Let’s meet at Tulane’s Green Finance Conference, 10-11 March 2011

Two Reasons to Attend ‘Strengthening the Green Foundation’

I want to make sure that you have the latest on Strengthening the Green Foundation, an exciting green finance conference that’s taking place at Tulane University, in New Orleans, this Spring.

Tulane University’s new Master in Sustainable Real Estate Development Program and the Federal Reserve Bank of Atlanta invite researchers, industry practitioners, and policymakers to participate in a conference to advance the understanding of and improve the practice of green development and finance.

1. Set the Agenda: Advance the Study and Practice of Green Building Finance

Core research tracks include the development and finance industry structure, green valuation, and portfolio management. Practice and policy tracks include green underwriting, green measurement and certification issues, and green leasing.

Read the complete call for papers, which includes details of the conference tracks, the abstract submission process, and deadlines, as well as a link to the online abstract submission site.

2. Leverage Time: Meet Me, Other Practitioners, Policymakers and Green Finance Specialists

This will be a great use of your time spent on understanding the green finance space. I have the honor of being among the speakers and am excited about the great list of practitioners, researchers and policymakers who are scheduled to present.

If you are attending, please drop me a line at and let me know.  This is a breakout year for green finance and I’m sure this event will be filled with thought-provoking insights you can’t miss!

Put Fortune 500 Product Innovations to Work for Your Green Initiatives

Now that the economy appears to be improving, we expect billions of dollars of fresh capital to flow into green development and energy efficiency retrofits over the coming years.

However, we also know that many firms are still hesitant to proactively green their portfolios and financial offerings. We think we know why and have new tools to boost their confidence.

These practitioners are saying something that the green building crowd simply can’t ignore. They feel they’re in a Catch-22: they know their companies are at risk if they don’t go green, but they don’t have a clear view of the possible results of committing their capital to green investments at a meaningful level.

Even though researchers have published studies indicating that green properties earn an average 3% higher valuation, or 16% higher net operating income, that still doesn’t mean that you are going to make that on your properties. It doesn’t mean that your particular tenants are going to pay you more rent on a given date. Nor does it mean that you will absolutely realize these results upon sale of your particular green assets.

The truth that leaves these firms skittish is that realizing the value-add of green depends on many variables for which no data exists. Not only must you do the right things, but the sub-market around your asset has to do (enough of) the right things, too, in order for you to be properly rewarded for your sustainability initiatives.

That’s a very hard disclaimer for many investors, lenders and governments to tell their shareholders and voting taxpayers.

So we’re stuck, right?

No, we’re not. There is a much better way.

What Real Estate Can Learn from the Fortune 500

We noticed that leading global players – players like VeriSign, SAP, Genesys, etc. – face similar issues as commercial real estate investors.

They also have the predicament of committing billions of dollars each year to create new or revamp existing products and services in an unclear business environment. The B2B product development gurus who work for these companies told us about the secret sauce of their success – what has made the difference between so-so and blockbuster products, even when the economy is tough.

It turns out that Fortune 500 companies reduce their investment risks within new/revamped product and service initiatives by using sophisticated “voice of the customer research” (VOCR) tools very early in the design process. These tools gather how customers perceive and experience their products and services, which is perhaps the most difficult information to obtain. It is also the most valuable for developing new products and services – particularly the kinds of products and services that are very new to an industry, like green building and energy efficiency.

The B2B product development gurus stressed that these techniques minimize capital at risk because the company obtains key insights up front on what might enhance their product’s success with their customers. Products and services can then be further developed to fit customers’ needs as closely as possible. Often times, these methods reveal data about unspoken or hidden needs customers have never clearly expressed, leading to innovative product breakthroughs.

Galley Eco Capital has carefully adapted VOCR tools to work specifically for the real estate finance and investment sector as well as municipalities engaged in energy efficiency and green building programs. They are available within a branch of special services called Real Estate Innovation Advisory®. REIA now offers special collaborative forums that power green initiatives by enabling investors, lenders and governments to collaborate with their customers on their green space, investments, and service offerings.

