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Paying For Green

One cannot help but notice – every magazine and every professional publication these days has at least one article on green building technology. After the 2008 energy roller coaster, it seems appropriate to put some of this into perspective. As building inspection engineers, we will tend to focus on existing buildings, but much of what follows applies to new buildings as well.

What Are Building Owners Doing?

In 2007, and again in 2008, the Building Owners & Managers Association (BOMA), Real Estate Media and the U.S. Green Buildings Council (USGBC) conducted a survey of real estate investors, owners and managers. As evidence that the subject is gaining attention, 87% of the respondents in 2008 said that the greening of their portfolio was a high priority, versus 81.5% in 2007. In terms of putting their money where their mouth is, in 2008 80.6% said that their firms had allocated funds toward sustainable practices versus 63.9% in 2007, and 86% said that they would spend the same or more next year. In terms of what they are doing, 90% report employing some kind of energy conservation measures, 88% recycle, 82% have some kind of water conservation program and 62.2% have indoor air quality (IAQ) programs. All are up from 2007 except IAQ, which remained about the same.

While all this points to the increasing role of sustainability in existing buildings, not everyone is convinced that green technology makes economic sense. The evidence that tenants are demanding it is anecdotal and inconclusive for the most part. And there remain skeptics who wonder whether it is worthwhile or necessary. Still, if such measures involved little or no cost, there would appear to be no reason not to include them in the normal operation of all buildings.

Changes in LEED Certification

Before describing some of the approaches that are being used to fund green initiatives, it is worth taking a quick look at the status of the Leadership in Energy and Environmental Design (LEED) initiatives as promulgated by the USGBC. As of this writing, more than 77,000 individuals have gained LEED Accredited Professional (AP) status, including 17 Criterium engineers. The program is becoming mainstream and several key changes are scheduled for implementation in 2009. Two of the more significant from our standpoint are:

  1. True Life Cycle Assessment – The credit weighting system employed in the past did not always correspond to those measures that have the greatest effect. Thus, it was often possible to pick up credits for actions that were relatively meaningless. This is being corrected in 2009.
  2. Regional Considerations – Actions in one part of the country may have less impact than in other areas. Issues such as whether energy demand is higher for heating or cooling and whether water supplies are adequate or limited all should (and eventually will) factor into the rating of buildings.

Making the Numbers Work

For the property investor, owner or manager, the financial return is, and will always be, paramount. Funding sustainability must be looked at from many perspectives. No single path to supporting a financial investment will likely result in a significant return on investment. But if multiple strategies are considered, the payoff is clearly attainable, depending on the variables affecting the investor. We attempt to list some of these considerations below.

Financial Incentives

One of the first things to consider when considering green retrofits is the availability of local, state or federal financial incentives. The USGBC lists a total of 179 such incentives around the country. These may be found on its website at http://www.usgbc.org/DisplayPage.aspx?CMSPageID=1852

Reduced Operating Costs

The savings produced by green technologies are real. A study by the New Buildings Institute found that median energy use of 121 LEED-certified buildings was 24% below that for the national building stock. The U.S. General Services Administration found green buildings had 26% less energy usage and 13% lower overall maintenance costs. According to a survey by Turner Construction of industry executives, the median payback period was believed to be 7 years. However, with many green technologies costing little or nothing to incorporate, the reality is often quite different.

Financing Opportunities

In 1999, researchers working for Pacific Gas & Electric and the U.S. Environmental Protection Agency concluded that reductions in energy costs of 20 to 30% can improve net operating income by 2 to 5%. If such measures were incorporated into the appraisal and lending processes, higher property valuations would necessarily result. Capitalizing the value of “green” is just now entering the financing process resulting in higher cap rates or an improved ability to service the loan.

Strategic Planning

Once the decision has been made to employ green technology, the building owner/investor should carefully consider all the technologies available. Some gains may be accomplished at little or no cost. Some technologies may actually compete with each other. It is important that decisions not be made on a salesperson’s representation of savings or one person’s pet project but on an overall look at the way a building interacts with its occupants and tenants.

Improved Marketability

In the first non-anecdotal study that we know of, by the end of 2007, occupancy rates were about 3% higher (91 vs. 88%), rental rates were $2.50 more ($29.00 vs. 31.50), and sales prices were about $40/SF higher in Energy Star versus non-Energy Star buildings. The results are based on a survey of Class A office buildings by the Burnham-Moores Center for Real Estate and CoStar. Although other uncontrolled variables may have contributed to this difference as well, there appears to be concrete evidence that energy-efficient buildings are worth more.

Improved Productivity

Studies in schools have shown that students learn more in spaces that are comfortable and well lit. Studies in the commercial environment are more limited, but in 2007, Capital E Analytics estimated that where green technology is employed, lower absenteeism, fewer headaches, greater retail sales and easier reconfiguration of space resulted in savings 10 times the energy savings alone.

Income Generating Opportunities

All the above measures are designed to reduce or offset the costs of green building systems. It is also possible to use this technology to improve the bottom line. At least two Real Estate Investment Trusts (REITs) are using their significant roof areas – warehouses in the case of ProLogis and shopping malls in the case of Developers Diversified – to install photovoltaic solar panels. The energy generated will reduce operating costs for both the owners and tenants and also produce rental income.

According to a survey by Turner Construction, the number one factor discouraging the construction of green buildings is the “cost and documentation for LEED certification.” As we can see, green construction can work and be profitable. Recent developments at the Environmental Protection Agency suggest that green construction may also become mandatory. A knowledgeable consultant should be able to put all these factors together and assist with the process of making green buildings part of our built future.

Volume 20, Number 1

January 2009

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