Cliffhanger: Which of these investors will earn a green value premium?

Do you believe that achieving a value premium on green properties is possible? Even in the currently tough market?

Well, Jamestown and the State of California have both recently been in the press talking about how they expect to realize extra value from their commercial real estate via green and energy efficiency strategies.

Check out the articles and tell us if you think their projects should earn them greater returns than non-green market peers.

Jamestown: $3-$10 Million Portfolio-wide Retrofit Commitment

Jamestown has committed to greening its entire $4 billion commercial real estate portfolio. In the recent New York Times article about their efforts, they point to their European sensibilities as being the reason why they moved ahead with a portfolio-wide commitment to greening existing buildings.

When  you read through the savings and quick paybacks that they report achieving, it seems clear that their focus is on low-hanging fruit. After all, $3mm-$10mm in retrofit costs are peanuts on a $4 billion portfolio. The good news is that they report realizing immediate savings — meaning permanent increases to property net operating income.

Nonetheless, or perhaps because of that, they focus on the green/energy efficient building’s ability to attract the right kinds of tenants and assure the asset’s sale to a broader pool of buyers. The article showcases several recent efforts, including 999 Peachtree Street in Atlanta, GA, which recently earned LEED-Gold status.

We actively follow how German and other European investors are moving quickly to incorporate comprehensive acquisition and portfolio management sustainability programs. You can read previous posts about these investors’ enhanced criteria and due diligence here. More good stuff –> If you receive Pacesetter, our newsletter, you recently read and downloaded the new EECE study ranking global property funds according to reported and implemented energy efficiency practices.

State of California: Will Green Buildings Net Higher Sales Prices?

The State of California recently put a portfolio of 11 properties, totaling 7.3 million square feet, on the market for sale-leaseback transactions. The State is reporting that these properties, most of them being, in their words, “some of California’s most energy efficient and environmentally friendly properties” could sell for $2 billion, and would be “attractive to a market that is seeking sustainable, green designs.”

What makes this an item worth tracking is that the state official making that quote is also reported as saying that the sale will allow the State of California to “lock-in the lowest rental rates seen in years“.  Bids on the sale are due 14 April. It will be interesting to see the extent to which a green premium can be realized when market or transaction conditions stipulate particularly low rents.  The beauty of real estate is that it is not rocket science — there is no free lunch, and all trade offs come with their price. We are seeing and hearing that, in tough markets, green strategies help to hold back some amount of value deterioration, but are not necessarily rewarded with immediate upside.

That being said, there are multiple angles to watch here.  For instance, the concerns expressed recently by some investors about the mixed-use Boston property that attracted 27 bidders and might close at a “crazy” 6% cap rate.

Why the concern? That cap rate, indicating a valuation far higher than typical for the current point in the real estate cycle (even for Boston), reflects the current shortage of high quality properties combined with a lot of capital on the sidelines. This kind of activity raises fears of a liquidity bubble, even in these tough times, as investors pay up to win what few good deals are available.

That could be a strategy that helps Schwarzenegger shrink the state’s debt woes by more than they would typically recover from the assets.

Yes, the excitement continues!

Benchmarking Anchors Energy Efficiency Retrofit Finance…and Returns

For us, 2009 is already shaping up to be “The Year of Energy Efficiency Retrofits”. Constrained credit markets mean that growing organic cash flow within the existing building portfolio is a real estate investor’s top priority.

So we now spend more time with owners applying an integrated finance approach that structures the right deployment of capital to pay for retrofits while creating the best combination of environmental and economic returns.

Great green finance for existing buildings actually begins with a solid benchmarking process, in order to establish where the opportunities for energy, water and operational improvement exist within the portfolio. This is necessary since operating cost reductions can be a key source of repayment for retrofit costs.

Benchmark Like a Pro

So what critical areas you should be looking at when thinking about your company’s own benchmarking practices?  We have our own experience, and also want to share recent comments from Nick Stolatis, of industry pacesetter TIAA-CREF, that really bring the message home. Nick dispensed hard-won benchmarking wisdom at a forum we sponsored last fall, experience gained while benchmarking their 200 building, 44 million square foot existing office portfolio:

1. Tap the experts. The knowledge and guidance of benchmarking experts will help you avoid potential pitfalls. The first time that TIAA-CREF benchmarked their portfolio performance via the Energy Star Portfolio Manager tool, they realized that more than 50% of their properties were not being benchmarked correctly, if at all. This cost them valuable time and money. With the help of third party consultants, they re-launched their benchmarking efforts. The consulting team, which had developed the Portfolio Manager tool, helped TIAA-CREF establish reporting protocols and additional tools to identify under-performing assets. The re-launched effort resulted in 100% program implementation.
2. Benchmarking is forever. Your asset managers and property managers (and all of their staff) need to understand that benchmarking is an ongoing weekly (if not daily) activity. As a portfolio manager, you need to make sure that they have the right tools and knowledge to consistently and accurately track building performance data.
3. Training is crucial. All asset managers and property management staff need to have adequate training in performing benchmarking tasks. TIAA-CREF, with the help and guidance of their consultants, set up a complete training program for staff, featuring periodic webinar tutorials.
4. Establish expectations. In addition to adequate training, staff needs to understand that these activities are a requirement of their position, not an optional task.
5. Don’t overlook the low-hanging fruit. Benchmarking can take months, even years, to provide an accurate picture of your portfolio’s energy and water performance. In the meantime, there are a number of low-cost/no-cost measures that can be implemented across all property types. For TIAA-CREF, replacing any existing T-12 bulbs with T-8 (only high efficiency) or T-5 bulbs was an easy way to reduce energy use by 30% per bulb, at no additional cost.

Learn About Benchmarking and more from Energy Efficiency Retrofit Specialists

Finally, if you are working to retrofit your existing portfolio, you should attend the Financing Energy Efficiency Retrofits workshop at the upcoming Green Building Finance and Investment Forum – West. During this workshop, top industry leaders will be presenting the newest best practices on financing mechanisms, case studies of successful building retrofits, the nuts and bolts of LEED-EBOM certification and new regulatory initiatives that make sharing building energy information more transparent. Here is the link to the agenda and registration information.

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