San Francisco Once Step Closer to Mandatory LEED

Mandatory LEED in San Francisco is a critical step closer to being fully approved, according to yesterday’s San Francisco Chronicle. The Building Inspection Commission signed off on it last night. Its now at the Board of Supervisors for approval.

Bare Bones Overview
Under the proposed addition to the building codes, the following  construction must be LEED-certified:

• new residential high-rise buildings taller than 75 feet
• new commercial buildings larger than 5,000 sf
• renovations on commercial buildings larger than 25,000

Additionally, new residential construction will have to comply with Build It Green’s GreenPoint Rated system.

The article also indicates that complying with the legislation will cost developers an additional 5% on their project budgets, but does not provide a source for this particular information.

No Incentives on Tap
Interestingly, a city official is quoted as saying that city officials had hoped to offer incentives to builders whose projects obtained highest levels of environmental performance, but they scrapped the idea because they feared “it could lead to developers unnecessarily tearing down buildings or remodeling structures in order to take advantage of incentives”.

Hmmm…. so exactly how much in incentive fundings did the City think it would have to shell out? I’m sure they could have devised some sort of method to reduce this particular concern, (if this was truly the main concern).

The quote:

“What we now have is legislation that says if you’re going to build, you have to build to this standard. But it doesn’t encourage you to build a green building in lieu of keeping an existing building.”

Read the article for yourself and decide.

Energy Efficiency German-style & LEED Grows Legs

Last week, I moderated an energy efficiency symposium that brought together German and American building and energy experts. The Germans were here to sell us a few building energy products and services. The Americans were there to look and buy. After a few great presentations and some hefty debate from an engaged audience, I started synthesizing clear differences between how Germans and Americans approach high performance buildings.

So here’s a few statistics and slides from the presentations, to give you a picture of the current state of energy consumption, how its being reduced in Germany as well as some thoughts on why Germany and the US are achieving different results. Go here to the German American Chamber of Commerce Website to see all the presentations in full.

Germany & Japan Use less Energy to Create the Same Economic Value as the US Fred Pollack, an architect with Van Meter Williams Pollack helped frame the current state of energy consumption in the US with the following statistics from the International Energy Agency:

Energy Consumption, in $/Gross Domestic Product as of 2006:

• USA = 3.2 kwh/ $GDP
  
• Germany=2.4 kwh $GDP (25% less than the USA)
  
• Japan=1.5 kwh / $GDP (53% less than the USA, 37.5% less than Germany)

So Germany and Japan can create the same unit of economic value as the US for 25%-53% less energy than the US. When you add to that, the current fact that the dollar’s value has weakened sharply against both the Euro and the Yen over the past year, then the idea of the US economy’s exposure to energy price risk becomes even more concerning.

When it comes to energy security, Germans have been walking another road, at a faster pace, for decades. Historical context frames these ideas and you’re probably familiar with the American version. Both Germany and the US experienced severe energy price shocks during the 1970’s. This experience kick-started Germany’s national policies that mandated decreases in building energy usage. That success has supported a steady walk to some of the cornerstones of Germany’s great track record in lowering its fossil fuel dependency: the wildly successful feed-in tariff, the creation of the low-energy and Passivhaus standards as well as the Plus-energy House.

Dr. Manfred Hegger, Professor with the Technical University of Darmstadt put up a slide summarizing how residential energy consumption in Germany has decreased as new legislation was enforced and innovative construction methods developed. Click directly on image to see an enlarged version.

Reduced energy consumption in Germany is more closely associated with investment value preservation. The German presenters kept stressing how their ideas and products contributed to “investment security”.  Americans currently talk about greening buildings in terms of lowering operating expenses, but the idea of investment security isn’t spoken about so widely. So I could see that German owners have developed the thinking that, to the extent a building is energy inefficient, the owner is exposed to energy price risk from the open market — a very bad deal. Bear in mind that Germany has 1) MUCH higher energy prices (gasoline in Germany now = ~$8/gallon) 2) a slower rate of economic growth than the US generally and 3) correspondingly lower interest and cap rates. So value appreciation through opportunistic rental rate increases like we can do here in the US (sometimes) is less likely.

