Green building

Energy Wise

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," DiVall adds.

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.
Photo credit:
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 officer.

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 certification.
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 Washington, D.C.

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," Livingston says.

"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 traditional construction.

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.

Jennifer Norbut

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