For Real Estate, Transparency is the New Black

Did you Read Co-star’s article today about “the state of energy efficient and green buildings” in across the US?

Read all the hand-wringing there about how hard it is to green buildings?

Of course, its a tough time for landlords to navigate their portfolios towards energy efficiency — what with new state energy disclosure regulations, percolating federal building labeling discussion and all breathing down their necks.

Interesting to us is call for more transparency in our industry.  Notes Co-Star:

“The issue of tenants, real estate brokers and landlords all having access to more transparent and readily available information to enable them to make better informed decisions remains one of the biggest challenges facing the industry today, noted the panelists”.

This time last year, “getting the plaque” was all the rage. And some firms became a little too good at talking the green talk without necessarily walking the walk.

Experts pointed out that some buildings had obtained LEED-Gold certification, without significantly improving their energy profile beyond code requirements. They were able to achieve certification via sufficient LEED credits from other categories. And this caused a few to raise public doubts about  the market strength of third party ratings system to address market transformation to low energy buildings. Those concerns were misplaced.

We hope in the coming months that the voluntary, transparent dislosure of a building’s energy use becomes as trendy as getting a LEED plaque on a trophy office building was last year. That would go a great way toward shifting market perception in favor of a value premium for certified green and energy efficient commercial real estate.

Your 2009 Career Insurance Policy: Get LEED Accredited

Happy New Year!

The team at Galley Eco Capital enjoyed a restful holiday and are happy to reconnect with you on the 2009 Green Journey.

Hint: A recent study says that nearly 85% of real estate executives are working on greening their portfolios.

Are you prepared?

I’ve spoken with finance and investment professionals who say that they are not convinced that project LEED certification issues really relate to their work.  (Author’s epiphany: They never seem to subscribe to Our Green Journey, either.)

Being at the top of our game in this business is all about knowing how to judge property values and where they’re headed. And you can’t tell where values are headed these days without establishing the positive connections between integrated design, or green retrofitting, and asset value.

I think pragmatism should guide your thinking on this one. So many investors have announced that they are working on greening their existing building portfolios, you don’t want to run the risk of having obsolete skills. Finally, the USGBC is transitioning to LEED 3.0 soon, so you may want to get accredited anyway, particularly if you’d already started studying for the LEED-NC 2.2 exam and had gotten sidetracked before.

Do the LEED Hustle: Updates and Exam Prep Opportunities here in the San Francisco Bay Area

So here’s a public service announcement from my local Northern California USGBC Chapter:

Registration for the current LEED AP exams closes March 31st!

LEED Exam prep classes here in the Bay Area sell out in minutes. So some energetic hustle is required if you’re serious about getting accredited. Upcoming course choices with links are posted below.

Everyone else –> contact your local USGBC chapter about exam prep classes, get accredited and be the lion in your job market, not the gazelle.

LEED New Construction (NC) v2.2 Exam Preparation Workshops:

This full-day LEED NCv2.2 Exam Training Workshop will be offered in Silicon Valley and Sacramento and is designed to prepare you pass the test with confidence - the first time.  This is the “old” New Construction exam that will be offered until around May of 2009.  The “new” exam will come out sometime around summer of 2009.

January 23rd
8:30 AM - 4:30 PM
Milpitas

Click here for more information/registration.

February 11th
8:30 AM - 4:30 PM
Sacramento

Click here for more information/registration.

LEED Project Management Workshop:

January 30th
8:30 AM - 4:30 PM
San Francisco

Click here for more information/registration.

LEED for Commercial Interiors Exam Prep Workshop:

February 2nd
8:30 AM - 4:30 PM
San Francisco

Click here for more information/registration.

Green Building Operations and Maintenance Workshop;  The LEED Implementation Process:

This is the new 2009 version that will be part of the support for the new LEED EB exam that is due out around spring 2009.

February 6th
8:30 AM - 4:30 PM
San Jose

Click here for more information/registration.

Informative events about the LEED v3.0 transition:

LEED 2009: Looking Ahead:

The U.S. Green Building Council Silicon Valley Branch is presenting a look ahead at the changes to LEED Accreditation.

In this session you’ll get answers to your questions, like:
* Why is the LEED AP exam system changing?
* What are the differences between the new LEED Credentialing system and the
current LEED AP examination system?
* What is the timeline for introducing the new system?
* When can I expect the exam to change?
* When the new system emerges what does it mean for current and future LEED AP’s?

January 13th
5:30 PM - 8:30 PM
San Jose

Click here for more information/registration.

