By Ellen Sinreich, President, Green Edge LLC
In Part 1 of the business case of sustainable real estate, I wrote that it is hard to dispute it is less risky to take action to reduce green house gases than to do nothing. I would like to now explore the business case for green — market factors and regulatory factors.
The Business Case for Green – Market Factors
A good place to start is to understand the financial benefits of potential green features and how they could result in value creation. There are two types of factors to evaluate: market factors and regulatory factors.
Let’s start with just one of the market factors: lower operating costs. Given today’s technology, there should not be significant incremental cost involved in developing a high rise office or residential building that is 15% more energy efficient than a “traditional” building which meets minimum ASHRAE requirements. A 15% savings in energy costs can
lead to millions of dollars in additional asset value. Here’s how: Assume that energy costs are $3 per s/f. A building which is 15% more energy efficient means saving 45¢ per square foot in energy costs. If the building is 500,000 square feet, total savings would equal $225,000 per year. Going one step further, assuming an 8% cap rate, saving 45¢ per foot in energy costs translates into a $2,812,500 increase in the value of the building. Spread that savings and increased asset value over a portfolio and the value creation proposition is hard to resist.
Higher rental rates for green buildings are just beginning to be realized in the office arena. According to the U.S. Green Building Council, tenants of green office buildings experience a 2-16% increase in productivity. For most commercial tenants, their greatest expense is their labor cost. If their employees are more productive – because they are more
comfortable in buildings with fresh, filtered air (vs. the recycled air that makes us prone to catch each other’s colds), more daylight and views and less – or no – toxins from the carpeting, furniture and paint, that has to impact their bottom line and thus the amount of rent that they can and will pay for a green office.
Add to reduced energy costs and higher rental rates the potential for lower insurance premiums, lower waste disposal fees, reduced water and sewer charges, lower replacement costs resulting from longer life cycles of certain building components, increased rentable square footage resulting from smaller mechanical systems and what you have is an even stronger value creation proposition.
- Governmental Incentives
The other key value creation factors are those regulatory factors that are designed to incentivize green building features. Regulatory incentives can be divided into four categories:
- Tax incentives,
- Increased density and
- Expedited permitting.
In practically every state, there is some state, local or utility program or a combination of programs that offers financial incentives (or incentives that can lead to financial gain) for building green. There are more than 22 cities that offer one or both of accelerated permitting and density bonuses.
One way or another, there is no turning back: the tipping point has occurred and green, sustainable real estate is here to stay. In fact, as time goes by, there will be no choice, as the business case for green becomes even more compelling than it is today and better documented and as regulatory mandates become the norm. In time, buildings that are not
“green” will become obsolete and we in the real estate industry will take sustainability for granted.
1 Source: US Green Building Council
2 ASHRAE stands for the American Society of Heating, Refrigeration and Air Conditioning Engineers, which has established widely accepted minimum energy performance standards for buildings of all types.
3 Not all regulatory factors are designed to incentivize green building, some are mandatory, thus they may add cost, but without a direct benefit that can be monetized. For example, building codes, with which compliance is mandatory, are increasingly incorporating aspects of LEED (Leadership in Energy and Environmental Design), the green building rating system administered by the U.S. Green Building Council.
This article was first published in the Real Estate Journal in March 2008 and appears in The Saint Report with the permission of the author, Ellen Sinreich, president of Green Edge LLC, a Green Building consulting/law firm that provides strategic sustainability services to businesses and governmental entities. email firstname.lastname@example.org web www.greenedgellc phone 212-828-3840 212-828-3840