Part 1: Lessons for Future-Proofing Property Values

Since when has any firm achieved competitive advantage by just goin’ along with the crowd? Even in the current tough capital markets environment, excellence in real estate demands a continuous search for the newest ways to protect and advance asset values. This first installment of our Special Series on the Green Building Finance and Investment Forum New York,  features highlights from the talks by industry pacesetters that make sustainable real estate’s tomorrow happen today. It was a workshop chaired by Leanne Tobias, of Malachite LLC, and Galley Eco Capital’s Lisa Michelle Galley. Specifically, the session addressed threats and opportunities for investors created by rising energy costs, carbon policies, green building regulations, and changing tenant demand.

Fast Facts:

1. In today’s tenant markets, green buildings are the entry price for retaining corporate tenants - and their top talent.
2. On-site power generation and other new building technologies are not ‘star wars’ experiments, rather pragmatic, down-to-earth tools for energy price risk-mitigation.
3. Special taxation districts are a way to create financial solutions for community-scale sustainable development.

“I advise my clients to only consider

green facilities.”

– Peter Miscovich, Managing Director of Strategic Consulting, Jones Lang LaSalle

Green Buildings Are Plug-and-Play Solutions for Tenant CSR - and an Entry Requirement for Competitive Landlords in a Tenant’s Market

Peter Miscovich advises Fortune 100 companies on their corporate sustainability strategies. At GBFI, he laid out the 10-15 year roadmap on how tenant demand and demographics will dramatically impact real estate values. So what’s he saying?

• Corporate sustainability is now a permanent issue that will influence all organizational decisions, including real estate. Companies are paying attention to their energy use, and green buildings will be the required tool in their strategy toolbox to mitigate their exposure to energy and operating expense price risk. This will have major implications for the owners of existing, conventionally built commercial and industrial properties.
• Corporations will reduce their real estate footprint. Existing facilities are structurally underutilized, and the advent of telecommuting, office hostelling, and remote data management (from 3rd party vendors) will further reduce demand for office and flex/industrial space.
• By 2012, we will have a nationwide carbon policy, and those policies will directly impact real estate patterns.
• The suburban corporate campus model is outdated.
• Over the next 25 years, the vast majority of new household growth will be childless. There will be an increase in demand for smaller housing units, developed around transit.
• Given these impending changes, metropolitan areas that have scalable urban and suburban public transportation systems will prosper.

These expected changes point to demand and value implications for all commercial property types. Certified green buildings are a plug-and-play solution within overall corporate sustainability strategy. And in tough economic times, when it’s a tenant’s market, tenants — and their top talent — have more leverage to demand the green space they seek.

This has harsh implications for those landlords who want to retain corporate tenants, but will not or can not adapt space to the tenant’s corporate sustainability requirements. At the market level, this means that green commercial real estate sited near public transportation and affordable urban housing will be the favored locations of corporations over conventionally built property, because it provides them with significant soft and hard cash benefits.

Future-proofing Property-level Energy Price Risk: On-Site Power Generation and ESCO-led Retrofits

Incorporating on-site power generation into new construction and existing properties is no longer the province of special use properties like research labs and hospitals; today’s market considerations show this to be a pragmatic energy strategy that is gaining traction among the investors within the “four food groups”, too.

Fred Fucci, a partner at Arnold and Porter, LLP, addressed some of the challenges to creating and managing on-site generation capacity, as well as two other potential methods to minimize the impact of high energy costs:

• Utilize an energy services company (ESCO) to assess energy usage of existing structures, and enter into a performance contract to make recommended capital improvements.
• Use less energy, period. (Our comment: Everybody laughed when Fred said this, but heck - who can challenge that?).

Taking future-proofing one step further, Ed Brzezowski of Noveda Technologies, expanded the boundaries of technologically possibilities with his presentation of Noveda’s 31 Tannery project,  a 42,000 square foot office/flex structure with “net-zero electric” operations.

31 Tannery, in Branchburg, New Jersey, enjoys the rare Energy Star score of 100 and is a living showroom for high-performance, sustainable building technologies. Noveda, who’s business is to provide technology tools for monitoring real-time information about building energy use, were in need of new office space, wanted to show off their innovative capabilities and were resolute about walking their talk. The result? 31 Tannery uses less than 20% of the energy consumed in a conventionally-built structure, and reduces its carbon footprint by more than 1 million pounds of CO2 per year.

But wait, there’s more…. The most impressive number was the expected payback period for the advanced energy systems of 6 to 7 years, which is well within the investment horizon for institutional investors.

But participants had critical questions for Ed: do all those cutting-age systems actually cost out? Ed’s response? Yes, if you properly monitor your system performance. At 31 Tannery, they track real-time system performance down to 10 seconds, which allows them to catch and fix every system glitch that could negatively impact energy performance, and undermine their expected return on investment.

