Our (2007-2008) Green Journey - 9 Ways Green Building is Revolutionizing Commercial Real Estate

Happy New Year from Berlin’s Prenzlberg! The former East Germany is a great place to reflect on transformation and my usual year end questions are “how is my life different now than a year ago?”, and “where should I focus my attention in the coming year?”. The Green Journey approach to understanding green real estate finance and investment trends is not much different:

• What changes in real estate and green building are making us talk and act differently now as opposed to a year ago?
  

• What issues will shape what we say and do about green real estate  in 2008

2007 - The Sustainability Revolution

9 Building green is now a requirement, not an option.
At the end of 2006, green building was a futuristic concept - not a critical component of value creation. Now that is over:

• Studies from Davis, Langdon and United Technologies show the cost of building green can be comparable to non-green buildings, making the benefits of green building accessible to every real estate owner.
• We also covered industry pacesetters, such as Digital Realty Trust and GE Real Estate, who are already out of the gate with investment strategies centered on building, acquiring and greening their assets.
• Going green became a cool investment move recommended by mainstream economists by the end of 2007, making it clear that green is also competitive and profitable.

8 Uncontrolled and undisclosed carbon emissions are a legal and economic risk.
Aggressive legal and regulatory action kicked up some dust in 2007, showing that cities and states are regulating Corporate America’s carbon emissions, regardless of the political winds at the federal level. As one fund manager put it, “[carbon emissions regulation] is not a question of if, but when“.

• Real estate investors should check out Post Carbon Cities and pay special attention to the advice being given to municipalities on aligning local zoning and land use policy with sustainability and climate change goals.
• We posted before about the evolving requirement of disclosure of material risks associated with climate change and greenhouse gas emissions to shareholders.

7 Green financial pilot projects make first spflutters
While the credit markets went sideways on us, that didn’t stop some forward thinking groups from taking on the challenge of accelerating capital flows to green real estate. Nothing tangible is out of the gate, yet, but they still deserve our praise and attention.

• We posted about Sustainable Capital’s green residential mortgage backed securities platform, Green Bonds as well as the Clinton Climate Exchange’s $5 billion kick start of the building retrofit finance market. Expect a vigilant birddogging of these initiatives, since increased capital flows to green building is the critical validation needed for further expansion of sustainability.

6 National credit crunch =  Has anybody seen my lender?
Unfortunately, for a lot of the banks, “the beatings will continue until morale improves”. The latest post from The Real Estate Bloggers says it all. The silver lining for green building? Capital markets volatility forced us to hit the ‘pause’ button on business as usual dealmaking. Survival in ‘08 requires excellence at old school fundamentals: operations, tenant retention, and value creation. We posted about whether “subprime was good for green real estate?” with the answer that ‘cash is king’, meaning that green real estate is in a better position to generate more cash flow.

2008 - ‘The [Sustainability] Revolution Will Be Standardized’

5 Institutional Investors: Insufficient green product & at what price?
Constrained Debt has a cousin named Lotta Equity and she has a couple of frustrating problems — there’s not enough green projects out there to buy and no one has figured out how much to pay for it. A colleague forwarded a great article from the San Jose Mercury News, where a RREEF’s Andrew Nelson outlined the dilemmas:

“There just isn’t much green real estate to buy, making it tough to determine the value of green… “All the initial construction was owned and built for governments and you can’t turn around and sell that, so there has been very few - almost no transactions of green buildings,” he said. “When investors think about the business case for green buildings, they want to know: How do they sell? The answer is we don’t know.”

4 The Rise of Sustainable Markets: Know your city’s climate change, resource and energy agenda

With our post on San Jose, we considered cities that use sustainability to compete for talent, investment and to maintain long term viability. They have become sustainability’s cowboys, driving their own resource, energy and climate change policies, since the federal government can not deliver a comprehensive enough solution that preserves their viability. Since real estate has been outed as the big consumer of city resources and energy services and the big contributer to regional carbon output, it is fair to say that investors will have to think about investment markets in terms of resource and energy sustainability in addition to classic real estate fundamentals so that they can remain relevant to their municipal partners. Check out the U.S. Conference of Mayors website where you’ll see the cities strut their stuff on resource, energy and climate change.

