Powerful leasing stats for green buildings — on two continents

Strong evidence continues to build showing that green buildings can deliver better investment value, both now and later.

Moreover, the strength of this assertion is underscored when you see confirmation of leasing performance from unrelated international markets with different green building rating standards.

The below leasing stats are from local brokers and property managers in San Francisco and Paris. We hope that they can give you more ammunition for those green building value conversations you may have with clients and other stakeholders.

San Francisco: LEED vacancy = 9.7% vs non-LEED of 15%

Dave Klein, of NAIBT’S San Francisco office, maintains the RealGreen Index. It tracks the availability of office space in green buildings here in San Francisco, where he’s estimating a 9.6 million sf market of LEED buildings as of 9/09. That green space is overwhelmingly LEED-EB certified.

In our experience with underwriting markets, there is a very different point of view about 9.7% vacant submarket vs a 15% one, even in a historically strong market like San Francisco. That 530bp gap in vacancy shows that the non-LEED buildings will eventually be forced to offer either lower rents and/or larger lease concessions, resulting in lower effective rents to attract tenants.

If those non-LEED Landlords decide to tough it out and not offer greater concessions to compete, they’ll still be paying for that higher vacancy by being the last buildings to fill up, as the local market recovers and the LEED-certified buildings fill up first. It’s really just a question of time, as tenants seem to have already voted with their feet and checkbooks.

On the flip side, calling out these non-LEED buildings like this seems to be a nice circling of a fat EE-retrofit market, in my view.

» Download LEED vs Non-LEED vacancy (NAIBT) (111)

» Download NAIBT Green Index (153)

Paris = Green vs non-green pre-leasing –> 57% vs 11%

Recent story out showing that the French HQE (Haute Qualité Environnementale) green building certification is strongly preferred by tenants in the Ile-de-France submarket of Paris (largely corporate Class A office submarket).

Keep in mind that this is a 2 million sqm submarket — about 21,527,821 sf, meaning no small shakes for the fortunes of those investors. Per GlobeSt:

Around three-quarters of total office space above 5,000 square meters planned for delivery in 2012 and beyond will carry the standard, most of them in the periphery in the south of the French capital. It also concluded that HQE certification is accelerating leasing processes, with 57% of certified space deliverable next year already let, against 11% which is not certified.

In the case of this market, if you are the owner of a non-green building in development here (not even in operation, yet), and your investors see a pre-leasing variance of this magnitude, what kind of conversation are you having with them about creating value with their money?

Not a fun one, I think.

» Read the full story on French green building certification and leasing stats here.

While I realize that the real estate industry requires greater empirical support for the value contribution of environmental certification, these stats already point to huge implications for building owners in each of their submarkets as well as all others where green building penetration is growing. All other things being equal, lower vacancy and/or faster absorption  accrues directly to the bottom line and deliver a great pop to returns.

In my opinion, even though the industry hasn’t reached consensus on a final approach to valuing green buildings, asset underwriting methodology in each of these sub-markets must consider a particular asset’s environmental performance vs that of its peer set, since tenants have demonstrated a clear preference.

Will green finance ultimately be local?

What’s the best way to concentrate our money to fight climate change? At the national level? More subsidies for clean industries or incentives for individuals?

Today’s Green Inc blog post examines the idea that cities are the most likely agents for positive action against climate change, since the authors see “uncertain prospects for a global treaty in Copenhagen”, which means “that local communities will need to lead the way on climate change.”

The column’s authors pose the  idea that, “like politics, action on climate change is ultimately local”.

It is estimated that cities contribute somewhere between 30 and 41 percent of global greenhouse gas emissions. The estimate has a large range because no one is really certain of how to measure this particular statistic. Nevertheless, GHG emissions at even the lower end of that range makes cities key actors in reducing greenhouse gas emissions.

Nearly two years ago, we posted that cities would lead most positive progress on green building and climate change.

