Future-proofing Tip: Use Green Building Rating System Critiques
I have posted before about future-proofing being the hot buzzword for industry pacesetters. Property owners now dedicate an increasing amount of time to (re-)positioning their teams and portfolios for the expectations of a sustainability-conscious world.
But while everybody gets the catchy phrase, how does ‘everyday future-proofing’ actually happen?
I recently met with a group of executives, who detailed their process of moving their firm towards being a socially responsible corporate citizen. They talked about how sustainability has injected elements of excitement and risk into today’s real estate industry. They were happy about ‘going green’, but also expressed frustration about being on a ‘hamster wheel’, since the good green building initiatives they were currently implementing could easily be superceded by “bigger, better, faster” improvements to building science and the regulatory environment.
Fortunately for many firms with this type of anxiety, the American Institute of Architecture has just published “Quantifying Sustainability”, a report in which they have issued new position statements about the Green Globes, LEED NC-v2.2 and SBTool 07 rating systems. It’s a not-too-dense ten pager and a quick read – if you can squint through the 6 point font they are using.
Here are the Cliff Notes from the AIA report:
- On Green Globes: the AIA recommends that Green Globes ratings systems adopt more specific and stringent requirements for energy reduction and building operational performance since these are the two most important dimensions of carbon production. Green Journey Notes: Making recommendations about requiring items which are at the heart of carbon production is a slap.
- On LEED NC-v2.2: The AIA calls for more implementation of Life Cycle Analysis, and would like to see the greater use of renewable energy and a requirement for greater carbon reduction for certified projects. Green Journey Notes: While the report says that the AIA is neutral about all ratings systems, they did take the time to refer to LEED as “providing a measure of environmental achievement” and said that the recommended changes would “continue to make this system an effective resource for architects”. None of the other rating systems evaluated received this level of praise. Second of all, the USGBC has already announced, and we’ve already posted here, that the next upgrades to the LEED rating system incorporates all of these suggestions in some form of another. I am guessing that this paper was written before the USGBC’s announcement of the changes.
- On SBTool 07: The AIA recommends that this system would be a stronger tool if there was an increase in the number of required items vs those that are simply encouraged and if project documentation were required. Green Journey Notes: Ouch!
So how can this intel improve “everyday future-proofing”?
- Rating system weaknesses can contain clues: revealed by the critiques are direct pointers to the most likely changes that you will see to those ratings systems. They are also a comment about what will define good industry practice in the near future. So there’s your content for potential future proofing. Here’s the core of where you can mine your ideas about staying ahead of the curve in a sustainable world.
- Beware of minimum compliance: Just trying to achieve the minimum certification level leaves your firm open to the risk that your buildings could easily fall outside the newer standards of acceptability, once any ‘tweaks’ are made to the rating system.
- The endgame is low and no carbon: Understand the difference between a single asset checklist process and achieving concrete energy and operational performance targets across your portfolio that are tied to quantifiable carbon reductions. As you can see from the AIA’s position on ratings systems, this is the tough measure that they are applying which means that this the the industry standard they are driving towards, even if the current ratings systems might not reflect it.
Premium Real Estate’s “Shift to Green” Assessed and Advanced at Infocast’s Green Building Finance & Investment Forum—East
LOS ANGELES, CA Leading institutional investors, fund managers, developers and thought-leaders will convene in New York City September 8-10, 2008 to gauge the impact of the “green tsunami” on property values and portfolio energy efficiency at Infocast’s Green Building Finance & Investment Forum–East.
One report and study after another (from Costar, New Buildings Institute, Leonardo Academy, among others) validate claims that green buildings lease faster, and at higher rents, and drastically cut operating costs, up to 25-30%. The U.S. General Service Administration and a growing number of major cities, including Los Angeles, Dallas, Washington DC, and Boston have mandated LEED™ standards for new buildings, with San Francisco and San Jose not far behind. A new consensus is emerging that the perceived risk factor once attached to green building may be shifting to non-green, as it depreciates against the long-term higher values of LEED™-rated projects.
