Avoid the threat behind lower emissions

You might hear that 2009 carbon emissions are down over 2008 and think that means you have more time to get started with your portfolio’s sustainability initiatives.

In reality, you should do just the opposite– because there is a real estate story buried here that isn’t as benign.

The DOE Energy Information Administration (EIA) projects that 2009 U.S. carbon emissions are projected to be 6.5% lower than in 2008, due to

weak economic conditions and declines in the consumption of most fossil fuels.

The EIA also projects 2010 emissions growth at +0.9% over 2009. For reference, the EIA’s 2009 Annual Energy Outlook, projects U.S. emissions growth of 0.3% p.a. through 2030.

We became curious about the level of economic activity accompanying these projected changes in emissions, looking particularly at economic indicators most closely tied to real estate fundamentals.

So we dug in to the EIA’s super handy table of of macroeconomic indicators, where you can derive a snapshot of the “economy-buildings-sustainability-finance” trends that shape green finance:

2009 vs 2010 Macroeconomic Snippets

According to EIA projections, in 2010:

• real GDP growth will be be +1.07%
• real personal income, non-farm and commercial employment will shrink 0.31%-0.6%
• the number of housing units will remain flat with nearly no new construction
• vehicle miles traveled will increase .4%
• the change in the producer price index for petroleum reflects 20% year-over-year growth (ouch!).

Essentially, the 2010 picture picture is one of continued high unemployment and shrinking incomes, even as the economy begins to recover. And at the same time, petroleum prices are projected to grow at nearly 19 times the rate of GDP growth.

This basically lays out the risk of a continuing deterioration of real estate market fundamentals and investment portfolios even while the official news may be reporting an economic recovery.

Moreover, these projections highlight the immediate value of energy efficiency retrofit programs on property portfolios, as a real defense against escalating petroleum-driven operating expenses. It also highlights the benefits of  sustainable district-level and regional strategies for communities.

The threat of increased petroleum prices against shrinking incomes also supports the need for green finance programs, since these enable powerful, immediate responses to portfolio-wide and regional sustainability problems.

So don’t let stories of low carbon emissions slow down your firm’s energy efficiency and sustainability initiatives. Your efforts will help you to avoid some the other risks buried in the same story.

How are you moving sustainability forward in a weak economy?

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The New DOT/HUD Partnership That Will Influence Your Green Investments

Uncle Sam is drilling down on the hidden costs of poor transportation options, high transportation costs and lack of access to affordable housing — which means that (sooner or later) real estate investors who want to stay relevant in their communities will be doing the same thing, if they haven’t started already.

Case in point:

The US Department of Transportation and US Department of Housing and Urban Development announced a new task force on community sustainability that will attack the interrelated problems of energy costs, transportation options and housing affordability.

We’ve posted before about the fact that most of us real estate professionals, despite being consumers ourselves, are not aware of the extent to which fuel prices, long commutes, lack of transportation options and lack of access to affordable housing erode the finances of tenants in our properties, their employees, not to mention community viability.

The announcement points out that the average working American family spends nearly 60 percent of its budget on housing and transportation costs.

And we posted awhile back about Ken Rosen’s comments on these topics:  US consumers have been “importing” higher inflation than domestic US levels. Low income individuals are particularly affected, paying 7%-10% inflation rates due to their exposure to fuel and food price increases combined.

Interesting is a snippet within the announcement, which deals directly with the “business case” argument for American families:

[The HUD/DOT task force will]…redefine affordability and make it transparent. The task force will develop Federal housing affordability measures that include housing, and transportation costs and other costs that affect location choices. Although transportation costs now approach or exceed housing costs for many working families, Federal definitions of housing affordability don’t recognize the strain of soaring transportation costs on homeowners and renters who live in areas isolated from work opportunities and transportation choices.

When we’re working with clients on their green investment strategies, we tell them to make sure they understand how project siting and design decisions affect the business case of tenants and other stakeholders. Even if the clients are not directly involved with HUD housing, the federal government’s influence (and stimulus funding) on these issues will help state and local governments highlight the same areas within their own jurisdictions.

So the task force’s scope, in so many words, becomes the new scope of real estate development when interacting with local officials. We think that the best way real estate investors can manage that enlarged scope is to make sure the interrelationship between transportation costs, access to housing affordability and community viability figure just as prominently in any sustainable project’s business case as their own.

Photo credit: Flickr/Cocoi-Urban Sprawl, Las Vegas

Housing Developers: Preparing for Opportunities During the Downturn?

So I heard Bob Gardner, of RCLCO, give a presentation about the state of the multifamily market and trends at the ULI Multifamily Trends conference today. Turnout was good, albeit with a somewhat subdued mood overall.

One of my friends summed it up this way, ” there’s a lot of folks in this room who are hurtin’ right now”. The more positive statements by the groups who reported that their business and portfolios were still performing well went something like, “we’re building out product that we’ve committed to; beyond that we’re staying on the sidelines”.

All that being said, a couple of mezz guys said that they were getting steady calls to assist with recapitalizations that couldn’t be accomplished through the senior debt channels.

The Sunny Side of the Housing Downturn

The bright side offered by Bob and several of the other speakers was that many real estate fortunes have been made during a downturn. Bob’s example: low land prices in the early 1990’s set up master developers for many years thereafter. Hmm… good point; so I started taking notes.

He pointed to Gen Y as one of the largest opportunities out there right now and that real estate developers and investors would be wise to study up on this group and prepare for the significant impact they might have on how and where real estate will be built in the very near future.

Basic Gen Y 101–> Here is a presentation that will give you the GenY download.

