Photo: Tim Griffith California Academy of Sciences The Rainforests of the World interior and its Living Roof are part of the museum's green building strategy

Green Gains
REITs are increasingly embracing green building
By Allen Kenney

One growing class OF investors and institutions is beginning to sharpen its interest in sustainability as part of a focus on corporate social responsibility (CSR) in general. This group wants to see companies take proactive approaches to lessen their potential environmental damage, according to Stu Dalheim, director of shareholder advocacy for Calvert Group, a socially responsible investment firm that sponsors mutual funds. "We want to see that companies are paying attention to their core impact on the environment, as well as looking for opportunities to directly reduce that impact," he says.

Green building, however, has grown into more than just the domain of a progressive fringe of investors. Leaving aside the business ethics and morality of going green, it's making more sense on a strictly business case. With energy prices skyrocketing and no relief in sight, the economics of making buildings more energy efficient are improving. Despite the uncertainties associated with the green movement, industry executives and observers seem confident that embracing sustainable building will benefit companies and their shareholders over the long haul.

Green Stars

The evolution of green building in commercial real estate is evident in the commitments made by some high-profile REITs to sustainable building.

In January, for example, ProLogis (NYSE: PLD), the world's largest industrial REIT, announced that all of the company's development going forward would be built in accordance with the U.S. Green Building Council's (USGBC) Leadership in Energy and Environmental Design (LEED) standards. LEED certification is widely considered the domestic real estate industry's gold standard for environmentally responsible building, and ProLogis is pursuing certification for all of its current and future building. In the months since the announcement, ProLogis also has unveiled programs designed to leverage renewable energy sources and improve its overall energy efficiency.

Photo: Tim Griffith

"By incorporating design elements for LEED certification for all our new distribution space in the U.S., we help to extend the lifetime of our buildings, ensure they perform to the highest standards of environmental construction, and provide our customers with distribution facility options that further their own sustainability agendas," says ProLogis Chief Sustainability Officer Robert Watson.

Retail REIT Regency Centers has been another industry leader when it comes to green building, unveiling its own sustainability program in November 2007. Regency's aims for its initiative are slightly more measured than those of ProLogis. Among Regency's goals, the company intends to obtain LEED certification for 20 percent of its new developments in 2008, 40 percent of next year's starts and 60 percent of new projects thereafter.

Peternell says the list of benefits from such efforts starts with the fundamental goal of almost any company.

"What you're really talking about is a higher-quality product, and we have a reputation of being a quality developer," he says. "We believe sustainability and green development is the natural extension of our value proposition and our brand."

For mall investors looking for environmentally friendly companies, NAREIT Leader in the Light honoree Simon Property Group (NYSE: SPG) stands out as having been one of the most aggressive REITs. Earlier this year, the Indianapolis-based mall giant won an award from the Environmental Protection Agency for its efforts in reducing energy use and carbon emissions at its properties across the country. The Energy Star Partner of the Year Award was the first won by a REIT in more than five years.

Liberty Property Trust (NYSE: LRY) has also been at the forefront of green real estate, and an exemplar of the LEED program. The USGBC has even called the Malvern, Pa.-based Liberty, which has 73 million square feet of office and industrial real estate, the "poster child for commercial green development."

One of the biggest "going green" announcements came last year from CB Richard Ellis Group Inc., the world's biggest commercial real estate services firm. The Los Angeles-based company said it would go carbon neutral by 2010—meaning the company's office space won't be a net producer of greenhouse gas. CBRE plans to accomplish that mainly with aggressive energy efficiency programs but also by buying wind power and carbon offsets, says Sally Wilson, the firm's global director of environmental strategy. The company is rolling out its plan for its facilities management clients too, so it will have a multiplier effect.