[Local governments] 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 contributor 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.

As of this date, about 1,000 U.S. local governments have signed commitments reduce greenhouse gas emissions within their jurisdictions.

What could this mean for green finance? A lot, we believe.

We have just seen local governments flexing their muscle with a major share of U.S. stimulus funding going for local government initiatives for green buildings, energy efficiency retrofits, home weatherization and green jobs. Tax lien financing, a local government finance innovation, which is growing rapidly here in California, is catching on nationwide.

With banks still navigating a tough economy and not offering the kinds of products and amount of capital needed, there seems to be both need and opportunity for local governments to become primary suppliers and coordinators of the finance for sustainability.

If you agree with the Green Inc’s columnists’ analysis of the global climate change situation, they really don’t have much choice.

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Galley Eco Capital helps Helsinki to reduce carbon emissions

San Francisco-based sustainable finance consultancy Galley Eco Capital was announced as part of a winning team for the redevelopment of the Jatkasaari district in Helsinki, Finland, which will be an urban zone with low or no carbon emissions.

Sitra, the innovation agency of the Finnish government, revealed today that the winning team for their “Low2No” development design competition was made up of Arup, Saurbruch Hutton, Experientia and Galley Eco Capital. The multi-national team was selected out of 74 initial entries, for their “C_life – City as Living Factory of Ecology” project.

Galley Eco Capital  brings their unique perspective as an international sustainable finance consultancy with a focus on creating green and socially responsible finance and investment programs.  Galley Eco Capital’s work complemented the architectural and consumer behavioral aspects of Jatkasaari by contributing new ways for finance to transform both the district and Helsinki market, to positively impact people’s lives.

The competition jury stated that the innovative monetary/economic model presented contributed significantly to the team’s clear top-down as well as a bottom-up strategy for leveraging the Jätkäsaari opportunity, in the spirit of the Low2No challenge.

Sustainable finance for Jatkasaari and Helsinki

While other team members devised the design, energy and consumer behavioral strategies for the project, Galley Eco Capital’s responsibility was to create an economic and funding model, which would support the project by integrating traditional and socially-responsible capital sources and products at a regional market level and set the right incentives to achieve maximum effect in terms of emissions reduction, energy efficiency and resource savings.

Starting with a thorough analysis of Sitra’s environmental and socially-responsible real estate objectives, the Finnish climate change agenda, and Finland’s participation within the global environmental finance markets, Galley Eco Capital developed ways to create a reliable pipeline of green mortgage, environmental, energy and carbon finance capital for Jatkasaari.

These products would all seamlessly connect with the traditional Finnish financial network to form a holistic financial system. Delicate synthesis was also required to create a flexible market structure, which would monetize available sustainability benefits while adequately funding the Jatkasaari project throughout construction and operation.

About Galley Eco Capital

Using their expertise in designing and implementing sustainable finance and investment programs, Galley Eco Capital’s strategies help investors, lenders and regional governments to bridge traditional with green finance and efficiently monetize the available sustainability benefits embedded within their real estate and renewable energy initiatives.

Galley Eco Capital’s unique approach assures more successful solutions through the application of interaction design principles, driven by culturally-aware, user-centric perspectives and underpinned by long years of international real estate and capital markets experience.

The strategies help drive positive change by:

• developing debt and equity financing structures based upon the value-add contributed by sustainability and energy efficiency,
• synthesizing traditional with emerging green financial products into holistic financial solutions,
• sourcing and structuring incentives and government subsidies to offset program costs,
• designing and monitoring sustainable investment performance measurement to assure positive program impact

Over the next 6 years, the Jatkasaari district will be designed, constructed and opened to the public. From there, the sustainable ideals that govern its day-to-day life will act as a model and example for the rest of Helsinki, Finland and the world. Through Galley Eco Capital, San Francisco will be a vital part of this journey.

