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