Greendex: Investors seeking sustainable real estate companies have few lists to rely on By Ryan Chittum Environmentally friendlier developments seem to be everywhere these days. It's becoming easier for tenants to find green space, whether they're as high profile as Al Gore's investment firm, Generation Investment Management LLP, or they're a mom-and-pop store going into a new LEED-certified mixed-use project. But just how easy is it for stock-market investors to put their money in environmentally friendly real estate companies? While there's lots of money to be saved—and made—in sustainable development, it's still not as easy as it could be for investors to put their money where their values are—at least when it comes to real estate equities. For now, retail investors are mostly on their own in getting green real estate stocks. For example, green real estate mutual funds are close to nonexistent. Forward Uniplan Advisors has a specialized fund called Forward Progressive Real Estate Fund (Nasdaq: FFREX), which picks real estate companies with enlightened policies on the environment, governance and social issues like labor. Its biggest holdings are Simon Property Group, ProLogis, and AMB Property Corporation (NYSE: AMB), but the fund is perhaps the only one of its kind so far. Similarly, the Dow Jones Sustainability Indexes contain real estate companies. However, there's no real estate-specific index yet, says Dow Jones Indexes spokeswoman Naomi Kim. "There are a lot of ways to find companies, but there's not a single official list that says, 'Here are the REITs rated according to a set of standards,'" says Gary Pivo, professor of urban planning and natural resources at the University of Arizona. That means real estate investors seeking green are facing a long slog through companies' securities filings and marketing materials to learn about their environmental attitudes and policies. Beyond that research-intensive method, though, Pivo says investors should look at resources like U.S. Green Buildings Council's (USGBC) LEED database and the government's Energy Star program. He recommends that users with access to CoStar search its databases, which contain the same information, but have the benefit of being easier to search. Another place environmentally concerned investors can use for direction is the Global Reporting Initiative (GRI). The Amsterdam-based public interest group studies a host of sustainability issues and maintains a worldwide network of eco-interested academics, company executives, investors and other business professionals. GRI has developed what is considered to be the most widely used reporting framework around the world for measuring an organization's economic, environmental and social performance. The framework includes guidelines for performance indicators and statements related to issues like a company's overall strategy, governance structure, labor practices and environmental impact. Investors also can use GRI's online clearinghouse of social responsibility reports to check up on a company's performance. Unfortunately, though, the site advantages for real estate investors are about as limited as the green mutual fund market—the worldwide list of real estate reports is just six companies long. Ryan Chittum is a contributor to Portfolio.

Photo: California Academy of Sciences

Green Pain for Long-Term Gain

As the green movement builds steam across the real estate industry, opinions continue to vary on bottom line effects and the best way to implement such programs.

While companies like ProLogis have dived into green real estate development head first, others are taking a more restrained approach. Peternell says Regency intends to start building sustainability into its operating platform incrementally to help evaluate what works and what doesn't. Consequently, the company is relying on "baseline sustainability measures" for all of its current projects and plans to gradually ramp up its emphasis on LEED certification.

"In our new developments, we want to incorporate known commodities," he says, which would include energy-reducing light fixtures and other green building hallmarks. "We don't want to say that we're going to LEED certify everything that we do, because we don't completely understand what the costs are."

Regency currently estimates its eco-friendly plan will likely raise its construction costs by as much as 2 percent. That's around the industry average for LEED certification, according to Ed McMahon, the senior resident fellow for sustainable development at the Urban Land Institute. He notes that most research places the impact of going green at somewhere between 2 percent and 6 percent, depending on a project's level of eco-consciousness.

Of course, green proponents point out that higher costs can be offset by greater savings and increased revenues. Dalheim and McMahon dismiss the notion that sustainable strategies will have cut deeply into companies' financial performance, noting that the trickle-down effect of environmentally efficient building can actually help boost the bottom line.

PROLOGIS' KAISER DISTRIBUTION PARK IN FONTANA, CALIF. will have 250 megawatts of solar panels attached to its roof, generating enough power to provide 1,426 households for one year.