Special Taxation District Enables Community-Scale Sustainable Development

Frank Owens presented Georgetown Land Development Company’s vision of future-proofing: a to-be-built, transit-orientated, new-urbanist, mixed-use, brownfield development with on-site energy generation.

This $90 million re-development of the Gilbert & Bennett industrial site in Redding, Connecticut, will feature 300,000 square feet of commercial space, and 415 housing units, which includes loft-style apartments, townhouses and single-family homes. The 55 acre site will also feature a passenger rail link into New York City.

The development will create a special taxing district to provide low-cost financing for environmental site clean-up, rail-station improvements, and renewable energy systems. The district is a financing platform that can issue bonds, temporary notes, and other financial instruments, which are payable through the district’s fees, revenues, or benefit assessments. An important feature of this district is that, unlike tax incremental financing (TIF), the local municipality and state are not liable for the district’s debt. There is no specific limit to the number of financial instruments that the district can offer.

While the real estate market is in a downturn, and other projects are being canceled, this sustainable real estate project has lined up financing, and will proceed with medical office and local-serving retail in the project’s first phase.

By incorporating on-site energy generation, multiple transit linkages, and a compact urban format featuring multiple uses, this project is hedging against many of the forces that are affecting real estate values. Have you done the same yet with your portfolio?

*  *  *

Don’t forget to read the other installments of our Special Series on the Green Building Finance and Investment Forum New York. Our series brings you perspective and frank discussion from the industry pacesetters that are making sustainable real estate’s tomorrow happen today.

Photo Credit: 31 Tannery Project, Copyright 2008 Ferreira Construction

Photo Credit: Georgetown Land Company

Banks, Climate Change & Green Real Estate: Money Talks

Mindy Lubber, head of Ceres, talks about how the big US banks are taking responsibility to reduce the negative effects of climate change. You’ll notice that she mentions the banks being signatories to the Carbon Principles and changing the way they go about financing coal-fired power plants.

This is good to keep in mind because people often get confused about why some of the big banks advertise their corporate social responsibility, as if its a global policy applicable to all lines of business, but still have no committed capital, specific products or policies earmarked for green commercial real estate.

No, I’m not saying that they are greenwashing. Certainly tightening due diligence and financing guidelines for coal-fired power plants is a good thing.

The Green Journey take on it is caveat emptor**, but in a proactive, not a lazy or disaffected, sense.

Keep in mind that any company — not just banks — advertising their social responsibility can (and often do) “choose locally” and “talk about it globally”. Yes, they can pick out a few business areas to be more green, ignore the others, claim to be totally socially responsible, and then use that to enlarge their corporate reputations, win awards, and make more money. All of which keeps watchdogs like Ceres in business in the first place.

How to navigate this space? Its up to all of us to give credit where credit is due, and at the same time ask more pointed questions about their business policies regarding sustainable real estate and then vote with our wallets.

Notes:
** Means ‘you’re on your own, dog’. Thousands of years ago in Latin, it meant ‘let the buyer beware’.

Climate Change “Opportunity”: Work from Home, More IT, Less Real Estate

Commercial real estate has had somewhat of a funny love affair with IT over the years. Remember back in the 80’s, when we were warned about the paperless office? It was still all good with IT, even though the paperless office never really happened — we never took the projected real estate angles seriously, anyway.  How about the 90’s, when folks claimed that the internet would kill the shopping mall? Then IT made us sort of nervous. Now another wave of ‘less real estate/more IT’ ideas are back, but this time with a climate change angle and, also with a smarter sounding term that can get you more attention at the cocktail party — at least until people figure out what you’re really talking about…

The Climate Group has just issued a new report that lays out the many opportunities available to the information, communications and technology (”ICT”) sectors to help reduce carbon emissions. Like many issues associated with reducing carbon emissions, buildings get a lot of attention in this report, too. Hence, my interest in understanding how the opportunities could interact with commercial real estate.

One main concept, called dematerialization, stands for using technology to replace high carbon activities with low carbon alternatives. A simple example of dematerialization would be replacing face-to-face meetings with videoconferencing for example. A farther reaching example would be e-government.  Dematerialization’s attractiveness lies in its ability to be applied to a wide range of business activities.

For the commercial real estate world, the report highlights telecommuting as one of the biggest opportunities for ICT sectors because it is a dematerialization application presenting the largest opportunity for carbon emissions reductions and absolutely requires ICT to be effective:

“Currently the largest opportunity identified within dematerialisation is teleworking – where people work from home rather than commute into an office. Although other dematerialisation opportunities may come to prominence in the future, based on historic trends, the analysis found that teleworking would have the largest impact, up to 260 MtCO2e savings each year (detailed assumptions in Appendix 3). For example, in the US, if up to 30 million people could work from home, emissions could be reduced 75-100 MtCO2e in 2030, comparable to likely reductions from other measures such as fuel efficient vehicles.”