For more information on the Low2No project, or on Galley Eco Capital, contact Lisa Michelle Galley, Managing Principal, at +1 415 655 6668, or via email at “lisa at galleyecocapital dot com”.

Bioregionalism & Green Finance: “It’s the (sustainable) economy, stupid”

At least, that’s what Luke Lowings seems to be saying, in his review of Pooran Dersai’s new book, One Planet Communities. And he’s not making a bad point. It’s time that a solid discussion of finance accompany visionary development.

Dersai’s new book espouses “practical bioregionalism” — focusing on architectural principles for building a whole community — as opposed to just the sustainability of individual buildings. He argues for applying principles of bioregionalism to create sustainable communities (definition of bioregionalism here).

Lowings’ main complaint about One Planet Communities is that its heavy focus on building sustainable communities ignores the parallel task of creating a sustainable economy to support them.  My brow furrowed as I realized that, if this was Lowings’ chief complaint, then he’s probably very depressed about everything he reads on sustainable buildings. To date, not many have been able to lay out a cohesive set of principles and practice for the kind of finance that truly supports sustainable communities at a regional level. So I feel Lowings’ unfairly picks on Dersai about a general problem in the market, not for any particular failing on Dersai’s part.

Financial Infrastructure Needs to Support Sustainable Communities

Nonetheless, Lowings still has a good point –> the current availability of financial tools and resources for green real estate developers and investors is more of a swap meet than a market. It does not offer the depth and breadth of organized infrastructure that bioregions can rely upon.

• Recently, there have been a glut of new studies and tools dealing with narrowly defined pieces of individual building-related financial problems — green lease clauses, detailing paybacks on specific retrofit measures, and the potential value-add of third party certification to individual green buildings.

• On the funding side, the owner’s discovery and selection process requires trudging through a a swamp of new incentives, stimulus funding plus the byzantine tax and regulatory requirements that accompany them. To come up with a green business case on their own, they have to hopscotch around, stitching together those new green funding sources with their traditional capital relationships. Repeat that whole process again, for every single building they intend to green.

• It’s no wonder that nearly 70% of the participants who attended one of our recent webinars, indicated that they were not applying for or using any sort of incentives whatsoever. Why not? Too confusing to figure out!

The final wrinkle relates back to our post last week on green building valuation. In order for finance to support sustainable communities, the investment real estate community will have to be able to assign a value to amenities such as community farms and more schools. There would have to be a cultural shift towards more long-term economic stability as opposed to above-inflation rental growth. From today’s standpoint, that is a very tall order.

Bioregions don’t fit neatly into industry accepted conventions of primary and secondary real estate markets. Real estate fundamentals are driven by global and national market forces, not just regional ones. Capital markets these days cannot exist exclusively within a fenced-off business territory.

So I think that the sustainability movement has to acknowledge a certain level of hype that is accompanying the bioregion vision and incorporate a sober view of global demographics and economics in their economic planning.

Case Study: The Preserve - an official candidate “One Planet Community”

Can bioregionalism completely address some of the ills we see within our communities? Hmmm…. maybe.

GlobeSt.com has put out the word on A.G. Spanos’ announcement of a $2 billion “environmentally and economically sustainable” community that will generate 12,000 jobs and over $15 million in annual revenue for Stockton, CA”.

This community, called ‘The Preserve’, is also endorsed under review for endorsement by the One Planet Community, which gave is considering the endorsement in exchange for the development subscribing to its ten principles that address public transit, economics,natural habitats, energy and water, jobs, education and well being.

Two things come to mind as I read this announcement:

#1: Stockton, California has a foreclosure rate of 15% vs California’s 9.5% and the US rate of 6.72%.

# 2: The Stockton, CA metropolitan statistical area posts unemployment of 15.5%. It is ranked 359 out of the total 372 MSA’s tracked by the Bureau of Labor Statistics.

Which leads to my main question:

Can installing a bioregion heal an ailing city?