Conversely, slow rental rate growth combined with volatile, already high energy costs greatly exposes a property to quicker value erosion. So Germans are combating real value deterioration via lowering building energy consumption. Energy has been relatively cheap in the US and American owners, while cost conscious, have focused on growing the top line and reducing first costs, but only now are thinking about risks to the building value from escalating energy costs.

Germans use an energy budget to drive the design and construction process, not just “optimization”. An energy budget is the maximum amount of energy a building is permitted to consume. Period. For example, in Germany, the low energy residential house standard basically restricts maximum heating usage to 30-20 kwh/sqm/yr (USA:8,000-6,000 kBtu/sf/yr). In the commercial property market, the concept has evolved to the point where an owner simply will not pay for a building that exceeds its agreed energy budget. It is the architect’s job to make sure that every building part and system works together to achieve the energy budget in addition to creating the building’s aesthetics. Over the years the energy budget of German commercial buildings has been reduced as innovations in building science were introduced. Architects and engineers distinguish themselves by the smaller scale of the systems that they
install into a building, not how much.

The Germans pointed out that the building is also usually cheaper, when it is dependent on smaller systems. They also had the strong opinion that American design and construction professionals still focus on “optimizing” using established building codes as benchmarks as opposed to obtaining the greatest absolute reductions in energy usage. And this optimizing mindset leaves too much room for tolerating more energy consumption out of buildings than is truly necessary. Their experience is that current building science and technology can deliver buildings that operate with greatly reduced energy consumption and systems at reasonable costs, if we Americans were to utilize an ‘energy budget’ mindset.

Measure Actual Energy Performance, Not Just Energy Modeled. One of the strengths of the discussions was that the German speakers had a great deal of actual data comparing the energy efficiency regulations implemented over the years with the actual energy decreases achieved. This supported the advice of Dr. Norbert Fish, Professor at the Technical University at Braunschweig, that one really can’t know a building’s actual energy consumption until its been tested during the first 1-2 years of operation. His slide below shows how widely the actual energy consumption of high performance buildings can vary.

LEED Gets Lots of Praise and is Growing Legs Andrea Traber, President of the USGBC Northern California Chapter, gave an update on the upcoming changes to LEED. I posted about this before and you can also find info about upcoming changes on the USGBC national website here.

The German participants were complementary about the LEED system as a way to provide a cohesive language to discuss the green building domain and its components. They also noted that they were seeing international investors, particularly Americans, approaching them in Germany and trying to relate green building performance there in terms of equivalent LEED ratings. So there was lots of interest in LEED generally, since it is starting to move through the investment market. After the event, I talked to a few German product manufacturers who said that they realized that in order to better market their products to US property owners, they were going to have to translate their products contribution to energy reduction into LEED-relevant performance data, since this has become the official language of the green building community in the US.

Photo Credit: Flickr/Popaver - Passivhaus.

Energy Efficiency & Building Value: Co-Star Statistics

Looking for data to support the value of building green? Join a growing crowd and read on…

If my software let me write sarcastic subtitles, this one would be “Most often cited statistics at green real estate conferences in Spring 2008″. Seriously, now that so many in commercial real estate are trying to quantify how much (additional) asset value can be created by green initiatives, I think it is good to share those zeitgeist concepts that help shape the industry’s attitudes towards investing in green real estate.

Like alot of you, I’ve been to quite a few green building finance conferences lately. I’ve noticed that in the larger venues, the findings from the Does Green Pay Off? report always get a slide or two throughout the presentations.