3 Real Estate Innovations: Compete using adaptive reuse and explore overlooked construction methods

We posted here about moving beyond simply building brand new LEED-certified buildings. Eeking out profits from existing real estate and focusing on other construction methods must since the cost side of new construction is not expected to decrease ever. Check out these two posts as food for thought:

• Dave Stejkowski, aka The Dirt Attorney, blogged about a compelling Economist story on lifestyle centers. Nothing for me to add here. Read the post and the article for the full picture.
• Howard Liggett posted about ‘The Myths of Modular Housing’ - a lower cost building method long in use in Germany and other countries, but still stigmatized and misunderstood in the United States.

2 LEED & Beyond: We need transparent performance assessment of building performance

We stay abreast of the EU’s moves on greenhouse gas and energy policy to understand the various ways green buildings are being adopted. And we concluded that ‘transparency makes a market’. No particular rating system in and of itself completely informs an investor about the true performance of a green building. In addition to increasing the certification of green buildings, there will have to be a focus on establishing transparent disclosure of the actual performance being achieved by green buildings, to remove the risk of investors and tenants overpaying for substandard green buildings in the coming years.

1 Land use policy is the new civil rights movement.

I was at a recent function where an executive said “Land use is what will change our children’s future”. His position was that we overfocus on individual green projects, forgetting that the greatest impact on a development happens within zoning and land use planning forums, since this is where decisions on use, infrastructure, transit, density, energy and resource use are made. And these decisions determine the quality of life and livelihood of ordinary citizens and businesses for generations. Sustainability as a movement is changing our individual assumptions about fairness, rights and responsibilities at every level of society. Local officials and citizens are now more vocal about the fair allocation and continued provision of resources and energy as a part of their basic rights  — and are becoming increasingly active in shaping land use decisions to defend those interests. Real estate investors are already very familiar with land use and environmental issues in general, but the growing notion of citizens perceiving resources and energy access as part of their moral rights is an additional level of complexity that sustainability brings to the land use planning. Read ULI’s The Ground Floor to keep abreast of the (r)evolution of sustainability within land use policy.

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I think a nine point countdown is enough for a year - plus we can never be sure what else is around the corner. If you have any more burning issues that you think we should be covering, please drop us a line! We would love to hear your thoughts and perhaps share your contributions the rest of the Green Journey crowd.

So much success in in 2008 and we hope for an exciting year in green real estate!

Photo credit: flickr/inky Bob - Compass and Map Mono

Frohe Weihnachten! | Happy Holidays from Our Green Journey!

It’s 2.30 in the afternoon and we’re off to Berlin for the annual family holiday! We have survived the obstacle course to the gate and are now relaxing, waiting to board a long flight to see loved ones and friends that we don’t see quite as often as we like.

But I couldn’t leave sunny SFO today without letting you know that I’ve appreciated your taking the time over the past few months to read Our Green Journey and share your perspectives and occasionally even, pass it along to  other friends and colleagues.

I hope that you and your loved ones enjoy your holiday together and wish you all einen Guten Rutsch ins Neue Jahr! (That’s German for ‘have a good slide into the New Year’)

Photocredit: Flickr: “Christmas in Berlin” / Eirik Newth

National Real Estate Investor Highlights Big Barriers to Green Building Finance

I receive a steady stream of green building studies — nowadays increasingly sponsored by the mainstream real estate publications. I usually read the mainstream studies with a bit more caution since some of them seem better suited for spreading rumors than educating and offering a constructive way forward.

And there are also those studies that focus on reporting the mood of the industry in a comprehensive enough way as to be thought provoking and educational. National Real Estate Investor might have done just that with their 2007 Green Building Survey, just out and worth a deeper look. It is a “state of green building” survey, taking the pulse of thousands of developers and corporate owners in a sufficient breadth and depth to make the results more ‘real’ and therefore more credible. While NREI did not answer every burning question, I think they did a good job of illustrating some clear dichotomies between wanting to go green and actually taking on the challenge of doing so.

Green Finance Conundrum: The Money’s Everywhere But We Can’t Get Our Hands On Any Of It

Here are a couple of nuggets for Green Journey readers that highlight the present day contradictions in financing green properties:

“Among developer respondents, only 18% have found favorable loan terms for green projects.”