Join an upcoming Mini-forum at Competitive Edge Workshop #3

If you are attending Competitive Edge Workshop #3 on June 24, you’ll participate in a mini-version of an interactive Real Estate Innovation forum titled, What Real Estate Investors Think about Your Products & Services (And How You Can Communicate Their Value).

Whether you are a real estate practitioner, investor, service provider or government employee, you will have hands-on involvement in learning how owners perceive green building products and services. You will take away insights about interactive forums as well as specific content that is immediately applicable for your own business.

Understand Your Customers, Minimize Investment Risk and Boost Investment Value

If you don’t have the voice of your tenants, borrowers, partners and customers influencing the development of your green building space, products, services and offerings, then you are missing an incredible opportunity to bring more certainty to your capital programs. You could also miss the chance to find more breakthrough ways to do smarter green initiatives.

Call me today to talk about how Real Estate Innovation Advisory® Services can help you gain clarity about enhancing your existing products and services or get customer input on new ones.

Galley Eco Capital Moves to Hub SoMa, Summer Get-Together in the Works

We’ve moved — here are the details:

We’re excited to announce that we’ve moved our offices to the Hub SoMa!

Hub SoMa is the newest Hub Bay Area venture - taking their co-working, collaboration business model into the heart of downtown San Francisco.

What’s great about the new location is that we can do more of our lab work — creatively designing green finance programs and collaborating on great ideas with the other companies focusing on social and environmental change.

Add to that the great event space we’ve gained where we can hold more workshops, talks and related events for the green finance and investment community. We can’t wait to show it to you!

In fact, we’re already psyched that it is the perfect place to to host our new Real Estate Innovation Advisory® forums (see the upcoming May Pacesetter for details on that other exciting offering!).

Summer Get-Together, Anyone?

We’ll be announcing our Summer Get-Together, happening sometime in June. We’ll have a meet-up among friends new and old, for an informal, fun time. Of course, you’re always welcome to call or stop by anytime before then.

If you want to make sure you hear about our Summer Get-Together plus upcoming green finance and investment workshops and events, make sure you’re on our newsletter list — sign up for it here and we’ll make sure you get the word.

Till then, please update our contact details in your records:

Galley Eco Capital, LLC

901 Mission Street, Suite 105

San Francisco, CA 94103

(415) 305-9512

(P.S. I’m off to Germany for the next few weeks — you might see a blog post or two if I run across any interesting green finance happenings while I’m out there (volcanoes permitting).

Auf widersehen!

Heard at ULI Boston: Four Forces Shaping Green CRE

There was fresh energy among folks recently at ULI’s 2010 Spring Council Forum in Boston — market opportunities are slowly coming back, but it would be a mistake for your firm to simply repeat all your old moves from the last cycle.

I heard four comments that represent the mood and actions of investors on green real estate now:

Here’s a synopsis of the forces I see those comments representing:

“The other shoe’s dropped, but no one heard it.”

Your plan → Get going on your green portfolio strategies, you’re already behind.

Professionals finally acknowledged that a) rumors of 30%-40% loss of value in commercial real estate are, for the most part, overstated and b) there is currently too much capital in the market chasing too few deals. The latter point has been creating the paradox of deals trading at aggressive cap rates amid a recession.

In the opening session, Equity Office Chairman Sam Zell explained the paradox. When real estate markets tumbled, investors had expected banks to dump lots of deeply discounted properties into the markets, which investors would snap up at rock bottom prices.

Wrong assumption. Instead, banks have focused on working out troubled loans and strategically offloading REO assets one-at-a-time, and as a last resort. That has given the market time to gradually readjust pricing, preventing fire sales.

Reality: on-going one-off REO sales cushioned the velocity and depth of property value loss. The practice has also frustrated distressed players, forcing them to compete for REO deals against high net worth individuals and other sources with more patient capital, willing to pay more. This way has helped the banks to achieve better than predicted pricing on their sold assets and the market again saw no drastic fall in commercial real estate pricing.