Building on the momentum of Infocast’s remarkably successful Green Building Finance & Investment Forum – West in San Francisco, Infocast has brought together the most forward-looking and incisive industry practice and thinking around green buildings in order to provide a venue for high-level networking among participants who have made substantial commitments to sustainable property development and investment.
Speakers will debate the strategic implications of the new market statistics, and explore the freshest, most ahead-of-the-curve insights on how to maximize green value creation for both new projects and existing building portfolios. They will also explore cutting-edge topics such as green leases, imminent carbon regulation, intelligent and net-zero buildings, quantifying social and environmental metrics, and the impact of high oil prices and “vehicle miles traveled” on property values.
The Forum commences with a keynote by Douglas Lawrence, Managing Director of JP Morgan Asset Management’s Urban Renaissance Fund. Winston Hickox, former environmental policies advisor for CalPERS and Director at Thomas Properties Group, will offer the luncheon address. The Forum is preceded by two half-day workshops: “Future -proofing Property Values” and “Preparing Your Portfolio for LEED™ EB and Energy Efficiency Retrofits.” The event, produced by Infocast, is also sponsored by Greenberg Traurig LLP, Galley Eco Capital LLC, and Malachite LLC.
The Forum will take place at the Coleman Center in midtown Manhattan. Full details and agenda can be found at www.infocastinc.com/building. Registration: (818) 888-4445 x43.
Zeitgeist: Fuel scarcity makes the bus cool again and the media’s suburbia deathwatch
So today I drove all the way over the Golden Gate bridge to get gas at the supposedly “cheap” gas station and paid $4.02/gallon. And that’s a good deal - closer to my house, gas costs about $0.20/gallon more. So I’m happy to chime in on the collective griping these days about rocketing fuel prices (excuse the cheesy pun).
The media has also picked up on our collective gasping about the high price to feed ourselves and power our lifestyles. Today’s post is a mashup of the latest pieces highlighting the swing in public opinion – with energy costs, land use and sustainability themes swirling throughout.
My Bus Pass Costs Less Than Yours
According to the media, one of the more interesting side effects of high gas prices is a removal of the social stigma associated with car pooling and the use of public transit. Apparently, instead of keeping up with the Jones’, you can now one-up them by cutting ahead of them in the bus line.
Not only is car pooling and public transit better for the environment, but research has shown it boosts employee moral and productivity as a great by-product. Companies such as Microsoft and Google provide ‘in-house’ transit systems and others encourage their employees to skip the commute all together by working from home.
Here’s one of the best employee transit programs that I heard about today: At the Getty Center, employees get a vacation day for every 100 days that they use alternative transporation – that’s three extra vacation days per year!
The Endangered Suburban Strip Mall
Now journalists say rising gas prices are accelerating the decline of ‘suburbia’ as we know it, Suburbs are a direct product of cheap, plentiful oil and land. Neighborhoods were literally built on the outskirts of cities – why not? It was convenient to jump in your car and drive wherever you needed to go. Now it turns out that rising fuel costs and oil shortages are forcing big-box stores and strip malls out of business. An article I read recently, based upon an interview with twelve time author James Howard Kunstler, claims the end of suburbia is near. Kunstler predicts that small towns built around a retail hub (like back in the ‘old’ days) will enjoy revitalization as our society grows noticeably less affluent than it is today.
When the suburbs and giant cities that were built back when fuel was cheap are forced to deal with an extreme fuel shortage, what is going to happen? Our economy is going to suffer as the fuel supply dwindles, and the amount of petrol needed to keep everything running is not available. Kunstler predicts this will affect any system built on a grand scale – schools, government offices, hospitals and farms. It will mean changes in the way we produce food, a change in where we live and how we conduct business as well.
You can find the article about public transportation becoming cool here, and the article about the possible end of suburbia here.
I would love to hear your thoughts.
Green Finance Innovation from Japan: Sumitomo Trust’s Lending Products for Sustainable Real Estate
Meet Masato Ito!
