Altruistic or Opportunistic?
July 01, 2006
Appeared in National Real Estate Investor Magazine
Ten years ago, commercial real estate professionals perceived “green” — or environmentally sustainable buildings — as high-cost projects reserved only for altruistic tree huggers with deep pockets. Today, green buildings are sprouting up across the country, leaving hard-core investors asking, “How do green buildings really pencil out?”
The accepted wisdom a decade ago was that green buildings cost 15% to 20% more to build than conventional buildings, says Michael Deane, operations manager of sustainable construction for Turner Construction Co. But that's no longer the case.
“Although it still may cost a developer 2% to 4% more upfront to construct a green building, the payback is usually in three to five years,” he says. “In the long term, a green building is actually going to save the owner more money through energy savings.”
New York-based Turner Construction, the largest general builder in the country, has completed 150 green buildings nationally valued at more than $10 billion and encompassing 42 million sq. ft. “Green buildings are becoming more mainstream by the day,” says Deane. Turner's green portfolio is predominantly concentrated on the West Coast, the Northeast and Midwest. However, Deane notes that Turner receives green-building queries weekly from Southern states.
Yet, the belief that green buildings cost more to build remains a major obstacle to the green building movement, according to Turner. Each year the firm surveys building owners, developers, architects, engineers and consultants on green building issues.
In the most recent survey, the majority of executives (70%) queried indicated that they “perceived” higher construction costs as the biggest hindrance to adopting green building practices. Conversely, two-thirds of the executives with actual experience in green buildings reported a higher return on investment (ROI) for green buildings over conventional buildings.
Although the characteristics of a green building may vary among building owners and developers, the main features are energy efficiency and long-term sustainability. Currently, the U.S. Green Building Council's Leadership in Energy and Environmental Design (LEED) designation is noted as the industry's best gauge for measuring a building's degree of greenness.
For instance, Houston-based Hines recently completed 1180 Peachtree in Atlanta, the first high-rise office building in the Southeast to be certified for gold status in the Green Building Council's LEED core and shell development program. To achieve the gold rating, the developer designed the building to include a number of quantifiable features.
The 41-story office tower, for instance, boasts a water management system that uses captured rainwater and condensation from the building's mechanical system to provide 100% of the water for its landscape irrigation system. The company also used recycled materials in its concrete, steel, glass, drywall and ceiling tile.
Hines Senior Vice President Jerry Lea says recycled products are not necessarily more expensive than new materials, adding that they carry the same warranties as non-recycled materials. “We find that the premium cost of green buildings is not the hard construction costs, but the cost of the documentation required for LEED certification,” he explains. This involves third-party commissioning where a consultant must verify the project has adhered to the USGBC's standards.
Quieting the skeptics
In spite of LEED's growing presence in the marketplace, many developers question the actual value of the certification. For many building owners and developers, LEED certification carries a lot of weight because it offers a third-party seal of approval and gives developers a competitive edge.
According to Jim Lutz, senior vice president of development for Liberty Property Trust, the industry is rapidly changing. This $6.8 billion company, headquartered outside of Philadelphia, has 13 buildings spanning more than 3.2 million sq. ft. currently seeking LEED certification. “Today you may stand out if you're green, but in five years you'll stand out if you're not green,” says Lutz.
A growing number of investors do place a value on the LEED certification, according to Lea. Hines is currently working with a major pension fund investor to establish a fund that will consist only of LEED-certified projects. “The investment community not only views sustainable development as socially responsible, but cites that buildings with better amenities and better working environments will ultimately be more attractive to tenants over the longterm, making them more valuable than those which are less environmentally friendly,” says Lea.
Currently, Hines has three certified buildings, totaling more than 3 million sq. ft. out of its 102.6 million sq. ft. portfolio. Another two buildings totaling 650,000 sq. ft. are in the pre-certification stage, and both are seeking LEED silver status. As for future developments, Lea anticipates most, if not all, of Hines' future spec office buildings to be LEED-certified at some level.
The estimated value of new construction projects registered under the LEED program since its inception in 2000 has grown from $782 million to $7.73 billion. David Callan, vice president with Syska Hennessy Group, a New York-based engineering, technology and consulting firm, says LEED standards are on their way to becoming part of the building code.
The U.S. Green Building Council recently partnered with the American Society of Heating, Refrigerating and Air-conditioning Engineers and Illuminating Engineering Society of North America to develop a minimum standard for high-performance green buildings.
Scheduled for completion in 2007, the proposed yardstick, Standard 189, will apply to new commercial buildings and major renovation projects. “This new standard will provide a baseline that will drive green building practices into the mainstream,” says Callan.