In response to the question of why so many investors still talk about doing distressed deals, in the face of this very different reality, one panelist replied “the other shoe has already dropped, but no one heard it”.

Lots of investors have been delaying their investments in green initiatives, n waiting for the market to return to health. The good news is that the market is now not as bad as everyone thought. That’s also the bad news — all the players with dough have already gotten started, so you need to keep up.

“Every day, 1MM square feet of real estate is being LEED-certified.”

Your plan → The shift to green is happening much faster than you might think. You need to speed up your firm’s own shift to keep up.

Doug Gatlin, of the US Green Building Council spoke at our Responsible Property Investing Council Meeting, about the current stats on LEED. Here’s one: LEED certifications are running at 1,000,000 sf/day, even during an economic downturn. One council colleague, calculating a corresponding value of several hundred million dollars per day, said this fact would definitely influence his market conversations in favor of green building.

There’s still quite a way to go before we can say that market transformation from LEED has really happened. One main premise behind Architecture 2030 goals is that the US either renovates or builds new a net 10 billion square feet of real estate each year. The 365 million square feet annualized velocity currently being LEED-certified represents 3.65% of the estimated 10B in annual square footage built or renovated in the US — so there’s much progress to be made.

Theory: For green building to influence leasing and investment activity in a market, the “tipping point”, “competitive mix” and “OS” factors have to all be balancing and reinforcing each other in healthy levels. A sufficient concentration of LEED-certified square footage in a sector can be enough to influence investment activity in that sector towards green buildings (tipping point). Note that “sufficient” needn’t be that much in absolute numbers.

That, plus LEED maintaining its relevance and dominance as a green building rating standard (competitive mix) and regulatory support on federal, state and local levels (operating system or “OS”) are the keys to further increasing green building volume. The lack of competitive mix and OS in a market or for a real estate asset class will result in no tipping point being achieved in the area being studied.

The tipping point and OS factors are already a particular force on investment real estate in some gateway metros. For example in San Francisco, brokers have been publishing their own reports showing higher occupancies in LEED-certified buildings. There are already whole classes of global investors who publicly refuse to buy inefficient buildings. So this force is already at work, even with a small proportion of US real estate earning LEED certification to date.

“Operators need the track record to execute on both traditional real estate and sustainability strategies.”

This was a fund manager’s answer to my question about what made her choose to invest with a certain real estate operator, who had brought her a deal with an extensive energy retrofit including adding renewable energy in the business plan.

With capital markets slowly thawing and the velocity of green building certifications growing, it’s time to ask yourself if you’re company will attract capital with a mandate for sustainable real estate. Fund managers are now speaking out about needing to work with partners who can execute on a sustainability plan.

Additionally, you’ll need to assist the equity partner with understanding the value-add from green strategies being pursued, that will come from your local expertise.  The good news is that right now the market is wide open. Most of the US investment real estate firms who have achieved any progress on greening buildings have done so with a few buildings and many are still just focusing on low hanging fruit.

With the projected high increases in energy and water costs, nimble regional operators have a great chance at building a great track record on greening buildings that can get them hired over larger competitors. Plus, its a big market, anyway, with lots of room for more players. Remember what I said above, about 10B sf real estate being built and renovated in the US each year plus all the money out there chasing too few deals?

“We’re serious about being green, but we’re skipping commissioning on all our buildings.”

Your plan → Ignore free lunches. Compete via consistently delivering the best building performance possible.

This was said by an owner’s rep of an institution presenting their multi-billion dollar portfolio of institutional assets. He added:

“We are making our space LEED certifiable. We’re doing many things according to LEED for existing buildings, like green cleaning and updating the systems in our buildings, but we’re saving a couple hundred thousand dollars by skipping commissioning.”

