REITs aim for worldwide certification

Concepts of green or sustainable building design and operation have caught on worldwide. Due to this, REITs with international portfolios, or even those eying international expansion, now face a welter of certification rules and best practices in different parts of the world.

In the United States, the two most widely used green rating systems for buildings are Leadership in Energy and Environmental Design (LEED) and EnergyStar. LEED originated with the U.S. Green Building Council (USGBC), a non-profit organization that now oversees the rating system. The organization dates from the late 1990s, and it began awarding LEED certifications to buildings in 2000. Thus far, about 14,000 projects have been either LEED certified or are seeking it.

At its heart, the USGBC rates structures according to how they impact the environment in a number of ways, including site selection, water savings, energy efficiency, materials and resources selection and indoor environmental quality. Each structure or group of structures submitted for a LEED rating receives points for various aspects of sustainability that it incorporates into its design or operation, and USGBC awards certifications based on point totals: basic LEED certification, silver, gold, and the highest, platinum.

EnergyStar, a voluntary set of standards established and overseen by the U.S. Environmental Protection Agency, addresses energy conservation, but is more widely used in residential development than commercial development and operations, as well as other items, such as appliances. EnergyStar ratings are given to buildings that achieve prescribed levels of energy efficiency.

Spanning the Globe

In the U.K., the equivalent of LEED is BREEAM, the Building Research Establishment (BRE) Environmental Assessment Method. In Britain, there are approximately 115,000 BREEAM-certified buildings and approximately 700,000 buildings registered for assessment. Unlike the LEED point system, the British system relies on licensed assessors who work within a quality assurance framework set down by the BRE. The rating levels do not include an ascending ladder of allusions to precious metals, but rather are pass, good, very good and excellent.

LEED has branched out into other countries, most notably LEED Canada, and so has BREEAM, which has considerable popularity in various forms on continental Europe. In the case of both LEED and BREEAM, a local nonprofit green building organization adapts the respective standards to meet local needs. There are, however, a number of homegrown green building standards existing or being created in various parts of the world.

For instance, Australia has Green Star, while Japan has the Comprehensive Assessment System for Building Environment Efficiency (CASBEE) and Taiwan has Ecology, Energy Saving, Waste Reduction and Health (EEWH). Russia, China and India, among other countries, are also developing green building standards.

Beyond a strictly national outlook, the World Green Building Council is an organization composed of national green building councils, whose mission is to accelerate the movement toward sustainability worldwide by encouraging national standards, rather than promulgating any kind of global standard. The current member nations of the World Green Building Council represent more than 50 percent of global construction activity, according to the organization.

Ready to Go Green?

Many REITs don't seem the least bit fazed by the prospect of building green worldwide. For example, AMB Property Corp. (NYSE: AMB) has a portfolio that spans the continents and has green initiatives in numerous places. "In each country that has its own standard, the engineering and construction firms have become well versed in green construction, so differing national standards aren't that much of an issue," says Steve Campbell, senior vice president and director of environmental and development services at AMB. "The trick for us is to take the valuable techniques we've learned in one country and educate the engineers we work with in other countries about them."

For example, he says, there isn't as much interest in installing florescent lighting in industrial properties in Japan as there is in North America or Europe, though sometimes it might be appropriate. "In much of Asia, what we in North America consider low-hanging fruit, such as florescent lighting, isn't as widely acknowledged," he says. "In Japan, metal halide lights have been optimized to be highly efficient, and it works well in most cases. But we want to help introduce florescent lighting where it makes sense in Japan."

At least two factors are driving green design and the push toward green certification. One is tenant demand, while the other is the prospect that many aspects of green design will save money for both landlords and tenants.

Certainly green design is close to mainstream these days, and tenants want to know their options in terms of sustainable properties, says John Gattuso, senior vice president and director of national and urban development for Liberty Property Trust (NYSE: LYR), which owns office and industrial properties in both the United States and the United Kingdom. "In 2001, when we started making moves to incorporate sustainability into our projects, I was asked at a conference how many tenants were inquiring for sustainable building features," he says. "At that time, we were leasing approximately 14 million square feet a year, and only one tenant had asked about it."

By 2005 and 2006, however, Gattuso says that "our leading-edge customers began asking seriously about sustainability, though they might not have been willing to pay a premium for it. Now I'd say that the majority of prospective tenants have sustainability in mind, and many are willing to pay the small upfront premium associated with it."

Cost Savings of Green

How much is a "small" upfront premium? "It isn't standard from project to project," Gattuso says. "But we can say if you approach a development as sustainable from day one, you can see cost premiums in the 1 percent to 2 percent range, or less."

It's also become clear in recent years that for the upfront cost of many green design features, both landlords and tenants save costs in the long run. "The most obvious are energy costs, but sustainability is bigger than merely lighting or insulation," Campbell says. "Site selection in infill locations offers a huge opportunity in sustainability."

He cites urban distribution facilities in Japan as an example of green developments that are sustainable largely because of their infill locations. "Such a location allows the concentration of distribution in urban areas, which cuts out a lot of the truck traffic and energy costs," he says. "This approach could be applied in North America or Europe. It just takes some rethinking about distribution, and the high cost of energy may well get that rethinking started."

Moreover, the weight of recent evidence suggests that green buildings are gaining a competitive edge over less green structures. This spring, the CoStar Group released a study that found that green buildings outperform non-green assets in certain important economic metrics. The study examined more than 1,300 LEED and EnergyStar buildings totaling about 351 million square feet, compared with non-green buildings of similar size, location, age and other variables. Among other findings, LEED buildings fetched rent premiums of $11.33 per square foot over non-LEED buildings, and have 3.8 percent higher occupancies. Likewise, EnergyStar buildings were shown to have an advantage over non-EnergyStar ones.

Is actual LEED or EnergyStar certification, which involves considerable amount of documentation on the part of either the owner or the developer, worth the expense? Or can developers add cost-saving green features without going to the trouble of the certification process?

Liberty Property Trust's Gattuso advocates certification. "In some respects, it's a seal of quality," he says. "It lets the marketplace, and prospective tenants, know that you aren't out to greenwash your properties with lip service, but have incorporated a prescribed list of features that will result in a high-performance, low-footprint building."