What’s driving the shift toward greener properties?
By Rich Rosfelder |
Have green properties been more resilient through the downturn? Yes, according to a 2010 CB Richard Ellis study: 79 percent of owners surveyed believed that sustainable properties attract and retain tenants. The study, which defined green and sustainable buildings as those with a Leadership in Energy and Environmental Design certification or Energy Star label, also found that owners of sustainably managed buildings anticipated a 4 percent higher return on investment than did owners of traditionally managed buildings.
But the answer isn't that simple.
“Because the majority of green buildings on the market are newer class A properties that also are typically less expensive to operate, these properties by default have been the big winners through the recession,” says Rick R. DeKam, CCIM, principal with Midwest Realty Group in Portage, Mich.
However, other factors have contributed to the continued success of green properties in many markets. The downturn marked a shift in tenant sentiment, increased government support for green buildings, and the widespread availability of energy-usage data. As the market finds its footing, CCIMs anticipate that these factors will not only play a role in the recovery but also, perhaps, shape the future of the commercial real estate market.
Tenants Take Notice
On a global scale, corporate tenants are driving the shift toward sustainable properties. According to CoreNet Global and Jones Lang LaSalle's fourth annual corporate real estate Sustainability Survey, which was conducted in 4Q10, 92 percent of respondents consider sustainability criteria in their site-selection decisions. And, more to the point: The number of respondents willing to pay more for green leased space climbed from 37 percent in 2009 to 50 percent in 2010.
However, in a 2010 global sustainability survey conducted by GE Real Estate, only 40 percent of U.S. tenants rated energy certifications as valuable.
“I've had some tenants insist on having green buildings to choose from when planning their next office lease,” says Beth Young, CCIM, LEED-AP, vice president with Grubb & Ellis in Houston. “Typically, those tenants - engineers, architects, or other service companies - have a special interest in locating in a green building.” In these cases, the property becomes a part of their brand.
In many instances, tenant sentiment toward green buildings also divides along generational lines. “I handled a 65,000-sf green lease for a major law firm,” says William Hugron, CCIM, SIOR, senior vice president with Ashwill Associates in Newport Beach, Calif. “All of the attorneys 35 and under were asking questions about LEED, while the senior partners could care less. They said they won't be around long enough for it to make a difference for them.”
DeKam also is seeing more interest from the next generation of decision-makers. “Company employees are involved in site tours, asking specific questions about energy savings, groundwater irrigation, heating, ventilation, and air conditioning set-back controls, auto-lighting sensors, and other features,” he explains. “We never would have heard these types of questions three to five years ago.”
For most companies, however, sustainability still takes a back seat to tried-and-true fundamentals. Young recently represented a tenant that leased space in a green building based mostly on the competitive rental rate - not the property's energy efficiency and other sustainable features. “The green building owner was much more aggressive [than the tenant's former landlord],” Young notes. However, other green buildings that were considered were too expensive to make the short list.
Government Greens Up
As the private sector dialed back its emphasis on sustainability during the downturn, the federal government ramped up its efforts. Last October, the U.S. General Services Administration announced that it would require a LEED Gold certification for all new federal building construction and substantial renovation projects. In addition, all new federal agency leases must be located in Energy Star-labeled buildings.
Government lease requirements, combined with the lack of new construction coming online, spell opportunity for owners of older properties and brokers who assist them, according to Hugron. “The government typically leases class B buildings,” he explains. “Existing inventory that can be retrofitted will see more demand.”
Groups that offer green certifications also see opportunity in the GSA's continued expansion. In March, U.S. Green Building Initiative President Ward Hubbell asked the GSA to reconsider its LEED-only policy, explaining that competition among certification programs will lead to progress and innovation. Government agencies such as the State Department and Veterans Affairs have used GBI's Green Globes rating system to assess and certify numerous buildings, Hubbell noted. To date, however, the GSA has not modified its policy.
While the federal government pursues a sustainability agenda as a tenant, it's also helping to fill the void left by traditional lenders that are apprehensive about funding green projects (or any projects, for that matter). The 1603 Grant program, which is part of the American Recovery and Reinvestment Act, covers up to 30 percent of property that is part of a qualified facility, fuel cell program, solar property, or small wind property. The Renewable Electricity Production Tax Credit and Business Energy Investment Tax Credit also can help offset green retrofit expenses.
Even federal incentive programs not specifically geared toward green projects are starting to focus on sustainability. Community Development Entities in five states were awarded New Markets Tax Credit allocations specifically for renewable energy projects in 2010, notes J.R. Chantengco, CCIM, president and managing director of the Triwest Group in San Diego. Triwest Group, one of those five CDEs, “is working on a $7.5 million suballocation for several renewable small wind projects in San Diego,” Chantengco says. He expects the NMTC allocation to generate $50 million from tax investors during the next few years to fund commercial property leasing programs throughout California.
“The message for our industry is that these incentives have provided additional negotiating leverage for our landlord clients,” says Karen Mankowski, CCIM, LEED-AP, senior associate with Grubb & Ellis in Charlotte, N.C. But timing is a major factor when seeking government funds. “Many of these incentives exist for a limited time only, either because they are part of a finite pool of money or because they are bundled with other initiatives that are subject to legislative approval on annual basis,” Mankowski notes. And given the federal government's recent credit woes and the economy's ongoing fragility, sustainability-driven incentives could wind up on the chopping block at any moment. (For more on federal, state, and local initiatives, see sidebar “Legislative Update: Energy Efficiency.”)
Driven by Data
For owners and developers that can't secure funding via government grants and other incentives, options are still limited. Sustainability is not a consideration for small, regional lenders, and that probably won't change anytime soon. “To quote a commercial loan officer and fellow CCIM, 'Cash flow is king,'” Mankowski says.
