Powerful leasing stats for green buildings — on two continents

Strong evidence continues to build showing that green buildings can deliver better investment value, both now and later.

Moreover, the strength of this assertion is underscored when you see confirmation of leasing performance from unrelated international markets with different green building rating standards.

The below leasing stats are from local brokers and property managers in San Francisco and Paris. We hope that they can give you more ammunition for those green building value conversations you may have with clients and other stakeholders.

San Francisco: LEED vacancy = 9.7% vs non-LEED of 15%

Dave Klein, of NAIBT’S San Francisco office, maintains the RealGreen Index. It tracks the availability of office space in green buildings here in San Francisco, where he’s estimating a 9.6 million sf market of LEED buildings as of 9/09. That green space is overwhelmingly LEED-EB certified.

In our experience with underwriting markets, there is a very different point of view about 9.7% vacant submarket vs a 15% one, even in a historically strong market like San Francisco. That 530bp gap in vacancy shows that the non-LEED buildings will eventually be forced to offer either lower rents and/or larger lease concessions, resulting in lower effective rents to attract tenants.

If those non-LEED Landlords decide to tough it out and not offer greater concessions to compete, they’ll still be paying for that higher vacancy by being the last buildings to fill up, as the local market recovers and the LEED-certified buildings fill up first. It’s really just a question of time, as tenants seem to have already voted with their feet and checkbooks.

On the flip side, calling out these non-LEED buildings like this seems to be a nice circling of a fat EE-retrofit market, in my view.

» Download LEED vs Non-LEED vacancy (NAIBT) (349)

» Download NAIBT Green Index (428)

Paris = Green vs non-green pre-leasing –> 57% vs 11%

Recent story out showing that the French HQE (Haute Qualité Environnementale) green building certification is strongly preferred by tenants in the Ile-de-France submarket of Paris (largely corporate Class A office submarket).

Keep in mind that this is a 2 million sqm submarket — about 21,527,821 sf, meaning no small shakes for the fortunes of those investors. Per GlobeSt:

Around three-quarters of total office space above 5,000 square meters planned for delivery in 2012 and beyond will carry the standard, most of them in the periphery in the south of the French capital. It also concluded that HQE certification is accelerating leasing processes, with 57% of certified space deliverable next year already let, against 11% which is not certified.

In the case of this market, if you are the owner of a non-green building in development here (not even in operation, yet), and your investors see a pre-leasing variance of this magnitude, what kind of conversation are you having with them about creating value with their money?

Not a fun one, I think.

» Read the full story on French green building certification and leasing stats here.

While I realize that the real estate industry requires greater empirical support for the value contribution of environmental certification, these stats already point to huge implications for building owners in each of their submarkets as well as all others where green building penetration is growing. All other things being equal, lower vacancy and/or faster absorption  accrues directly to the bottom line and deliver a great pop to returns.

In my opinion, even though the industry hasn’t reached consensus on a final approach to valuing green buildings, asset underwriting methodology in each of these sub-markets must consider a particular asset’s environmental performance vs that of its peer set, since tenants have demonstrated a clear preference.

More on green lease clauses: Out with the bad, in with the good

Today’s post shares details about that “bad” green lease featured last Friday. Also I’m sharing a few green lease tips from BEPN that talk about ways green lease language can help support value creation in environmentally certified buildings.

The “bad” green clause’s web of risk

Several folks pointed out that LEED-EBOM certification can be achieved without any cooperation from the tenants. Unfortunately, our “uniquely negotiated” lease contained other typical provisions, which, when combined with the green clause in question, made the green business case uncertain, in the eyes of the buyer.

The lease in question was that of a major tenant - and major tenants are often able to negotiate special terms many other areas of the lease, with a deep focus on the expenses that can be passed through via common area maintenance and capital expenditures.

The major tenant lease was no different.  Lease language required the Landlord to obtain the major tenant’s permission in advance of passing through any expenditures, which were outside of a stipulated list. On top of that, the pro rata formula for calculating the tenant’s share of base building common area included an alternative common area square footage.  The formula denominator was a negotiated larger number, so the major tenant would pay less than its full share of common area expenses.

All of the above moves are typical, and limit the major tenant’s exposure to unforeseen or undesirable cost increases over the lease term.  In exchange for this, the Landlord gets a great tenant on a long term, which greatly enhances the building’s image and value.