Green building practices are already routine for some companies. The Opus Group, a $1.4 billion real estate developer with more than 35 million sq. ft. under development, builds sustainable buildings whether clients request it or not.
“Sustainable design is good business from an operational standpoint,” says Tom Olmstead, Opus' vice president of government programs. Of its more than 8.3 million sq. ft. of office properties developed in the last four years, the Minneapolis-based developer has 627,089 sq. ft. of LEED-certified office buildings in its portfolio and another 2.4 million sq. ft. seeking LEED designation. Olmstead maintains that the remaining 5.4 million sq. ft., though not LEED certified, would qualify if put to the test.
Many commercial building owners are opting to take simple, low-cost measures to improve energy efficiency. A priority should be placed on refining existing practices, according to Stuart Brodsky, program manager of the EPA's Energy Star program. In fact, the EPA estimates that 20,000 commercial buildings now use the energy performance rating tool on an ongoing basis.
Brodsky recommends establishing a maintenance schedule that covers everything from lubricating motors to reviewing thermostats for accuracy to verifying damper operations. “A deficiency in any of these areas can have a snowball effect on a building's entire operation performance,” he says.
The Energy Star program recently partnered with the Building Owners and Managers Association (BOMA) to launch the BOMA Energy Efficiency Program, an educational initiative for BOMA members with the long-term goal of lowering commercial real estate energy consumption by 30%.
The commercial real estate industry spends $24 billion annually on energy, contributing up to 18% of the carbon emissions in the U.S, according to Brenna Walraven, BOMA International's chairman-elect. “If only 2,000 buildings adopted [BOMA's] low-cost best practices over the next three years, the result would be $400 million savings in operating costs and a 6.6 billion pound reduction in carbon dioxide emissions.”
Energy costs represent roughly 40% of a landlord's operational costs. But by taking basic steps, Brodsky notes that building owners can reduce their energy costs from $2.60 per sq. ft. to less than $1.80 or $1.70 per sq. ft. annually, a tidy sum.
Behemoth office owner Trizec Properties is a prime example of what can happen when a company decides to turn off a light switch. The company, soon to be acquired by Brookfield Properties for $4.8 billion, cut energy consumption over its entire 40 million sq. ft. portfolio by 15% during a five-year span — an annual savings of almost $16 million.
Two worlds collide
For some smaller developers, however, financial carrots may be the best way to encourage green development. “There is still an important distinction between the green world and the investor world,” says Jeff Sackett, principal of Portland-based Capstone Partners LLC. “Financial incentives are one of the best ways to bring these two worlds together.”
Although most of Capstone's projects have elements of sustainable design, Sackett says his company hasn't sought LEED certification, primarily because of costs. Still, the 3-year-old firm is currently taking advantage of incentives offered by the Portland Development Commission in exchange for a LEED silver rating on a 40,000 sq. ft. retail/office condo rehab project. In return, the commission will provide 100% construction and takeout financing at below-market rates, as well as build all street frontage improvements on three sides of the block.
At the state level, incentives to promote alternative energy sources are also emerging. New Jersey is at the forefront and pays commercial building owners up to 50% of the upfront capital and installation costs to invest in solar technology, according to Michael Winka, director of New Jersey's Clean Energy Program.
The most recent incentive nationally is the Energy Policy Act of 2005, which President Bush signed into law in August of 2005. The law includes a provision that offers commercial building owners up to $1.80 per sq. ft. in tax deductions if a building requires 50% less energy than a conventional building. The incentive, however, only applies to new construction and retrofits installed from Jan. 1, 2006 through Dec. 31, 2007.
Although incentives may be the impetus to jumpstart green development in the U.S., in Europe they are commonplace, according to Tom Farrell senior managing director and head of design and construction for Tishman Speyer. The New York-based company's portfolio consist of over 50 million sq. ft. of office properties in Europe, the U.S. and South America with future developments planned for India and China.
On the domestic front, Farrell sees an opportunity for Tishman Speyer to distinguish itself from its competition by pursuing sustainable projects. Currently, Tishman Speyer has 4 million sq. ft. under development in the U.S. pursuing LEED certification, including the 860,000 sq. ft. Hearst tower in Manhattan, which is seeking LEED gold status.
“The LEED rating system is becoming more recognized throughout the world,” says Tom Scarola, director of engineering for domestic development for Tishman Speyer, which is considering LEED certification for projects in Brazil and India.
For the longterm, both Farrell and Scarola believe that sustainable construction makes good business sense. “On a gross basis, we need to be competitive,” says Farrell.