We have a post from an honored guest today! I had the great pleasure of watching a presentation by Masato Ito, of Sumitomo Trust, earlier this year during the Responsible Property Investing Summit. He gave us an overview of Sumitomo Trust’s new green real estate financing products that they have developed. Fortunately for us all, Masato has been kind enough to share his work with Our Green Journey.
Hint: Pay close attention to his focus on quantifying the value-add of green in real estate via reducing depreciation and the property’s risk premium within net income and the cap rate.
Enjoy and please let us know your comments!
Note: If you click directly on the images, a pop up window will show you a closeup of the diagram.
The Sumitomo Trust’s “Eco Trustution”
I am a licensed Real Estate Appraiser in Japan and am working for the Sumitomo Trust and Banking Co., Ltd.
The Sumitomo Trust is trying to utilize the trust bank’s functions as much as possible to provide eco-friendly products and services and has coined a new word “Eco Trustution”, which means ‘to provide solutions to eco-problems by using the functions of trust banks’.
Under the “Eco Trustution” concept, Sumitomo Trust is developing and promoting financial products, such as preferential rate loans for environmentally friendly housing, environmentally conscious construction consulting, and an Eco Land Fund (support for contaminated land purchases and revitalization fund). We are also on the way to launching a “Japanese Sustainable Real Estate Fund."
Pursuing the Value-Add of Sustainable Real Estate
To promote the “Eco Trustution” business further, I am working on the value-add provided by sustainable real estate.
In case of “direct capitalization”, of the income approach, value is calculated by “Figure 1” (dividing net income by capitalization rate).
Therefore, I thought that it was possible to evaluate the environmental value-add if I arranged countermeasures from the environmental consideration of real estate systematically, and then connected them to "net income" and the “capitalization rate“.
It becomes like Figure 2 below, when shown in a little more detail.
The left side of the graph shows how net income of real estate is different from normal real estate. As for the sustainable real estate, the utilities and the repair costs will decrease faster than those of normal real estate by effects of energy saving and improvement of the durability. It is thought that net income increases and, if the total income increases by the quality improvement, the net income will also increase.
The graph on the right side of Figure 2 shows how a capitalization rate of sustainable real estate is different from normal real estate. Because I use net income before depreciation here, I used a capitalization rate including depreciation rate of a building. When durability of a building increases, it is thought that depreciation ratio reduces. In addition, I can express the added value as "a risk premium reduction" in a capitalization rate of real estate which does not catch influence of future taxation and regulation reinforcement by environmental consideration.
In this way, I think that sustainable real estate has the possibility to make value by increase of net income and reduction of capitalization rate.
Amended
from “A note on environmental value added for real estate “(Masato Ito) for the tenth anniversary memorable article for Tokyo Association
of Real Estate Appraisers in 2005
In January 2008, as a Deputy Chair of Research & Study Committee of Japanese Association of Real Estate Appraisal, I launched the “Added Value of Sustainable Real Estate“ working group.
Connecting CASBEE to Real Estate Appraisal
Connecting Comprehensive Assessment System for Building Environmental Efficiency (CASBEE) to real estate appraisal is one of the most important missions of the “Added Value of Sustainable Real Estate“ working group.
In Japan, a cooperative academic, industrial and governmental project was launched to establish a new system called CASBEE. Buildings certified by CASBEE so far are less than 30, but some Japanese local governments have introduced the CASBEE system for their environmental policy to encourage green buildings. These governments require building owners to report CASBEE’s result of their buildings when they put up a new building. The number of the reports submitted to local governments is more than 2,000.
As for CASBEE, BEE (Building Environmental Efficiency) is calculated by Figure 3 (dividing building environmental quality and performance by building environmental loadings). BEE shows how the assessment results for buildings can be labeled as class C (poor), class B-, class B+, class A, and class S (excellent), in order of increasing BEE value.