So think about it –

what could happen in commercial real estate if 30 million people eventually worked from home?

The trick to realizing substantial emissions reductions from telecommuting appears to be in how far-reaching the employer’s work-from-home program extends. A company would need to have a significant number of employees working from home more than three days per week to generate substantial energy savings of 20%-50%. Less than that level of telecommuting means that the company still maintains significant office space for periodic office-workers, and therefore, less energy cost reductions.

Persuasive ‘Everyday’ Sustainability Case Studies

To lots of companies, sustainability can seem like a pretty exotic exercise. This perception can make it hard for us to convince clients and colleagues about the benefits of green building. That may not have to be the case.

‘Tackling the Energy Monster’ was today’s Wall Street Journal report on how soaring energy prices have triggered a reality check among small businesses, which often pay higher utility rates than large companies and are less able to pass their cost increases on to their customers.

This article was packed with eight great case studies of specific ways, backed by cash results, that companies re-tooled their businesses to cut or avoid energy costs. I call these actions ‘everyday sustainability’ because they’re rather unflashy, but are accessible to many businesses and deliver long term positive results.

Here’s a partial list of the winning actions:

• Missouri delivery company: Using GPS-route mapping software from United Parcel Service, Inc. to eliminate excess miles driven by drivers. 25,000 miles were cut. Even though unleaded gas prices rose 31% last year, this company only experienced a 1% increase in fuel costs for that period (!). The company even saved more than that since the drivers were paid by the hour. Less miles driven = less payroll expense.

• Oregon shoe manufacturer: Had new facility built using designed-in energy saving options. The energy-saving improvements cost an additional $149,140. An energy audit revealed that the company saved $32,000 annually with the new facility. In addition to that, the new building qualified for $52,000 in state tax credits to offset the costs. The company figures it will recoup its entire (additional) investment within three years.

• San Francisco civil engineering firm: 40 employees and a second office in New York. Employees now travel 70% less than before due to web conferencing. The web camera and projector cost $70 and $850 respectively. The firm saves $30,000-$40,000 annually.

• Interest-free financing from public utility: Southern California Gas & Electric and San Diego Gas & Electric offer interest free loans of up to $50,000 to small-business customers if they use the funds for energy efficiency upgrades and equipment. That’s in addition to the free utility audit.

So, check the article out and add it to your arsenal of proof that sustainability initiatives are real world actions and save lots of money.

If you’ve got any good case studies to share with the rest of us, send them along so everyone else on the Green Journey can benefit from your good experience.

Tangible Integrity: Why Google Leases Green Office Space

I went to a local ULI Green Trends Program last night. Kacey Clagett, of Field Paoli, moderated a panel consisting of David Radcliffe, Sustainability Director for Google, David Johnson, West Coast Director for William McDonough & Partners and Richard Springwater, Head of The Prado Group, the developer who built Foundry Square.  Great discussion overall on why going green makes sense from the perspective of a tenant, architect and developer.

David Radcliffe’s comments on why Google leases green space stood out. Not only is leasing green space consistent with the general corporate philosophy, but he took the time to detail Google’s thinking process about green space. You can imagine that Google can throw a great deal of brain power at anything they want to study. It is safe to say that a couple of those brains went into overdrive deconstructing their “green space = value” proposition. Here’s a short summary on their perspective:

When Google evaluates space decisions, they look at their total cost of occupancy, which is made of:

• Base Rent
• Additional Rent – operating expense reimbursements
• Workplace Services, overhead
• Other related costs

Google studied their total costs of occupancy for leasing green space and figured out that they were paying a higher Base Rent compared to non-green space. However, since Base Rent was only 34% of their total costs of occupancy, the increase in rent for the green space increased their total occupancy costs by only 1.7%. So, the additional cost of green space is negligible in their view.

They also looked at one of their most important activities, attracting talent. They ran various tests attempting to isolate what mattered most to employees and linked it to sustainability initiatives, including occupying green space.

You gotta keep Google’s hiring scale in mind as you read this: Radcliffe pointed out that Google is hiring on a scale of 200 employees per week (!!). The right or wrong hiring equation has massive business implications for them, so they spend lots of energy learning and making sure they are delivering on what the right talent cares about.

They isolated several key variables of what their employees and talent care about the most. Tests revealed that a company’s integrity is THE most important variable to the employees and recruits. Integrity trumped pay, career development and every other traditional measure of employer relevance to Google employees. And the employees and recruits interpret green working facilities along with other green initiatives as being visible evidence of Google’s integrity.

So, for Google, leasing green space provides huge upsidewith very little or no downside. Not a bad deal at all.

Photo Credit: Flickr/Keso - Google logo

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