The lack of adequate banking products, which respond to the higher quality and performance of green buildings is clearly evident. By the way, only 20% of corporate owners found favorable loan terms for their green projects.

The Green Journey Perspective: NREI could have done a great service to the industry here by exploring in depth the favorable terms obtained by developers and corporate owners. What made them favorable? Lower pricing? More proceeds? And who is offering them?

“A large majority have not taken advantage of any government incentive for green building.”

I have known this anecdotally from my own finance practice and NREI confirms the same observation nationally. 77% of the study respondents indicated that they had not taken advantage of any sort of government incentive. One respondent highlighted the confusion when he stated that “there are different types of incentives at the federal, state and local levels and that they are hard to keep track of”.

The so called confusion is part of the early process of  market restructuring. Governments and municipalities, having an interest in enforcing energy security and community sustainability, are politely pressing their way forward to their seat at the capital table. Private investors, lenders and other traditional stakeholders are not used to this and haven’t yet learned to fold in the government’s money into their analysis. However, if the current political and legal trends continue, they will.

Green Homebuyer Intel Plus Dan Green Interview On Subprime

So this week I’ve spent time at the annual summit of  Build It Green, one of the pacesetting west coast organizations dedicated to greening the residential sector. BIG’s market impact is significant — it is expected that forthcoming state legislation establishing minimum green standards for single family housing will be based in part upon BIG’s GreenPoint Rated guidelines.

Marketing Reality Check: Do you know who and where your green homeowners are and why they buy?

I follow BIG’s work because their standards also cover greening multifamily properties, a key area of my business. One highlight of the summit was a great presentation of key findings from a McGraw Hill Construction’s Green Homeowner SmartMarket Report, putting out current intel on how homeowner attitudes about green housing are changing. Last week, I posted about pursuing demographic plays when possible in 2008. Green Journey readers are getting a couple of the more provocative nuggets here, since a) green residential is predicted to be a $60 billion market by 2010 — possibly a good opportunistic play by some of my fund friends — and b) this type of info should give some early insights to us commercial property professionals who need to understand LOHAS/green demographic lifestyle trends for retail, hotel and multifamily properties.

Intel #1:  71% of all green homeowners are women. Most are married and highly educated.

The study doesn’t elaborate on why women green homeowners outnumber men two to one, although I thought I heard some snickering in the audience when that particular slide came up.

Note also that word of mouth is the preferred method of how people gettheir information to buy green homes — from direct personalrecommendations by other green homeowners. Not from TV and official advertising overtures of homebuilders. Though it wasn’t directly stated
in the study, you can also infer pretty clearly who is missing the green wave so far: the poor, ethnic minorities and lesser educated. They do not exist in this report.

You should have heard the San Francisco crowd gasp when they heard that one! And here’s where the cynic in me can’t be restrained: largely oversupplied (and now soft) markets always tend to display the highest levels of production. In another section of the report, it states that housing starts in the south in 2008 and 2009 will be their lowest ever. I think you can safely tie those two statements together when interpreting the regional data. By the way, other leading regions are: Washington, Colorado, Nevada (Ouch! California didn’t even make the top five).

Green home features can cut energy bills by half. Rising energy and interest costs are starting to become apparent to homeowners and energy cost savings are the unique selling proposition of green homes, equal in importance to the green consumer’s ethical concerns.

Want more intel? Click the McGraw Hill link above to get the whole study (note: get out your credit card; $$$).

State of Residential Real Estate Markets: Interview with Dan Green

If you care about interest rates and think that the housing market performance could have some effect on commercial real estate (like I do), then you should get to know Dan Green. He’s a residential mortgage planner and a pretty astute reader of the capital markets. He blogs regularly about these topics at TheMortgageReports.com.

Since the whole subprime debacle has been unfolding, he’s been debunking what he calls misleading information about mortgage rates and subprime being bandied about in the media. Take a look at his recent interview at the National Association of Realtors convention, where he talks about subprime lending and where he thinks the residential market is going in 2008. If you have an opinion about whether its good for subprime borrowers to get assistance from the government or think that the housing market could make life tough for commercial real estate, listen to Dan’s perspective as you think it through.

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