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.