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?

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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

Future-proofing Tip: Use Green Building Rating System Critiques

I have posted before about future-proofing being the hot buzzword for industry pacesetters. Property owners now dedicate an increasing amount of time to (re-)positioning their teams and portfolios for the expectations of a sustainability-conscious world.

But while everybody gets the catchy phrase, how does ‘everyday future-proofing’ actually happen?

I recently met with a group of executives, who detailed their process of moving their firm towards being a socially responsible corporate citizen. They talked about how sustainability has injected elements of excitement and risk into today’s real estate industry. They were happy about ‘going green’, but also expressed frustration about being on a ‘hamster wheel’, since the good green building initiatives they were currently implementing could easily be superceded by “bigger, better, faster” improvements to building science and the regulatory environment.

Fortunately for many firms with this type of anxiety, the American Institute of Architecture has just published “Quantifying Sustainability”, a report in which they have issued new position statements about the Green Globes, LEED NC-v2.2 and SBTool 07 rating systems. It’s a not-too-dense ten pager and a quick read – if you can squint through the 6 point font they are using.

Here are the Cliff Notes from the AIA report:

• On Green Globes: the AIA recommends that Green Globes ratings systems adopt more specific and stringent requirements for energy reduction and building operational performance since these are the two most important dimensions of carbon production. Green Journey Notes: Making recommendations about requiring items which are at the heart of carbon production is a slap.

• On LEED NC-v2.2: The AIA calls for more implementation of Life Cycle Analysis, and would like to see the greater use of renewable energy and a requirement for greater carbon reduction for certified projects. Green Journey Notes: While the report says that the AIA is neutral about all ratings systems, they did take the time to refer to LEED as “providing a measure of environmental achievement” and said that the recommended changes would “continue to make this system an effective resource for architects”. None of the other rating systems evaluated received this level of praise. Second of all, the USGBC has already announced, and we’ve already posted here,  that the next upgrades to the LEED rating system incorporates all of these suggestions in some form of another. I am guessing that this paper was written before the USGBC’s announcement of the changes.

• On SBTool 07: The AIA recommends that this system would be a stronger tool if there was an increase in the number of required items vs those that are simply encouraged and if project documentation were required. Green Journey Notes: Ouch!

So how can this intel improve “everyday future-proofing”?

• Rating system weaknesses can contain clues: revealed by the critiques are direct pointers to the most likely changes that you will see to those ratings systems. They are also a comment about what will define good industry practice in the near future. So there’s your content for potential future proofing. Here’s the core of where you can mine your ideas about staying ahead of the curve in a sustainable world.

• Beware of minimum compliance: Just trying to achieve the minimum certification level leaves your firm open to the risk that your buildings could easily fall outside the newer standards of acceptability, once any ‘tweaks’ are made to the rating system.

• The endgame is low and no carbon: Understand the difference between a single asset checklist process and achieving concrete energy and operational performance targets across your portfolio that are tied to quantifiable carbon reductions. As you can see from the AIA’s position on ratings systems, this is the tough measure that they are applying which means that this the the industry standard they are driving towards, even if the current ratings systems might not reflect it.