Here are a few notes on Gen Y’s demographic characteristics, which strongly favor green and sustainable real estate investing:

• This group of consumers is willing to pay for walkability and transit. They really value their time, so they are not big on paying for a big house and commuting. These types of issues receive great attention when siting sustainable investments.

• They are very into working from home. Having an office in a corporation is not as much of a big deal for them. (Cuts into their “me-time”.)  This also seems to add support to the low carbon information, communications and technology opportunities, talked about in my telecommuting post yesterday.

• They start becoming homebuyers in 2012 (!!). The green angle here is the “other green”. (Excuse the pun, I couldn’t resist)

Yesterday I wondered aloud about whether developers would start creating more live/work units that cater to home workers and families all in one. If so, make sure they’re sited in a walkable, transit-oriented location.

Based on what I learned today about Gen Y, it appears that this type of product is not some far off fantasy, but could present a mid-term opportunity. In any event, an economic downturn is a good time to study the opportunity and spend time positioning your firm to deal with this emerging demographic trend.

The Carbon March Visits Moosehead Lake, Maine

A few posts back, I depicted climate change concerns within urban planning as becoming the ‘new civil rights movement’. It was a stark metaphor, illustrating the degree to which greenhouse gas emissions within real estate development has become a defining issue for our industry.

The Christian Science Monitor has just devoted lengthy column space to a development dispute in Moosehead Lake, Maine, where environmental groups raised concerns over the potential negative carbon impacts from the proposed 2,300 housing and apartment units. By their calculations, the development would produce 9,500 tons of carbon dioxide annually – putting an additional 1,850 vehicles on the road. A representative from one of the groups cites their concerns as several and interrelated – not only are they unhappy with the the size of the development, but also with its location being far from town and only accessible by car, encouraging lots of driving.

Particularly timely for the Green Journey was the article’s update on states’ efforts to formally tie real estate development activities to climate impacts and state emissions reductions targets.

“Climate change has kind of permeated everything with regard to land use”.
-Scott Morgan, senior planner with the California Governor’s Office, as quoted in the Christian Science Monitor.

Carbon March Status: Regions That Formally Connect Real Estate Development to Climate Impacts

• 35 states have climate action plans or are in the process of developing them.
• Of the above, 17 states have set emissions targets for greenhouse gases. However, far fewer have laws that presently allow direct action on the basis of greenhouse gas emissions.
• California is seen the nation’s leader in pushing towards the inclusion of greenhouse gas assessments within local development plans and taking legal action against municipalities and/or companies, which it believes are not taking sufficient action to reduce their greenhouse gas emissions.
• Across the US, only California, Massachusetts and King County, Washington have established climate change analysis into the state environmental review process that applies to land development.

In previous posts, we recommended that real estate investors learn about a) any climate change plan in effect in jurisdictions where they develop and operate investments and b) proactively managing the carbon footprint of their assets as the regulatory environment evolves.

So far, there is no need to change that suggestion.

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Please let us know your thoughts. Our Green Journey is a forum for sharing and your perspective is valuable.

Photo credit: Flicker/Jonathon Brennecke - Moose

San Jose’s 50 Million Square Foot Vision

CoStar and others featured San Jose Mayor Chuck Reed’s big ten point vision that will green San Jose in fifteen years by 2022.

Called the Green Vision, this plan artfully concentrates the vision’s outcomes around “10 far-reaching goals that address energy consumption, water use, greenhouse gas emissions, and other environmental impacts“.  Sounds nice, but the real estate market underwriter in me still makes me roll my eyes a little because it is intuitively doubtful that such big numbers can be achieved. Plus success will be measured several city administrations into the future leaving me wondering whether realistic accountability can be implemented.

Nevertheless, it was still interesting  to do a little fact checking to better assess San Jose’s current real estate and sustainability context. Keeping this type of info in mind helps with future assessment of the Green Vision as it evolves.

What Kind of Impact Will Retrofitting 50 Million Square Feet Have?
The vision calls for retrofitting 50 million square feet in 15 years, or 3.33 million square feet of commercial real estate per year through 2022. Rosen Consulting puts the total size of the metro San Jose commercial real estate market at just under 552 million square feet .  So mathematically, the mayor’s retrofit proposal addresses roughly 10% of the current day San Jose commercial real estate market. 90% of the commercial square footage remains untouched for the same fifteen year period, making this objective not as exciting as it appears on the surface. But it may still be tough to meet. Rosen Consulting reports metro new construction amounts to less than 2 million square feet for 2007 with lower levels projected in the immediate years ahead. So somehow, this vision requires existing owners of commercial real estate to immediately begin retrofitting properties at the rate of more than 3 million square feet per year. Hmmm…. How and for how much paid by whom?

Is San Jose a ‘Sustainable City’ in the First Place?
San Jose ranks #23 — between Phoenix and Dallas — in Warren Karlenzig’s How Green is Your City, where SustainLane ranks US Cities according to their sustainability criteria. San Jose gets lots of credit here for adopting far reaching sustainability measures way ahead of many US cities. 62% of all waste is already diverted away from landfills and the mayor’s vision increases that to 100% in 2022. Air quality already ranks #7 in the nation and water is pretty clean at #12. The city’s leadership has proven repeatedly that they get the tight connection between offering a top quality of life for residents and preserving the region’s status as the hub of high tech. That said, room for improvement lies with a severe affordable housing shortage and a widespread allergy to public transportation. Nevertheless, city actions to enforce living wages, incorporating LEED standards into public buildings, and install five new renewable energy systems in 2008 are what make SustainLane praise San Jose as being a city “best situated to promote - and reap the benefits of - a transition to a greener economy.”

So while I’m not a big fan of grand statements, it helps to see a city with a positive track record try to push itself harder to stay competitive.