The limiting of expenses (which is typical) plus the questionable “green” clause, created a situation for the investors where, a) much of the CAM and capital expenditure repayments were “locked in” by the prior owner over a very long time, limiting the new landlord’s flexibility, and  b) if any type of CAM or cap-ex charges were related to “green features” over the major tenant’s lease term, they couldn’t recoup those charges from the major or any other tenant either.

These investors’ business plan is to hold assets for a long term and realize an explicit increase to NOI from operating them as certified green buildings. So they were very focused on lease language not limiting their ability to execute that strategy. Losing part of the CAM recovery via the negotiations might be typical, but being further prevented from recovering costs from any tenant for any sustainable features over a long term put the lease contract into their “risky” column.

BEPN: “Green leases essential for achieving landlord’s environmental goals”

Check out this article from BEPN titled “Green Leases are Coming” (subscription might be required). It lays out a few issues that green leases address, all aimed to make sure that tenants and landlords are aligned with the environmental goals set for a project.

Essentially, the article talks about the kinds of lease provisions that can be negotiated with tenants so that it is easier for the landlord to achieve environmental objectives for a building.

The only part of the article that I would question is the assertion that most leases in the United States are triple net. During my tenure on the San Francisco Mayor’s Task Force, we talked about this point at great length. Large owners and property managers on the task force indicated that most office buildings are leased with gross leases. Of course, retail and industrial properties are nearly always triple net leased.

In any event, the main point here is to make sure you do not exhaust yourself trying to develop or retrofit green, then negotiate the “same old same old” in your leases. If you do, you are passing up a great opportunity to maintain and enhance the value of your environmentally certified building.

Friday Photo: National Clean Energy Summit + Post Scripts

Recently on 11 August, political and economic leaders gathered at CityCenter, Las Vegas for the National Clean Energy Summit. CityCenter is a multi-billion dollar, LEED-registered, mixed-use development still under construction and recently narrowly avoided being named the biggest foreclosure of the year (search: “citycenter+las vegas+foreclosure”).

* * *

Post Scripts

On the guaranteeing of LEED certification … “over my dead body” vs. “who’s to stop it?”

Yesterday’s post about consultants guaranteeing LEED certification generated comments from two adjacent, but distinct philosophical camps: a) The Indignant and b) The Resigned.

Here’s the sampling of sentiments (note: when people comment to me directly, I withhold their names for all kinds of obviously decent reasons).

Camp 1: The Indignant aka “Over my dead body…”

From D.C.:

We would absolutely not ever guarantee LEED certification. We feel confident we can achieve the desired level of certification with cooperation from the owner and its consultants. BUT this is a third party certification program over which we have no control.  I recently exchanged emails with another small, start-up consulting firm making similar claims.  I asked how they could do so –  I think they basically hadn’t thought it out much and were small enough that if they were sued, they could probably just go under. I think this is a symptom of new companies that lack experience and are trying to win business.  I am not sure our owners would take this seriously – but our owners are pretty savvy about the process too.

From San Francisco:

We’ll never guarantee…with the reviewers producing very different reviews even for similar buildings in the same city we haven’t a hope of knowing where the building will finally end up in the LEED process..it’s not in our hands.

Camp 2: The Resigned aka “Can we really stop it?”

Grant Roden, who posted to comments wrote:

Yes, I think that LEED consultants will be forced to ‘guarantee’ LEED certification. Due to the marketing potential from investors / lenders and occupants, owners will go with a company that claims they can guarantee certification. However, this will not reduce the cost associated with getting certified, if anything, I think that it will be possible for consultants to increase their fees. Now with V.3 requirements there are more ‘after-market’ and post-occupancy monitoring necessary to get certified. The consultants need to be associated with the project for years after completion.
This is where the lawyers will need to come in and develop contracts to ensure that the owner, consultants, contractors and occupants understand their roles in ensuring certification.

Thanks for all the comments, everyone and have a good weekend!

Yudelson: ‘You should be tougher’ on non-LEED West Village

Your input is requested on a very important matter!

Yesterday, I highlighted the UC Davis West Village student/faculty housing development getting a $2 million grant from the California Energy Commission.

I also noted the project not adhering to LEED guidelines or any other third-party rating standard for that matter.

That definitely caught the attention of none other than Jerry Yudelson — a Green Journey reader with regular comments — who took me to task on not going deeper on the lack of third-party rating standard for the project.