LEED Update: New Testing and Rating Systems:

For those of you who could not make it to Boston for GreenBuild, now is your chance to catch up on what is in store for LEED in 2009 and beyond.  LEED Version 3 takes effect in 2009 and will bring about the most significant changes to the LEED program in years.

Additionally, the LEED AP testing program will be overhauled in 2009.  The new credentialing program will feature LEED Associates, LEED Accredited Professionals and LEED Fellows - each with their own testing and maintenance requirements.  Join us on Jan 14th and be among the first to learn how these important changes to LEED will impact your projects and teams.

January 14th
5:30 PM - 7:00 PM
San Francisco
Click here for more information/registration.

Part 3: JP Morgan Chase Talks Green Real Estate Investing

When JP Morgan Chase says that sustainability is creating fundamental changes to how they invest in real estate, you pay attention. Part 3 of our special series on the Green Building Finance and Investment Forum - New York, co-sponsored by Galley Eco Capital, continues with the perspectives of  keynote speaker, Doug Lawrence, Managing Director at JP Morgan Chase Asset Management.

“Achieving sustainability can be an uphill battle-but it’s crucial that you get there. Your future customers will demand it, and your ROI will depend on it.” - Doug Lawrence, JP Morgan Chase

Doug set the stage by reminding everyone about the basic objectives of investment banking:  1) preserve and grow clients’ capital and 2) make money for themselves in the process.  In JP Morgan Chase’s case, sustainability has become a profitable strategy for them that also preserves and grows client capital, which in turn ensures their competitiveness in the ever-changing financial marketplace.

Case in point: Doug manages the Urban Renaissance Fund, JP Morgan Chase’s newest vehicle, which focuses on cities and their first suburbs — where population density is high and the payback on energy efficiency is substantial.  The Fund sees investing in sustainable real estate as a way to improve returns and reduce investment risk. However, “getting there” with green real estate is not without it’s challenges.

Green real estate is a different animal than conventional real estate. Successfully investing green means re-calibrating underwriting metrics and changing many of the fund’s business procedures. It costs money to do this and it can take quite a  bit of time to change hearts and minds about what constitutes a great sustainable real estate investment. On top of that, you have to manage organizational inertia, which can often be the worst enemy of change.

“Green means changing our procedures, our underwriting, our vendors, the way we put our products together.” -Douglas Lawrence, JP Morgan Chase

So how did Doug and his team help the powers that be at JP Morgan Chase embrace green real estate? Well, first of all - it took them two years, plus some organizational change, but the repeated message to leadership was clear: if we don’t do this, we will lose our edge, and our financial products for real estate will be obsolete.

Doug drove home his point about obsolescence in real estate with the example of the emergence of building air conditioning back in 1950/1960s. The technology was rapidly implemented, and buildings that did not incorporate air conditioning became obsolete. They faced appraisal risk, and their valuations decreased quickly. For owners, their failure to upgrade their properties increased their investment risk and devalued their real estate holdings.

Wanted: Experienced and Knowledgeable Green Developers and Investors

So now that your fund is focused on sustainable real estate, what’s next? Well, your next challenge is identifying experienced and qualified developers/operators who can reliably build your project in a way that gets you the great green benefits you (and your investors) seek.

In today’s market, a successful track record is key to investor confidence; and Doug made it clear that, while they are supporters of green real estate, they are not interested in any developer learning about it on their dime. However, since green real estate is still in its infancy, they realize that they have to be flexible in how they evaluate their partners, otherwise they will have a difficult time generating a sufficient level of investments.

“If you have a great idea, tell us how you are going to mitigate risk.”

So what do you do if you’ve got a great development track record, but are new to sustainability and want to attract green equity capital? From Doug’s perspective, if you want their money, you need to reduce the execution risk within the investment.  And creating strategic alliances between the experienced developer and firms with proven sustainability expertise is a smart way to mitigate those types of concerns.

And with that great team in place, what aspects about green real estate are driving JP Morgan Chase’s involvement in the sector?

• Green retrofits to existing buildings can be done profitably: JP Morgan Chase estimates that existing buildings which have been retrofitted green enjoy a 3% higher occupancy, a 7.5% higher valuation and use 25%-30% less energy than their non-retrofitted counterparts.

• There is no cost question about building green real estate: Despite the fact that many in the industry still talk (incorrectly) about hefty cost premiums to build green, JP Morgan Chase sees that an experienced developer of green property can deliver LEED-certified and LEED-Silver product to market at absolutely no cost premium whatsoever.

• Integrated design is the key: Engineer value at the beginning instead of value engineering at the end of a project. Also, integrated design optimizes both first and life-cycle costs.

