development. The consultants' fees added another
cost layer to the project, but were factored into the additional 2 percent to 4
percent for the green features.
Cost and time appear to be the biggest obstacles to environmental
certification, but many large companies can overcome these hurdles.
"Economies of scale increase dramatically with large projects, which is
why the government and large companies have been the first to certify their
properties," Helsel says.
Numerous real estate investment trusts are incorporating
energy-efficient properties into their portfolios because they can more easily
defray extra costs and maximize returns. "Better managing or reducing
energy costs at properties can play a role in enhancing shareholder
value," says Sheldon M. Groner, senior vice president of finance and
operations for the National Association of Real Estate Investment Trusts in
Large national developer Hines' commitment to building green properties
has generated publicity for the company within the marketplace. The company has
70 buildings totaling more than 46 million square feet that have earned the
Energy Star label and currently is developing a 41-story office tower in
Atlanta as part of the LEED Core and Shellprogram.
Taurus Southern Investment's planned green project has created a lot of
buzz for the company, according to Livingston. "This will be one of the
first green buildings in the state [of Florida]," he says. "The
design has produced some positive press and we feel this coverage will increase
through construction and lease up."
While large companies are leading the green building trend, mid-size and
small developers and owners are less likely to pursue certification because
they don't have the time or resources. The LEED certification process averages
three to five years and can range from $750 to $7,500, according to the USGBC.
However, small companies already may be using energy-efficient methods.
"As we learn more about green design it's interesting to see that many of
our company's current practices fall into the LEED rating system,"
"My sense is that a lot of smaller companies are implementing
sustainable features into their buildings, but they just aren't certifying
them," Helsel adds.
To encourage more developers, owners, and managers to initiate the LEED
certification process, the USGBC is making it more accessible. The organization
recently launched a Web-based LEED accreditation training course for real
estate professionals. In addition, Energy Star provides online toolkits for
property owners and managers along with specialized educational courses.
What Does It Cost?
"The perception in the industry is green building is more
expensive," Helsel says. This is true, but not as expensive as many people
think. A USGBC survey of 33 U.S. green buildings revealed their costs averaged
about 2 percent, or $3 psf to $5 psf, more than standard construction. However, Buchanan Partners
estimates the cost to build Bowie Corporate Center is about $15 psf more than
What is the payback for green features? Commercial
real estate pros have differing opinions, and because these properties are
somewhat new to the market, little conclusive data is available. Green designs
eventually should allow for rent premiums that increase net operating income
and thereby command higher selling prices upon stabilization, Livingston says.
Some developers are willing to take a risk now in hopes of future
returns. "We don't exactly know the time line for the payoff," Hubert
says of Bowie Corporate Center. "We do anticipate we'll save about 50
cents psf in energy costs." The NAR building is likely to recover the
green features' extra costs within five to seven years, according to Helsel.
Despite the extra upfront costs, the long-term benefits of
energy-efficient buildings appear to outweigh the short-term expenses. Cost
savings over 20 years could range from $50 psf to $65 psf, according to Urban
Land Institute's green building guide. Properties that achieve LEED
certification may see financial benefits of up to $65 psf, according to Kats'
report. (See chart.)
As corporate America continues to implement environmentally sound
practices and energy-efficient designs, the effects may trickle down in
commercial real estate. Building owners and managers can learn several valuable
lessons from the early adopters of the green movement, and that's just what
many of them are doing. "This has been a real learning experience for us
that we hope will help us with future projects," Hubert says.