For Real Estate, Transparency is the New Black

Did you Read Co-star’s article today about “the state of energy efficient and green buildings” in across the US?

Read all the hand-wringing there about how hard it is to green buildings?

Of course, its a tough time for landlords to navigate their portfolios towards energy efficiency — what with new state energy disclosure regulations, percolating federal building labeling discussion and all breathing down their necks.

Interesting to us is call for more transparency in our industry.  Notes Co-Star:

“The issue of tenants, real estate brokers and landlords all having access to more transparent and readily available information to enable them to make better informed decisions remains one of the biggest challenges facing the industry today, noted the panelists”.

This time last year, “getting the plaque” was all the rage. And some firms became a little too good at talking the green talk without necessarily walking the walk.

Experts pointed out that some buildings had obtained LEED-Gold certification, without significantly improving their energy profile beyond code requirements. They were able to achieve certification via sufficient LEED credits from other categories. And this caused a few to raise public doubts about  the market strength of third party ratings system to address market transformation to low energy buildings. Those concerns were misplaced.

We hope in the coming months that the voluntary, transparent dislosure of a building’s energy use becomes as trendy as getting a LEED plaque on a trophy office building was last year. That would go a great way toward shifting market perception in favor of a value premium for certified green and energy efficient commercial real estate.

Will the Economic Slowdown Grow or Slow Green Real Estate?

No doubt these are challenging times for the US commercial real estate market. It’s been a tough go since the start of the real estate credit crunch during the summer of 2007, and it’s not likely to improve in 2009.

But what does this slow down mean for sustainable real estate?  Will conventional and green commercial real estate come under the same pressures? Will the growth of green be derailed as investors, developers, and even tenants, quickly transition into survival mode?

Recently, several industry practitioners have prognosticated on how green will weather the storm. The verdict? It’s mixed.

In an article from Costar, titled “Amidst Deepening Recession, Green Fights Back“, industry experts argue that the tremendous growth in buildings registered with green building rating systems in 2008 are a testament to the continued growth of green during the slowdown (GEC note: The 2009 numbers will be more relevant). But an across the board decrease in construction starts will slow down green new construction, shifting the focus to existing assets.

In a tenant’s market with rising vacancy rates, portfolio managers would be smart to green their existing assets in order to keep tenants from leaving for greener pastures. According to David Pogue, sustainability director at  industry pacesetter CB Richard Ellis:

“If you’re going to compete today at the upper end in most of these markets against new product, that requires existing buildings to also be more sustainable.”

The National Real Estate Investor sees both challenges and opportunities for green in 2009. In the article “Green Building Industry Wrestles with Recession”, industry sources see lenders coming back online and considering deals again in 2009.

Unfortunately, while lenders may loosen up their purse strings, deflating energy prices may prolong expected payback periods for renewable energy systems and for green capital improvements in existing assets, lowering the returns from such investments.

The GEC Take

We don’t have a crystal ball, but we do see several things for green real estate during the downturn:

• Green will gain ground versus conventional real estate: We can only guess as to how long the deterioration in the commercial real estate markets will last, but we are confident that sustainable real estate will continue to gain market share. Any equity capital available for new construction is pretty much earmarked for green buildings.

• (Green) Cash is King: We see lots of players working very hard on a compelling LEED-EBOM investment strategy  for their portfolios.  Face it, most of the money that is active these days is chasing cash flow as opposed to taking the risk of a long development cycle. As one fund investor told us, “we need to see a real meatball (his private slang for real cash returns) on any deal we’re lookin’ at”. So creating additional cash flow through greening existing buildings satisfies the fundamental needs of investors active in today’s real estate markets. Meaning: there’s a tangible reward for becoming good at existing building retrofits and certification.

• Green incentives will grow: These programs will expand and bring more capital to the sector. At the federal level, the Obama administration has recently indicated that energy efficiency will be a big part of a stimulus package in early 2009. The October renewal of federal tax credits from the Energy Policy Act of 2005, set to expire at the end of the year, was a good first step.

• Green regulatory risk will grow: At the state and local level, sustainable building and higher energy efficiency are becoming mandates. While the real estate downturn means that reluctant developers and investors will have a stronger case to argue against new green building regulations, they will ultimately not prevail.  The governments that we’ve worked with have aggressive timelines for green regulation, and intend to move forward quickly.

• Green will rebound faster from the downturn: There is an established preference within the marketplace for green space. When demand increases, green space will go first. This is an advantage to the first-movers who can build green with minimal to no cost premium.

For more insight on future trends in sustainable real estate, be sure to look out for our 2009 prediction post at the end of this month.

Competing for Green: JLL’s Big Move

Earlier this year, I posted about how the big players in commercial real estate were under enormous pressure to figure out how to deal with the mass greening of their real estate portfolios.

You can see in this linked story that the major investment management firms are not being shy about making big moves in order to stay ahead of the curve on this developing area of real estate practice.

And those moves now include acquiring the consultancies who are responsible for developing the green buildings ratings system tools. Case in point: Jones Lang LaSalle’s purchase of ECD Energy and Environment Canada, Ltd., the developer of the Green Globes rating system.

The Co-Star story plays up a USGBC LEED vs Green Globes competition.  However, I didn’t see much of that competitiveness within the quotes from USGBC’s Mark Heisterkamp and JLL officials. They all politely downplay that aspect.

The Green Journey Take
Acquiring a consultancy is not a new thing, I know. Buying the folks responsible for developing the key technology used to assess a property’s greenness represents a new milestone on the path to
sustainability that deserves watching.

Think about it: what if a major global real estate investor-manager, or even a Microsoft-like tech
giant bought the entire development team of Argus, but left the Argus software itself intact and separate with a non-profit? What would “the rest of us” think? While Green Globes is not as prolific as LEED (or Argus) here in the U.S., it has been relevant to the groups who, for some reason or another, have not been able to embrace LEED. The Co-Star story focuses on the potential competitiveness between the two ratings systems, but it is missing the broader competitiveness issues sustainability is triggering among real estate investors.

The move by JLL underscores sustainability’s credibility with top-tier investor-managers: the fact that major commercial real estate investors are putting serious dollars into enterprise technologies to green their assets, even though much of the evidence about NOI and valuation benefits is still anecdotal and technically inconclusive about the exact benefits these investors will ever realize. The investment community has already decided and are not waiting around for the “real” proof.

What is also interesting is that this particular type of move — buying the particular consultancy which developed a ratings tool, also highlights the point of pain (and value) in our industry. That’s the enormous unfilled demand within commercial real estate for new talent, best practice and structured, efficient approaches to transitioning the modern property operation into a sustainable one.

In other words, professionals who already “get it”and have embedded “sustainable intelligence” into their treasure chest of commercial real estate talents are probably in hot demand.