Selling Your Deal: Know The 7 Fears of Real Estate Equity Funds

Doug finished the presentation by educating the audience on how to best position themselves and their transactions for investment by other funds like his. He presented seven key issues (or fears) that many funds have when it comes to sustainable real estate. By understanding and addressing these concerns, investors and developers can remove many of the roadblocks to getting funding for their projects. The seven fears are:

1. Fear of being too early. Equity funds fear the failure of your concept, because there is no protection for their capital. You need to have a lot of data to support what you are doing, and develop an executable business plan that can be understood by potential investors.

2. The fear of learning new stuff. As previously mentioned, bankers are conservative. They know certain things, and they know them well. They have their favorite product types, their favorite developers, and they have their risk management down to a science. Your project may represent a major departure from their investment machine, and they might resist. It is up to you to educate them, and to be persistent.

3. Loss of power. This fear is a derivative of fear #2. Changing the game forces individuals at the top of the corporate structure to either adapt, or risk becoming obsolete. When it comes to understanding sustainability, it’s your responsibility to educate your potential partners in a way that maintains their leadership as the smartest people in the room.

4. Maintaining deal flow. Equity funds don’t want to upset their developer partners; as that might  put their investment pipeline at risk. Therefore, they will tread lightly when it comes to convincing their existing partners to become more sustainable.  The antidote: re-read all of the above.

5. Fear of losing return. As a green developer/investor, you can use your potential equity investor’s fear of losing returns to your advantage; help them understand how their returns will be diminished if they don’t invest in green.

6. Fear of execution. Unfortunately, there is a flip-side to fear #5. If equity investors think that your sustainable real estate investments raise the execution risk for their capital, they will be less inclined to invest. Structure your deal and your strategic partnerships to mitigate as much risk as you can. (Our note: You should be doing this for every deal anyway)

7. Fear of being too late. Whether by law or by simple economics, green real estate will become the norm. When that occurs, the incentives for green building and the learning opportunities will be gone. If equity funds don’t understand how to evaluate and fund green investment before the market transformation, they will lose their competitiveness. Make sure that you emphasize this to your potential equity partners.

Doug’s perspective was well received by the audience at the conference, and we think that green developers and investors would be wise to heed his recommendations.

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If you liked this post and would like to receive more, please subscribe. Don’t forget to read the other installments of our Special Series on the Green Building Finance and Investment Forum - New York. As always, we welcome your comments.

Competing for Green: JLL’s Big Move

Earlier this year, I posted about how the big players in commercial real estate were under enormous pressure to figure out how to deal with the mass greening of their real estate portfolios.

You can see in this linked story that the major investment management firms are not being shy about making big moves in order to stay ahead of the curve on this developing area of real estate practice.

And those moves now include acquiring the consultancies who are responsible for developing the green buildings ratings system tools. Case in point: Jones Lang LaSalle’s purchase of ECD Energy and Environment Canada, Ltd., the developer of the Green Globes rating system.

The Co-Star story plays up a USGBC LEED vs Green Globes competition.  However, I didn’t see much of that competitiveness within the quotes from USGBC’s Mark Heisterkamp and JLL officials. They all politely downplay that aspect.

The Green Journey Take
Acquiring a consultancy is not a new thing, I know. Buying the folks responsible for developing the key technology used to assess a property’s greenness represents a new milestone on the path to
sustainability that deserves watching.

Think about it: what if a major global real estate investor-manager, or even a Microsoft-like tech
giant bought the entire development team of Argus, but left the Argus software itself intact and separate with a non-profit? What would “the rest of us” think? While Green Globes is not as prolific as LEED (or Argus) here in the U.S., it has been relevant to the groups who, for some reason or another, have not been able to embrace LEED. The Co-Star story focuses on the potential competitiveness between the two ratings systems, but it is missing the broader competitiveness issues sustainability is triggering among real estate investors.

The move by JLL underscores sustainability’s credibility with top-tier investor-managers: the fact that major commercial real estate investors are putting serious dollars into enterprise technologies to green their assets, even though much of the evidence about NOI and valuation benefits is still anecdotal and technically inconclusive about the exact benefits these investors will ever realize. The investment community has already decided and are not waiting around for the “real” proof.

What is also interesting is that this particular type of move — buying the particular consultancy which developed a ratings tool, also highlights the point of pain (and value) in our industry. That’s the enormous unfilled demand within commercial real estate for new talent, best practice and structured, efficient approaches to transitioning the modern property operation into a sustainable one.

In other words, professionals who already “get it”and have embedded “sustainable intelligence” into their treasure chest of commercial real estate talents are probably in hot demand.

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.

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