"The question for an investor would be, 'Does going green add value?' Certainly with respect to green buildings, there's a growing body of evidence this is the case," says McMahon.

For instance, Marc Heisterkamp, manager of corporate and investment real estate at the USGBC, says the energy savings of a LEED-certified building average 25 percent—those that are certified LEED Platinum or Gold can save 45 percent. Likewise, Simon Property Group saves some $11 million in operating costs because of its energy efficiency measures, which dropped its energy usage 10 percent from five years ago and reduce its yearly carbon emission by 65,000 tons or the equivalent of the carbon-sucking abilities of a 15,000-plus acre forest.

"If we do find that our costs increase in that 1 percent to 2 percent range, then we can absorb them on most projects through the potential benefits we can generate," Peternell says of Regency's sustainability program.

Studies confirm that green development has other value-added benefits. Research published by CoStar in March 2008, for instance, found that LEED-certified commercial property generated a premium of $11.33 per square foot from tenants over non-LEED peers. Certified green buildings can justify rent premiums of 2 percent over comparable buildings nearby, according to research published in April by the Fischer Center for Real Estate and Urban Economics at the University of California, Berkeley. To top that, they found effective rent premiums of 6 percent when they took into account the occupancy levels of non-green comparables nearby. Heisterkamp notes that rent premiums for environmentally friendly buildings can hit 10 percent in places where there's higher demand for them, like New York City.

A Green Thumb By Tara Anderson Stock market trends often reflect the public’s social concerns. With the growing focus on environmental sustainability there are numerous funds that focus on investing in environmentally conscious companies. This type of sustainable investing falls under the umbrella of the larger trend of Socially Responsible Investment funds (SRI), which are estimated to reach $3 trillion in assets by 2011, Portfolio found the following funds dedicated to investing in environmentally sound companies. • Ariel Appreciation    Ariel Fund • Blue Large Cap Fund    Blue Small Cap Fund • Calvert Capital Accumulation    Calvert Large Cap Growth    Calvert New Vision Small Cap    Calvert Social Balanced    Calvert Social Bond    Calvert Social Enhanced Equity    Calvert Social Equity    Calvert Social Index    Calvert World Values International Equity • Green Century Balanced Fund    Green Century Equity • Pax World Balanced Fund    Pax World Growth    Pax World High Yield Fund    Portfolio 21    Proshares • Sierra Club Stock Fund • Spectra Funds • Winslow Green Growth Fund • denotes parent company to the funds below.

LEED, Follow or Get Out of the Way

Whether companies that lag behind the green building movement will be penalized by investors remains to be seen, but Heisterkamp says it's clear that those who are at the forefront of sustainability have investment returns as good as, or better than, those who aren't.

That's been borne out by a study from Innovest Strategic Value Advisors, which found that isolating the greenest companies in the Dow Jones Wilshire REIT Index resulted in returns that were 4.8 percent a year higher than the overall benchmark index itself.

Photo: Curtis Parker/TheiSpot.com SIMON PROPERTY GROUP'S FASHION MALL AT KEYSTONE IN Indianapolis, In has benefitted from the company's energy savings initiatives.

Additionally, green REITs are touting their efforts as a competitive advantage in a market where environmentally based regulatory change is a matter of if, not when. Peternell contends that companies like Regency will have a lead in sustainable building that will grow as new technologies grow cheaper and employees gain the necessary skill sets.

"We'll gain the in-house expertise, which will be a source of competitive advantage for us, after we've done these projects for a year or two," Peternell says. "We'll have that knowledge in-house so that we can execute and duplicate that model more quickly and more cost effectively than other competitors can."

In fact, going green isn't just an option anymore, according to McMahon. It's an ultimatum.

"We are heading into a rapidly changing world. If your companies' properties are not green or energy efficient, you're going to be behind the eight ball," McMahon says. "The companies who get into sustainable building later are going to lose money, and the smart investors are putting their money behind green building and green development."