His point:

Like this story, but you have to be tougher in your commentary. Not only is LEED not mentioned, thus no third-party accountability, but CEC did not require it as a condition of the grant, going against a clear requirement for all new state buildings. Also, there are no clear sustainability objectives: e.g., housing to use no more than 5 kWh/sq.ft./year for heating, cooling, hot water and lighting, no more than 50 gals/capita/day water, 100% use of certified wood, no use of PVC, etc. Without these touchstones/benchmarks, the so-called “sustainable design” is not ground-breaking at all, just a grab bag of technologies and design approaches.

I gotta admit: Jerry’s making a big point. It is true that not even the most minimum standard for energy and water saving guidelines were agreed for the project, despite it being a deal controlled and co-sponsored by the University of California (sponsorship from ground lessor relationship). Adding to that, the project received funding from the California Energy Commission, a big proponent of green building in general.

Here at Galley Eco Capital, we’re aware of several large developments in California that have gone through an extensive environmental review and entitlement process taking many years. The sustainability requirements that they were required to adhere to were baked into the deal years ago, somewhere during the process.

Should the developer feel compelled to achieve LEED-certification anyway?  I know that we USGBC supporters would want them to do so.

They finally achieve entitlements now, years later, during a new era that expects more vigorous, sustainable land use, transportation, environmental and building policy. I am not 100% sure about whether this is the case for West Village, but it fits the fact pattern.

Other developments, such as the Catellus Mission Bay project here in San Francisco, encountered a similar situation with their entitlements. In Mission Bay’s case, the master developer did not have to require LEED-certification from vertical developers, but some — Alexandria and McCarthy Cook, for example — built buildings to LEED-Silver, anyway.

In their case, these vertical developers needed LEED-certification from a marketability standpoint, to remain competitive with UC San Francisco or the large biotech and pharma companies on the prowl for new space. The West Village developers are marketing the units at below market prices, so assuming the pent up demand remains strong, they will not face any marketing risk associated with the fact that their product is essentially “self-certified”. Here the real estate story could trump the broader trend towards going green.

Your turn: What do you think?

• Should we be harder on the West Villages of the world, who are getting grant funding for “research” even as they avoid adhering to the most minimal third-party certification?
• Are we not hard enough?
• Are their efforts really just a ‘grab bag of technologies and design practices like Jerry says?

Please send me (and Jerry) your point of view. I will compile all the messages and share with those who respond.

We like this kind of issue here on Our Green Journey, because we want an authentic discussion first amongst finance and investment professionals — no fluff. That’s the only way that we are all going to create better, more sustainable results for our communities.

So tell it like you really see it. Your input would be very much appreciated.

Citibank’s Destiny: Keep Funding Those Draw Requests

Audience question from my Eco Tuesday talk last night:

What are some of the challenges being faced by green project developers in today’s market?

Tough capital markets, along with soft economic and market fundamentals are creating adverse conditions for successful projects, green or not.  And tough conditions can also make bank and borrower relations turn pretty ugly.

Check out this Wall Street Journal article, detailing a legal street-fight between Citibank and the owners of Destiny USA, a green retail development in Syracuse, NY, currently under construction (again). It lays out the worst nightmare that can happen to a development and is happening more often — when a lender stops funding construction loan draws, presumably due to some violation of the loan documents.

DestinyUSA got a judge to force Citibank to keep the draw payments coming. The judge noted that Citibank’s reasons for halting payment of loan draws were not based upon any violation of the loan documents. He also said that Citibank was probably trying to conserve capital, even though it received TARP funding. Of course, Citibank has a completely different view of the situation.

And what was on the line for green development overall?

DestinyUSA has has announced many so environmental and social initiatives for its 1,000,000 square foot development, that  you can almost think of it as a test lab for retail sustainability practices.

Of course, the standard caveat for green development applies here –  we’ll have to see if this all really comes into effect as announced when the project is fully opened.

Nonetheless, their potential existence within a retail project would be a great leap forward for the greening of retail, as well as show the way for new work models that improve worker well-being.

Examples:

- LEED-Platinum certification targeted.

- Tenants to be provided with LEED-CI buildout guidelines.

- “Green parking” — parking spaces reserved for hybrid vehicles.

- Policy of 95% construction waste diversion.

- Renewable energy: The project will be powered by a free-standing on-site renewable energy plant powered by municipal solid waste (MSW) generated by the facility and providing over 16 Megawatts of power.

- Workforce model: workers hired for construction will be kept on and retrained to work in the development once it is operational. This is an idea we like alot; it could be replicated by many other developers (assuming they successfully navigate their projects through the tough market environment).

Hopefully enough green developments currently under construction will avoid the problems experienced by DestinyUSA and other developers, and survive the current market in order to open successfully and move the industry forward.

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