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.

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.

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.

Next Page »