But some national and global lending institutions are financing green projects. In May, Bank of America unveiled a $55 million program to encourage energy efficiency improvements to older buildings. The program will provide low-cost loans and grants to Community Development Financial Institutions specializing in financing for green projects.
Bank of America also will work with the CDFIs to collect pre- and post-retrofit data to measure impacts on energy and water usage and corresponding financial savings.
Rick Hardy, an adviser with Sperry Van Ness - Promus Commercial in San Diego and leader of the company's sustainable buildings team, which also includes Charles Copelan, CCIM, and Lauri L. Greenblatt Hines, CCIM, CPM, expects that these types of data eventually will be evaluated by all transaction participants - not just lenders. “When people begin to consistently see an energy use rating or some kind of sustainability measure for properties considered for lease or purchase, that's when the real sea change will happen,” Hardy says.
California's Assembly Bill 1103, which goes into effect on January 1, may signal the beginning of this transformation. It is the first law to require the disclosure of energy-use information when a building sold, leased, or refinanced. “When the end users have access to this data, it will impact their choices about which building they want to buy or lease,” Hardy explains. “There will be winners and losers, and the information will drive the market to make changes.”
The increasing use of building certifications suggests that some of these changes already may be in the offing. As of July 18, 1.45 billion square feet of commercial property was LEED certified and more than 6 billion sf was registered for certification.
In addition to more common certifications such as LEED, Energy Star, and Green Globes, alternative labels continue to gain popularity. “Through the Society for Environmentally Responsible Facilities certification, I recently certified my first two multi-tenant office properties and successfully marketed our sustainability achievements to prospective tenants,” DeKam says. “There's clearly a demand in the market for a more streamlined, cost-effective yet equally credible green certification alternative to LEED.”
Whatever the label, it's still up to CCIMs to effectively communicate what the information means for transaction participants. And the conversation, like the industry's attitude toward green properties, is certain to evolve. “In my practice, I'm talking to owners, property managers, tenants, buyers, developers - in short, everybody - about what I think is coming down the road,” Hardy says. “The demand for energy is increasing; the cost for energy is increasing; and availability of energy efficient space is limited. It's the kind of perfect storm that makes discussion of this topic critical.”
Rich Rosfelder is associate editor of Commercial Investment Real Estate.
Going Green 101
Recently, Dustin C. Gellman, CCIM, chief executive officer of GreenPoint Partners in Chicago, and former CCIM Institute President Richard E. Juge, CCIM, SIOR, co-founder of GreenPoint Partners and president of Re/Max Commercial Brokers in Metairie, La., discussed some of the practical concerns of working with sustainable properties.
What exactly is a green building?
Juge: “Greening” a commercial building may include a broad range of initiatives designed to reduce resource consumption and increase cash flow - including efficiency retrofits, solar installations, and water or waste reduction. When appropriate, Leadership in Energy and Environmental Design and Energy Star certification may follow to provide third-party verification that such measures were enacted.
What buildings offer the best opportunities for “going green?”
Gellman: The strongest candidates typically fit some of the following criteria:
• Located in metro areas with high energy costs and favorable incentives;
• Size is 20,000-plus square feet with a $40,000-plus annual utility budget;
• Best use types are office, industrial, hospitality, healthcare, and specific use; retail and multifamily sometimes work;
• Owner-occupied, tenants with gross leases, or single-tenant net-lease;
• Owners or tenants with healthy credit and no financial distress;
• Built prior to 2005 for energy-efficiency retrofits;
• Flat, unobstructed rooftops for solar installations; and
• class A or B properties for LEED certification.
Other factors may include the owner's position in the asset life cycle (buy, hold, sell), local attitudes toward sustainability, current or pending legislation, eco-conscious tenants, and the decision maker's access to capital.
What role can CCIM members play in the process?
Juge: Clients need solutions - energy costs are rising, time-sensitive incentives are available, tenants are demanding green space, and governments are introducing new legislation. CCIM members have an opportunity to increase client services and add value by helping clients navigate sustainability initiatives. Green building initiatives are best evaluated on a T-bar and articulated by a trusted adviser, and CCIM members are well-positioned to help clients understand that.
Further, sustainability is complex. Technology, incentives, and laws change quickly. Solutions require multidisciplinary expertise, and clients often don't have the internal resources to pursue green buildings. CCIM members can offer energy and sustainability services as a means to differentiate from peers, win new business, and ultimately do more transactions.
To read the full Q&A, visit www.ccim.com/cire. For more information on GreenPoint Partners, visit www.greenpointpartners.com/ccim.
Legislative Update: Energy Efficiency
During the State of the Union address, President Obama talked about the Better Buildings Initiative, which includes several energy-saving goals, such as achieving a 20 percent improvement in energy efficiency in commercial buildings by 2020. It also creates financing opportunities for commercial retrofits through the Department of Energy (www.dsireusa.org).
But if commercial real estate professionals are expected to fully embrace the future of sustainable buildings, lawmakers need to understand how green initiatives affect the industry. An integrative approach to making a significant change includes tax credits for energy-efficient building codes.
During the 2011 CCIM Institute Capitol Hill Visit in April, CCIMs talked with their U.S. representatives and senators about incentive-based programs versus mandated requirements for energy-efficient buildings. Participants told Congress that tax credits must be realistic, supplementing the discrepancy between the payback period and initial cost investment paid by property owners. CCIMs can contact their state and local officials to express the need for sensible tax incentives for energy-efficient building investments that contribute to a shared vision of a sustainable community.
- by Adriann Gerardi, legislative liaison for the CCIM Institute. Contact her at email@example.com. For information on state and local initiatives, read the full Legislative Update at www.ccim.com/cire.