In the shortterm, Farrell still sees some hurdles for the green movement. “I don't think a sale has been made inclusively to the market as a whole,” he says. “I think it is something that is evolving over time but moving in the right direction. This is not a zero-sum game.”
Iconic tower goes green
After the collapse of the World Trade Center on 9/11, owner Larry Silverstein hired the architectural firm Skidmore Owen and Merrill to redesign 7 World Trade Center, the first structure to be rebuilt on the site. The result is a model of environmental and operational efficiency in high-rise construction.
Currently, 7 World Trade Center is almost 30% leased. The New York Academy of Sciences signed the first lease and will occupy 40,000 sq. ft., the entire 40th floor. “As one of New York's leading edge, future-focused organizations, it is fitting for the Academy to make its new home in the greenest and most technologically-advanced property on the downtown skyline,” says Ellis Rubinstein, the Academy's president.
According to the U.S. Green Building Council (USGBC), in fact, 7 World Trade Center now stands as the “greenest” building in Manhattan. In March this year, the 52-story building achieved gold status under USGBC's Leadership in Energy and Environmental Design (LEED) rating system. It was one of the first projects accepted in the USGBC's Pilot Program for new core and shell construction, designed specifically for spec buildings. This designation covers base building elements such as the main structure and envelope as well as building-level HVAC and plumbing systems.
Environmental measures took root at groundbreaking. The Tishman Construction Corp. used ultra-low sulfur fuels and particulate filters on heavy construction equipment. This reduced diesel emissions by as much as 90% during construction and almost 90% of the construction waste was recycled.
Green features include low-flow, high-efficiency toilet fixtures, carbon dioxide sensors and a fresh-air intake system located at the top of the tower with multiple levels of high-performance filters. The building also collects rainwater to feed the cooling tower, as well as a fountain and irrigation system located in the building's 15,000 sq. ft. public park.
Silverstein Properties is also a pioneer with respect to pursuing alternative energy sources. 7 World Trade Center receives 100% of its core and shell electricity needs from wind farms. Silverstein buys renewable energy certificates that offset the building's energy usage with wind power.
Although 7 World Trade Center receives electricity from the same power grid as every other building in New York, it basically designates wind power as its energy source. Furthermore, the building plans to conserve energy through the use of steam-to-electricity turbine generators, and variable-speed fans coupled with natural daylighting. More than 90% of the occupied space will have direct daylight and outside views.
According to Scott Frank of Jaros, Baum & Bolles, the engineering consulting firm on the project, the full-height, low-iron, ultra-clear glass technology in the building is extremely energy efficient. Citing that each tenant will be responsible for its own energy bills, Frank notes this feature will provide the opportunity to install automatic daylight dimming controls, which is a significant cost-saving strategy. Frank says, “It gives tenants a direct incentive to conserve.”
LEED standard benchmarks sustainability
Six years ago, the U.S. Green Building Council (USGBC) launched Leadership in Energy and Environmental Design (LEED), a voluntary certification program for building owners and developers. To date, more than 500 buildings from across the county have been LEED-certified and more than 3,800 have been registered.
Based on scientific standards, LEED stresses state-of-the-art strategies for sustainable site development, water savings, energy efficiency, materials selection and indoor environmental quality. The program rates everything from HVAC systems to environmentally-friendly carpet.
To receive LEED certification, building owners and developers must comply with USGBC's comprehensive checklist that awards points for a number of sustainable building measures.
On a scale of 69 points, to receive a basic certification a building must secure between 26 to 32 points. Some developers, however, opt for a higher rating. A silver rating requires 33 to 38 points, and a gold rating requires 39 to 51 points. The ultimate platinum rating requires 52 to 69 points.
“A higher rating is added assurance that your building is designed and operating the way it was intended to do so,” Taryn Holowka, communications manager with USGBC, explains.
For many, the biggest downside to LEED certification is the documentation. The process can be long and cumbersome because it involves the compilation of detailed design records as well as engaging a third-party agent to verify compliance with USGBC's standards.
Recently, the council has taken steps to streamline the process. Since late 2005, LEED participants enter data online, which cuts back on documentation costs, saving time and money.
So how do Green building costs stack up? “Construction budgets for green buildings can run anywhere from 10% less to 2% more than conventional buildings,” says Brendan Owens, director of LEED technical development for USGBC. A 2003 report by California's Sustainable Building Task Force also states that a 2% upfront investment in green building design results in 20% savings on total construction costs. Holowka says that the savings takes place over the 50- or 60-year lifespan of a building.
A number of top office developers, today, are building green in response to rising energy costs. But they may also be building out of a sense of social responsibility.