“Pennywise and pound foolish” - even tired clichés are still true. If you attended our recent Competitive Edge workshop, Financial Considerations for Energy Efficiency Retrofits, you learned that Lawrence Berkeley National Labs (LBNL) research shows that on median costs of just $0.30/sf, commissioning alone achieved energy savings of 16%, with a 1.1 year payback and 91% ROI.

This means that our investor friend’s portfolio could probably deliver many more dollars in performance, which will literally go to waste via a) the properties remaining exposed to more energy price risk (current price plus escalations) than is warranted, b) not achieving the level of upfront energy savings that might have been possible, c) being in for longer-term, higher capital expenditures on their major systems since their performance was never audited to a commissioning standard.

Why is this unfortunate mindset a force on green building investing?  Actually — it’s pervasive to the point of being an archetype. You’ll find a similar mindset in a certain percentage of companies in every industry and at every point in the economic cycle. As the market matures, the economic downside of their inaction will become more apparent

Those of us who know better have to consistently incorporate building performance data into underwriting and valuation, and adjust prices accordingly. When a certain percentage of investors find themselves taking discounts at sale and losing enough tenants, then they’ll change their minds, improve their O&M - and even save themselves a few more bucks the process.

Galley Eco Capital Wins CALED Mandate

Financing and Business Model Challenges

Lisa Michelle Galley, Galley Eco Capital’s Managing Principal, has had a long career as a financial services executive and is a nationally-recognized green finance specialist. She spoke about the challenges encountered by groups such as CALED that decide to explore new financing models and products:

“Our experience with regional finance programs and products has shown some typical problems organizations encounter when they troubleshoot their initiatives, so we bring a  unique toolbox and skill set to help them identify the problems and create sustainable finance models.”

Identifying Root Causes

First, many organizations will decide that they have financing problems without knowing the root causes of why money is not flowing through their markets in the way they expect. Without identifying the root causes of the problem, they never know the true minimum requirements that any solution should deliver. As a result, fresh funding might not flow efficiently enough to resolve their financial problems. Galley Eco Capital uses performance technology tools and techniques to identify root causes to finance problems.

Systems Analysis Defines Problems Better

Then the problems should be analyzed within a dynamic system of behavior and interactions. For example, the power dynamics between price makers and price takers within a market has to be understood as part of defining the problem.

Price makers are firms from industries that have pricing dominance — they have the power to obtain their desired pricing within transactions. Healthcare companies are a great example. The markets dictate pricing to price takers, making them weaker actors in any business system. Many hotels and manufacturers find themselves in this group. To create successful regional finance initiatives, organizations have to identify the power dynamics between these groups and make sure mechanisms are in place, which will keep them in balance over time.

Galley Eco Capital applies concepts from system dynamics, analyzing business models within whole financial systems, in order to obtain deeper insights about how these issues might be brought into balance.

In the case of regional economic development, EDC’s may want to simply recruit a successful businesses from another region into their own. Without knowing the dynamics between the new firm and existing firms in their region, EDC’s may inadvertently encourage too many price takers, weakening their region with high unemployment –  price takers usually have no choice except to control profitability through firing personnel. Conversely, having too many price makers may dampen a region’s economic growth — these firms may maximize their profitability unrestrained while externalizing the social costs their actions create.

A sustainable business model will consider the dynamics and interactions between customers and transactions over time, in order to design financial programs and services that truly deliver the economic, social and environmental stability they promise.

New Tools for Financing Program and Product Development

Galley Eco Capital applies decades of experience in financial services, program and product development for investors, government agencies and lenders to assist its network of investors and collaborators. What’s unique about the consultancy and new to green finance is that the firm brings new tools for complex problem-solving and financial program development, such as systems dynamics, performance technology and innovation games to financing problems.

These kinds of tools render deeper insights into problems much more quickly, and help collaborate with clients to develop sustainable finance programs, new business models and other solutions that are better tailored to unique challenges.

For questions or comments about this story, please call Galley Eco Capital at (415) 655-6668 or email lisa@galleyecocapital.com.

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