Figure
3: Formula of BEE (http://www.ibec.or.jp/CASBEE/english/methodE.htm)
By the way, I described that in case of “direct capitalization” (one of income approach), value is calculated by the formula in Figure 1 (dividing net income by capitalization rate). I found an important relationship between these two formulas.
As shown in Figure 4 below, Indoor environment (Q-1) will reflect to increase of total income. Improvement of Durability (Q-2) will reflect the decrease of repairs and reduction of depreciation ratio. Energy saving (L-1) will reflect the decrease of utilities and reduction of environmental risk. Finally, Sustainability Ranking will reflect the reduction of marketability risk.
In this way I think it is possible to connect CASBEE to Real Estate Appraisal and we are pursuing the method. Now, this work is a collaboration of the CASBEE working group and Japanese Association of Real Estate Appraisal.
Figure 4: Connecting CASBEE to Real Estate Appraisal
Once again, our many thanks to Masato Ito for sharing his very important work with the Green Journey community. We would welcome any comments or questions that you may have for Masato about this article.
Heard at the Fisher Center: Connecting Energy Price Risk with Real Estate Values
So I was at the Annual Fisher Center Real Estate Conference today, where the focus was “the state of real estate” from both an academic and practitioner point of view. The slant was residential, with high quality data and insights. A good bit of the perspectives highlighted themes that are spurring the rise of interest in green development.
Robert Edelstein, Co-Chair of the Fisher Center, moderated a panel this morning on the state of the housing market. The panelists were James Saccacio of RealtyTrac, Bill Sumski of Paladin Pacific and Scott Ouellette of LandCap Partners. This question from the audience caught my attention:
“Do you think energy prices are impacting real estate values?”
Here’s a composite of the panelists’ responses:
“Yes, energy price risk has already been affecting consumers in significant ways. In the current wave of foreclosures, rising interest rates were the main reason that homeowners lost their homes. Many people do not know the second reason - that the rising cost of gasoline and home energy also made the cost of homeownership too expensive, forcing people to give up their homes.”
“Energy prices are also forcing homeowners to reexamine the cost of their auto commutes. A panelist stated that he felt that homeowners are already starting to think that the tradeoff for a longer commute to be way less compelling.”
Ken Rosen, of Rosen Consulting, provided his usual in depth economic analysis of U.S. real estate. Some of his comments also drew a thick black connector line between energy price increases and the threat to consumer and business viability. Highlights of his comments:
“Oil price increases are like tax increases. With oil prices at $122/barrel today, this is a huge tax increase on the consumer.”
“A year ago (April 2007), oil was $62/barrel, so its cost to the consumer has basically doubled in the past 12 months. At the same time in 2002, it was $20/barrel, a little over 1/6th of today’s price.”
“Official ‘core’ U.S. inflation is being reported at just below 2% currently. However, U.S. consumers, via buying so many products from abroad, are ‘importing’ a real inflation rate of 4%-4-1/2% p.a.. Part of that rate includes energy price increases. So the actual impact of energy price increases on the U.S. consumer and businesses is far greater than what is being measured and reported via the “official” data sources.”
But wait, (sadly) there’s more:
“For low income individuals, the real inflation rate is 7%-10% p.a. due to their greater exposure to food and energy price increases combined.”
So yes, the opinions were that real estate, including its value, is being directly and indirectly affected by consumers and businesses paying more for energy. This whole discussion did not even touch upon the increased cost of energy consumption of the buildings themselves.
A central thesis behind high-performance building is that the way a building gets built and is operated can lower its risk and preserve its value. Today I heard energy price increases being called a direct tax on consumers and businesses. So to the extent real estate investors are tolerating energy inefficiency within their control, then they are also accepting a tax on their own return and forcing it on their tenants and shareholders. And this type of cost has a direct impact on a building’s ability to maintain or grow in value.
A green building may not totally eliminate the “energy tax”, but the methodology goes a long way in helping owners and tenants get smarter about operating and managing their real estate in a way to minimize negative impacts on their cash flows and property value.