Take a look at one of the basic statistics connecting greater energy efficiency with higher sales prices (click directly on the image to see a larger version):

Data source: Does Green Pay Off? by Norman Miller, Jay Spivey and Andy Florance

I read this paper some time ago when it first circulated, and was a little hesitant about how much weighting to apply to its findings since it is focused on energy efficiency, which is only a part of developing green buildings. I am still hearing people speaking about Energy Star and LEED as if they are synonymous — they are not.

Nevertheless, green real estate investors are using this information as support for the idea that optimizing a building’s energy consumption is already being rewarded in the capital markets when they sell their properties.

Based on what I’ve been hearing, many of them are also assuming (hoping!) that the seller of a fully green building should be rewarded with an even higher sales price.

The Green Building Finance & Investment Forum: First Movers, 9 Ideas & Some Challenges

So today is a two post day, just to stay on top of the info deluge that is besieging my inbox. I’d posted before about the Green Building Finance & Investment Forum, which took place the latter half of last week.

The focus of the conference was for the green first movers to share experiences from their particular vantage point.

Most Talked About Green Building Ideas

• Be green or be obsolete. You have heard this one here many times before. It was reiterated throughout every panel and presentation. Leanne Tobias used the term “future-proofing” to refer to how green is being seen as a way to mitigate the risk of obsolescence. It became one of the most repeated buzzwords throughout the event.

• Think abundance - apply sustainability to grow the top line. Tom Paladino gave a wonderful case study about how his firm uses sustainability to create specific features that increase the rent premium owners can get on their buildings. This runs contrary to most people’s focus on using green building principles to reduce expenses.

• Sustainable markets – the downtown premium. Jonathan Rose presented his company’s approach to investing, which includes focusing on smart growth locations. They’ve got it down to the point where they have established relative return premiums for various markets.

• LEED branding is gaining economic value. Transwestern’s Greg O’Brien pointed out that investors were seeing a particular value in green building being certified. It is not enough for an investor to just say that they had made specific improvements to the property, but that LEED certification was being seen as a ‘good housekeeping’ seal of approval on the asset.

• Think beyond the net zero building. On the technology and innovation panel, panelists talked about thinking in terms of a net zero community, not just individual buildings. Bill Sisson, of United Technologies and the World Business Council for Sustainable Development and Laura Rodormer, of Swinerton Management Consulting talked about the need for the investment community to enlarge its view of how far we can go with net zero energy.

• Go for the low-hanging fruit. Immediately adopt low cost green strategies. Several panelists said that there were many high ROI green moves that can be immediately implemented at little or no cost (and without an investment committee’s approval). Changing lightbulbs might sound boring, but the energy savings generate a great return.

• Metrics measure what matters. Several investors pointed this out. We will not have positive financial, environmental and social outcomes unless we are measuring portfolio performance on all of these dimensions. Real estate investors now have the challenge to integrate measuring environmental and even some social outcomes within their portfolios alongside financial returns.

• Use government incentives, subsidies and tax breaks to your advantage. Steve Grant, of the Bond Companies, was in the audience.  He stood up in the middle of a presentation and pointed out how his company has gotten quite strategic about how they source and apply incentive dollars. It can be a significant source of financing that is often overlooked by investors.

• The green building tsunami is just beginning. State of California Treasurer Bill Lockyer commented that a year ago the investment officers at CalPERS and CalSTRS (our state pension funds) hardly ever heard about green building investments. Now they get about two proposals a week, requesting their investment in a new green fund.

And then there are still challenges

• Diagnosing with LEED-EB: Lots of investors talked about how implementing LEED for Existing Buildings is a very challenging, highly imperfect endeavor. Not only just to green a building, but they are also applying LEED-EB (now LEED-EBOM) as a screen for potential investments. No solutions were offered, this is an open point for all of us to follow. However, it was interesting to note that several
  consultants in the audience were muttering that the investors difficulties stemmed from trying to force LEED to fit their organization’s existing investment approach (i.e. put LEED criteria into the organization’s existing checklists) and not the other way around. There are lots of efforts underway throughout the industry trying to tackle this problem, so I’m sure we’ll see lots of movement here in the coming months.

