By Paul von Paumgartten
Building owners are charged with providing their tenants with an indoor environment that assists them in obtaining their business objectives. Green buildings can help do just that and, in the process, increase shareholder value for the REIT that owns the building.
Whether it is new construction or an existing structure, facilities are huge investments. And like any sound investment, building owners expect return on their capital. Today’s real estate industry leaders are finding that green buildings, while environmentally responsible, are a viable way to build, renovate and operate economically as well.
"Building green is really about creating better buildings," says Pamela Lippe, environmental consultant to The Durst Organization, developer of Four Times Square, the first environmentally responsible high-rise building in the U.S. "Buildings that provide better performance and returns for their owners and better lighting, indoor air and comfort conditions for their occupants are the goal. While green developers may still be a bit ahead of the marketplace, they are providing buildings for the future, not the past."
From a purely financial standpoint, green buildings offer REITs opportunities on both sides of the ledger. First, they can reduce expenditures. Green buildings are energy efficient, providing savings on utility costs and operations. They are also healthier for tenants and their employees because of improved indoor air quality, reducing liability risks and providing opportunities to lower insurance premiums.
Second, green buildings can increase revenue. Green buildings are more productive workspaces because of more efficient climate-control systems, delivering higher tenant occupancy rates. Additionally, because green buildings are healthier, more productive and more attractive to prospective tenants, they support higher lease rates and command a higher market value.
The National Geographic Society (NGS) has undertaken a comprehensive sustainable upgrade program for its facilities. An independent evaluation concluded that the facility’s value increased $4 for every $1 invested. Considering the NGS invested $6 million in green building upgrades, this equates to a $24 million increase in building market value.
Taking the Bite Out
of Initial Costs
Contrary to what some critics have argued, upfront costs for sustainable, green buildings need be no greater than those for traditionally designed and constructed buildings. New construction projects using the LEED (Leadership in Energy and Environmental Design) Green Building Rating System of the U.S. Green Building Council are proving to be cost neutral up to the Silver Level of LEED certification (which is the third-highest standard). Increasingly, building projects are guided by standards set by LEED, which is the industry’s most comprehensive authority for defining a green building based on its environmental friendliness, with 1,000-plus registered projects and numerous applications for certification pending.
Liberty Property Trust (NYSE: LRY) participated in the pilot phase of the LEED Existing Building (EB) program, while other REIT-owned properties are likely among the hundreds of applications awaiting certification.
"We wanted to be involved with the LEED pilot program because we thought it was so important to try and influence the improvement of the existing building stock of the country," says Jim Lutz, Liberty’s senior vice president of development. "The program, from my perspective, has been successful. It’s getting a lot of dialogue from people who are doing practical projects on the ground. Hopefully a lot of companies will make use of it and get their buildings LEED certified."
While Liberty is looking at renovating other existing buildings, it is also tailoring new construction to LEED certification. Liberty is designing a building in Philadelphia that will be the first high-rise skyscraper that will be a LEED-rated building in the U.S., Lutz says. Construction is slated to begin right after the first of the year.
For green buildings to be cost effective, integration is key. Integrated design and construction by a team that thinks ahead through the building project and throughout the life of the building have proven that significant savings can be realized in the new-construction, building-improvement and facility-operation processes. Consider these facts:
- The lifecycle costs of buildings can be reduced by at least 25 percent using an integrated team approach, according to the National Canadian Energy Code.
- By using an integrated design, construction and operating process, building owners can lower operating costs by 20 percent to 50 percent, according to "Green Development: Integrating Ecology and Real Estate."
- Integrated building systems cost 10 percent less to install and commission, according to Johnson Controls.
- Energy costs can often be reduced by up to 30 percent if building owners merely use existing energy-efficient technology, according to the U.S. Department of Energy.
- In the total life of the building, design and construction costs only amount to 11 percent, according to the American Society of Heating, Refrigeraton and Air-Conditioning Engineers.
As those facts show, cost reductions dramatically play out in designing and operating for energy efficiency. Energy is the single largest operating expense for commercial office buildings, according to the U.S. Environmental Protection Agency (EPA). Energy upgrades often have a 20 percent to 30 percent rate of return and are low risk. At a 10 percent capitalization rate, a building owner can generate $2 to $3 in incremental asset value for each $1 invested in energy performance improvements, according to the EPA. Also, saving 30 percent of energy costs would increase net operating income (NOI) by 5 percent in a building that has a net operating margin of 6 percent. Using the income approach to appraisal, the 5 percent increase in NOI would support a 5 percent increase in building asset value.
Features Beyond
Operational Savings
Beyond construction and energy cost savings, a number of recently completed behavioral studies are providing numbers that indicate there are even more bottom-line savings to be realized by "going green." Green design features such as daylighting, thermal comfort, occupant-friendly carpeting, wall coverings and furniture all play a key role in defining an interior environment. They also have a profound effect on tenant workforces.
- Because the physical workplace can affect job satisfaction as much as 24 percent, an enhanced indoor environment can reduce the costs of churn and turnover due to dissatisfaction, according to workplace-analysis research firm BOSTI Associates.
- Employees with control of their lighting were more satisfied with their jobs, more comfortable in their workspace and rated tasks less difficult to accomplish than those with fixed lighting, according to Ibid.
- Proper thermal comfort and lighting result in a 6 percent to 16 percent gain in productivity from increased worker effectiveness, fewer errors and fewer sick days, according to the Rocky Mountain Institute’s "Greening the Building and the Bottom Line."
An Asset in Attracting and Retaining Tenants
Hines, an international real estate development and management firm, has adapted a growing number of green-building technologies in its facilities that are attractive to tenants. For example, a building it is designing for a large Atlanta law firm will have new mold-resistant shaft liners for the HVAC system as well as electronic air cleaning technology because indoor air quality is of particular importance to this tenant. At another building in Houston, Hines has introduced a pure, filtered drinking-water system, which promotes good health and saves money for the tenants who do not have to buy bottled water.
Additionally, at a Hines-owned campus in Schaumburg, Ill., tenants are offering "glowing" reports about an under-floor air distribution system that allows for employee-controlled temperature and comfort systems. More than good reports, however, Hines has discovered that this multi-building corporate office campus is about 20 percent better leased than the average lease-up in the Chicago market. The under-floor air distribution technology also reduces the cost of churn.
"Higher employee productivity cannot yet be proven in these new facilities," says Jerry Lea, senior vice president, conceptual construction at Hines, "but the concept of healthy, green buildings is gaining ground in the tenant community, who are excited about the possibilities."
In an industry where publicly traded real estate companies strive to create shareholder value by setting themselves apart from their competition, green buildings provide significant differentiation. They offer increased attraction and retention, they add value to the asset management strategy by reducing costs and increasing income, and they deliver healthy, comfortable indoor environments that enable tenants to achieve their core business objectives.
Paul von Paumgartten is the director of energy and environmental affairs with Johnson Controls, Inc., and a treasurer on the USGBC board of directors.
