A new survey indicates a wider demand by property investors and tenants for buildings that have earned either Leadership in Energy and Environmental Design (LEED) certification or the Energy Star certification.
According to a CoStar Group study, LEED buildings command higher rent premiums per square foot over their non-LEED peers and have higher occupancy. Rental rates in Energy Star buildings represent a smaller premium per square foot over comparable non-Energy Star buildings and also have higher occupancy. Energy Star buildings and LEED buildings are each selling more per square foot versus those that are not.
“Most major property management companies are really trying to get a handle on green construction and green development,” says Jim Dyer, Vice President of project and construction management for Grubb & Ellis Company’s Corporate Service Group. “But it’s a moving target; there is not a defined set of green policies that everyone’s trying to follow.”
Smart Business talked to Dyer about what factors play a role in a company’s eco-friendly real estate policies.
How is the environmental movement making an impact on commercial real estate?
In today’s commercial real estate market, you must be prepared to market your product or services as being green. Like it or not, clients are now demanding it, and the government is starting to require it. The rapid growth of green initiatives within the real estate sector has caught many owners and property managers by surprise, most finding there is no ‘one-size-fits-all’ approach to moving green.
To meet a rapidly growing demand for environmentally friendly options, many owner/developers now include such green practices as recycling or the use of lower VOC (volatile organic compounds) building materials. Unfortunately, many of these options provide little, if any, ROI for the owner/developer. Conversely, the owner/ developer’s approach to green initiatives typically seeks out those concepts such as relamping to high-efficiency lights or upgrading HVAC equipment, which, while being ‘green,’ can also generate an acceptable ROI.
While there are many differing opinions as to which green initiative is more beneficial, the industry’s use of LEED certification and Energy Star certification has become an invaluable performance benchmark. These certifications allow developers/owners a means to market their product as being environmentally friendly. It also provides another measuring bar for investors and tenants trying to evaluate competing buildings.
How is local government involved in setting ecological standards that apply to real estate?
Recently, Dallas implemented a new program establishing practical incentives, such as expedited plan-check for those buildings and projects that make a demonstrated commitment toward meeting many of the same standards found in the LEED program.
In 2009, the city will also mandate that all projects reflect a 15 percent reduction in energy consumption as compared to the 2006 Energy Code and a 20 percent reduction in water consumption compared to the 1992 EPA standards. While it will lower the operating costs for the property, it will lessen the growing demand on the city’s utility infrastructure and financial resources.
How do finances, return on investment and spending threshold impact corporate planning for eco-friendly buildings?
All other factors being equal, using green building materials for interior finish construction typically can add 10 to 20 percent to project costs. While most construction budgets or operating decisions typically boil down to an ROI, those companies considering green options tend to be more subjective than simple ROI analysis. They tend to look at the available green options in a manner that does not easily translate into ROI numbers. Decisions factors could include: employing green initiatives as a means for retaining younger employees (generally considered more environmentally conscious), promoting a better image within the community or region, or even just being associated with participating in leading-edge green technology.
How does a real estate adviser or corporate real estate specialist manage green projects and construction?
Within commercial real estate, going green while still in its infancy has already demonstrated its ability to impact building operations and valuation. An afterthought only several years ago, it’s no longer uncommon for projects or properties to be positioned or viewed in terms of green value.
The challenges for project managers or transaction professionals involving acquisition, development and/or construction will be the same as they have always been, but they must now be able to understand and convey to the client the practical implications of green initiatives, policies and codes, and their potential impact on current and future value of investments.
JIM DYER is Vice President of project and construction management for Grubb & Ellis Company’s Corporate Service Group. Reach him at (972) 450-3218 or email@example.com.