Spreading Sustainability

Although the U.K. and Australian commercial real estate communities were the first to make strides toward green initiatives, U.S. real estate companies are now joining the party.

Up until this point, commercial real estate in the U.S. has been less aggressive than in the U.K. and Australia in going green, largely attributed to differing tenant and societal demands in the regions. The good news is that through existing Australian and U.K. sustainable initiatives, players in the U.S. can gain wisdom from programs that have been in place for some time.

To underline how far the U.S. has to go, in November 2007 Deutsche Bank's alternative investment group, RREEF, conducted a study entitled "Greening of U.S. Investment Real Estate" with the U.S. Department of Energy. The study suggests that the matrix of apartments, office buildings and shopping centers that comprise most U.S. real estate holdings are resoundingly un-green. Fortunately, there are a multitude of initiatives underway in the U.S. to change the picture.

Globally Green

As U.S. REITs and other commercial real estate companies begin the journey to green practices, there are a number of broader initiatives worldwide that may help lead the way. Michael Brooks, CEO of Real Property Association of Canada (REALpac) says that many North American real estate companies are just beginning to think about implementing social responsibility measures—a first step to integration of green practices in company-wide operations.

"There are a few U.S. real estate firms that are on board [like ProLogis, Inc. (NYSE: PLD)]," Brooks says. "But REITs like Australia's Investa Corporation and the British Land Company in the U.K., are true innovators." He adds that some Australian companies disclose their energy consumption levels publicly and have implemented standards created by industry consortiums and supported by local governments.

Additionally, there are many sustainability concerns that have initiated other standards, like the U.N.'s principles for responsible investment (PRI), which provides member nations a menu of ways to incorporate environmental governance into mainstream investment decision-making and ownership practices.

By adopting this type of standard, many commercial real estate companies are seeing dramatic results in their sustainability initiatives. For instance, Australian REIT Investa says it has cut water consumption by 33 percent, reduced electricity usage by 20 percent and cut natural gas usage by 41 percent across its entire commercial portfolio.

Evolutionary Process

Although government regulations usually provide incentives and a roadmap for creating a sustainability plan, it's up to corporate management to drive results. Peter Clarke, executive officer of British Land Company, says the company adheres to U.K. green building codes like the Building Research Establishment Environmental Assessment Methods (BREEAM) and incorporates standards from the United Kingdom Green Building Council (UKGBC). Because of growing concern for the environment, the UKGBC was formed in 2007 by a membership organization consisting of businesses from across the industry with a focus on sustainability. "Sustainability's been an evolutionary process, driven partly by regulation like the UKGBC and partly by industry councils like BREEAM," Clarke says.

The UKGBC's mission is to build national awareness of sustainability and provide clear direction for the sector as a whole. Recently, the UKGBC partnered with BREEAM, a REIT-supported council that has developed widely used environmental assessment methods for green buildings. "BREEAM is a leader in developing codes and standards for best practices in sustainable development," says Jenna Behan, the company's spokesperson.

Regional councils like the UKGBC are offshoots of the World Green Building Council (WGBC), whose current member nations represent more than 50 percent of the world's commercial developers including representatives from the United States Green Building Council (USGBC), Canada's Green Building Council (CAGBC) and the Australian Green Building Council (AGBC). These organizations offer corporate members the opportunity to work with a task force of industry experts to implement biodiversity and sustainability standards.

"New legislation is being introduced almost daily," says Fraser Hughes, research director, European Public Real Estate Association (EPRA). "Regional green building codes like BREEAM (U.K.), LEGEP (Germany), ESCALE (France) and EcoQuantum (Netherlands) are sustainability programs that are similar to LEED (USA) in providing project certifications, professional accreditations, reference guides and templates for certifying green buildings."

Making a Difference?

However, transitioning company's assets, mindsets and wallets towards more sustainable governance will not be easy. Compounding the inherent sluggishness of most large companies, many also cite faults in green regulations like the USGBC's LEED program. "Shortfalls, including exorbitant costs to become LEED-certified and a plethora of ever-changing codes, are causing concern," says Andrew Nelson, vice president, RREEF.

According to Nelson's research, it is too early in the game to confirm data on the benefits of green buildings in the form of expedited permitting, significant tax breaks and carbon credits.

"Although we are unable to track green building sales data so far, our projections remain bullish," says Dan Fasulo, managing director at Real Capital Analytics. He asserts that green buildings should trade at higher values than traditional buildings for the simple reason that they come with lower maintenance and utility costs. Therefore, this should equate to higher occupancy rates at premium rents.

According to Graeme Newell of the University of Western Sydney, "There are also many global green initiatives like the U.N.'s Kyoto Protocols and the EU's Energy Performance of Buildings that focus on reducing worldwide greenhouse emissions by setting minimum standards on a global basis and by implementing energy usage guidelines as well as global compliance and reporting schedules for governments and corporations of participating countries."

If they haven't already, corporate attitudes towards sustainabilility will be changing rapidly. "All REITs will need to have a sustainability program within a few years," says Jim Lindroos, operations manager for the Asian Public Real Estate Association (APREA). Brooks agrees. "Economical, social or meteorological anomalies affect how people live, where they live and how they work and think. A crisis is usually the catalyst that inspires most conservation," he says.