• Underwriting, Appraisals & Standards: When it comes to talking about underwriting standards, the industry talk sounds like the City of Babel. Lots of confusion. We still lack formalized underwriting standards that the industry can apply in order to understand green buildings financially, but there are groups, such as the Green Building Finance Consortium, that will be putting out papers about this topic in the coming months. Tim Lowe also presented a detailed analysis of what needed to happen in order for real estate appraisers to adequately value green properties. In short, there is lots of education still needed within the appraisal industry.

LEEDing Change

Now that you’ve got LEED all figured out, get ready to change — quickly. And if you haven’t got LEED all figured out, congratulations there is even more to catch up on.

Last night, the Northern California USGBC Chapter put on a presentation of upcoming changes to the LEED rating system. The event was so oversubscribed that the Chapter put up the webcast and slides for dowloading. Here are also a couple of highlights discussed, that are more pertinent to the financial underwriting of green investment properties.

LEED for Existing Buildings: Operations and Maintenance

• First of all, the above title is the new name for the old “LEED-EB” — stressing now the ongoing O&M best practices, not just a series of one-off projects to green an existing building once in its lifetime.
• The USGBC has partnered with BOMA to create some forthcoming green lease language. This language will hopefully align landlords and tenants on minimum expectations about environmentally friendly operating behaviors such as: recycling, mandatory lighting and HVAC shut down and using green cleaning products without VOCs.  Green lease language can also deal with submetering, an interesting point for us San Franciscans, since the California Public Utilities Commission now permits submetering of tenant spaces here. The presenters said that this is a great plus for green building because now tenants will be able to directly see the utility costs that their use of their suite is creating — theoretically giving them a vested interest in agreeing to comply with environmentally friendly building practices.  This may be true. I also quietly reminded myself of some conversations with landlords who were angling to pick up any utility savings as additional net rent, boosting the property’s net operating income. That may also be true in jurisdictions where submetering is not permitted. We’ll see how that shakes out in reality.

LEED Core and Shell Update: “The End of the Glass Office Tower in San Francisco”
This is the rating to watch if you deal with spec office development.

• The Energy & Atmosphere Credit, “EA”, has been tightened up a bit, with a particular San Francisco impact. Basically, the combination of achieving EA credits under the LEED-CS, achieving the LEED Gold rating needed to obtain accelerated permitting here in San Francisco and having to design the building to perform 40% better than Title 24 (the California Building Code) results in, as the presenter put it, “the end of the glass office tower in San Francisco”. In short, the energy efficiency of the building has to be improved to such a high standard, that a glass building shell may not be feasible any longer.
• Anecdotal LEED market acceptance info: the presenter, an architect, reported that his firm is working on approximately 60 office projects here in San Francisco and around the Bay Area. He says that on nearly every single one, developers are requesting some level of LEED certification for the project; underscoring his view that LEED is firmly embedded here in the Bay Area as the market standard for new office construction.

Future of LEED: Carbon Footprint Reconciliation + More
Not only are there a) more ratings and b) changes within the various ratings underway, but there will be an overall system revamp of how all the systems fit together plus more — possibly before the end of 2008.

One of the big upcoming changes will involve embedding a carbon footprint analysis within the LEED rating work towards certification. Last week, I recommended that lenders and investors should reconcile any LEED certification achieved with a carbon footprint analysis of the project. Apparently, this issue has been quietly evolving within the USGBC as well.  It was announced last night that in the future, perhaps as soon as Greenbuild in November 2008, the USGBC will adopt some form of carbon footprint calculation in conjunction with the various LEED updates, so that users can see how their green building design and construction choices actually play out on a project’s carbon footprint. No additional details are available as of yet, but we’ll be birddogging this one quite closely.

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

Photo credit: Flickr/hoveringdog - The Park, Nottingham, UK (2005)

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