Seriously.  With stats like those above, can the City of Stockton truly afford to support a brand new 1,800 acre community — whose tax benefits won’t be fully evident for many years to come?

My long career of lending other people’s money into many MSA’s has taught me to be cautious when I hear about multi-billion-dollar new developments going into distressed communities — green or not. The US real estate industry is littered with tales of failed revitalization efforts tied to grand master-planned schemes, which absorbed huge amounts of a suffering town’s resources, but actually took a very long time to return relatively little to the residents who needed the relief.

The complete terms of the Preserve development are not yet known, so the jury’s out on the ways in which Stockton will be impacted. But real estate financing history suggests that these kinds of deals only make sense to the developer if they are getting the land at a very low price (or for free) and the city is contributing advantageous financing terms (big infrastructure bonds, etc).

The city hopes for larger tax revenues from the new businesses and residents in years to come after everything is built. Any rewards for the residents won’t be evident for years — after all, houses don’t make long-term jobs. It works the other way around.

Lots of cities forget that. They also forget that, in 15-20 years when the promised development is fully operational,  the real estate cycle will be in a much different place than when they signed the deal.

Bioregionalism principles can certainly play a key role in stabilizing Stockton’s economic outlook, but I bet that the City of Stockton could probably accelerate healing of its distress with a large scale, pragmatic energy efficiency financing program for its existing building stock as well as existing businesses to reduce cost of operations, spur green collar jobs and prevent further bleeding of existing jobs. Stockton appears to have a deal in the works with utility, PG&E, but I’m talking about a bigger, farther reaching kind of program which would encompass other forms of green finance beyond that supplied by the public utility.

Long-term healthy jobs and an educated workforce are the DNA of every healthy real estate market — not to mention, sustainable communities. With all due respect to The Preserve, I don’t think that every city  needs to necessarily go through the long, expensive process of building big new green communities to get there. And I always have lots of questions when ailing cities start agreeing to these projects, since they are usually in the worst position to really reap the benefits.

The good news is that, “swap meet” aside, there are great green finance options available that, when properly structured, can support cities like Stockton to implement either energy efficiency, new green development, or both. The key is to focus on these options very early in the process and, as Luke Lowings suggested, to make sure that sustainable finance doesn’t take a back seat to sustainable community building.

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Things you might want to know:

• We’d love to hear your comments and suggestions.
• You can get Our Green Journey by email.
• You can contact Galley Eco Capital to discuss or initiate a project here.
• Sometimes you can see what we’re doing on Twitter.
• Photo credit: Stockton, CA Boom Town by Joguldi (Flickr).

San Francisco Once Step Closer to Mandatory LEED

Mandatory LEED in San Francisco is a critical step closer to being fully approved, according to yesterday’s San Francisco Chronicle. The Building Inspection Commission signed off on it last night. Its now at the Board of Supervisors for approval.

Bare Bones Overview
Under the proposed addition to the building codes, the following  construction must be LEED-certified:

• new residential high-rise buildings taller than 75 feet
• new commercial buildings larger than 5,000 sf
• renovations on commercial buildings larger than 25,000

Additionally, new residential construction will have to comply with Build It Green’s GreenPoint Rated system.

The article also indicates that complying with the legislation will cost developers an additional 5% on their project budgets, but does not provide a source for this particular information.

No Incentives on Tap
Interestingly, a city official is quoted as saying that city officials had hoped to offer incentives to builders whose projects obtained highest levels of environmental performance, but they scrapped the idea because they feared “it could lead to developers unnecessarily tearing down buildings or remodeling structures in order to take advantage of incentives”.

Hmmm…. so exactly how much in incentive fundings did the City think it would have to shell out? I’m sure they could have devised some sort of method to reduce this particular concern, (if this was truly the main concern).

The quote:

“What we now have is legislation that says if you’re going to build, you have to build to this standard. But it doesn’t encourage you to build a green building in lieu of keeping an existing building.”

Read the article for yourself and decide.

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