As Green as the Grass Outside December 27 2006 Trillions of dollars of commercial property owned by real estate investment trusts corporations and other investors around the world will soon become obsolete and will drop in value What s going on A significant real estate market shift is gathering momentum Green buildings which have a less negative impact on the environment boast lower energy consumption and offer healthier indoor environments than standard buildings are going mainstream As of this month the council had certified 669 buildings as green Waiting in the queue for ratings are 4 926 more edifices an indication of the enormous surge in U S market demand and the number of buildings being constructed with green considerations in mind The Green Building Council estimates that 5 of all new U S commercial construction will be LEED certified in 2006 The McGraw Hill 2006 SmartMarket Report predicts that green U S nonresidential construction alone will comprise as much as 10 of all nonresidential construction starts in 2010 Note This figure has been essentially flat since the LEED system was rolled out in the late 1990 s KAS Leading corporations and professional firms are the primary drivers of this green market shift Genzyme Goldman Sachs Hearst IBM JPMorgan Chase and Toyota have recently moved into green buildings Prominent law firms and professional services companies like Deloitte and Accenture are leasing green workplaces Even U S macho icon HarleyDavidson has constructed a green building for its Product Development Center in Wisconsin Recognizing this speculative developers like Hines the Durst Organization Alter Group East West Partners and Vulcan Real Estate are all constructing green buildings in cities across the U S including Atlanta Chicago Houston Los Angeles New York San Francisco and Seattle While many real estate brokers and investors remain unaware of the potential financial gains some savvy REITs and other investors are already searching for unrecognized green real estate investment opportunities For example partly empty B or second tier office buildings in A or top tier markets may be renovated to green standards thus allowing them to bring in premium rents and generate more favorable long term returns What s so great about green First these buildings have lower annual operating costs compared to standard structures Genzyme s 12 story 350 000 square foot corporate headquarters in Cambridge Mass for example uses 42 less energy and 34 less water than a like sized standard building Warner Bros renovation of its Building 151 in Burbank Calif reduced electricity gas and water costs by 38 Overall green office buildings offer approximately a 10 savings on utility costs each year Second green offices healthier environment helps reduce absenteeism and illness After Toyota s customer services unit moved into a LEED gold certified expansion of the car maker s North American headquarters in Torrance Calif absenteeism fell by 14 Third these structures spawn stronger employee attraction and retention because they re more comfortable healthier places to work Following PNC Financial Services Group s move into a silver certified building in Pittsburgh for example employee turnover dropped 50 below the typical level experienced at a standard PNC facility Finally and of critical importance to employers numerous studies and completed buildings demonstrate that green workplaces can raise employee productivity by up to 15 annually Just a 1 increase in productivity is worth 3 per square foot to a company annually or 600 to 700 per employee per year according to the Capital E consulting group Many skeptics assume that these benefits are cancelled out by higher construction costs Actually most green buildings now cost no more to construct than standard facilities Turner Construction s 2005 Green Building Market Barometer study found that the average estimated cost premium for sustainable building is only 0 8 for a basic LEED certification which is easily repaid through lower operating costs Toyota s 624 000 square foot green addition to its Torrance headquarters cost no more to build than a standard low rise business campus in southern California PNC has constructed 27 of its planned 117 LEED rated bank branches on the East Coast Each cost 100 000 less to build than a standard bank branch uses 40 to 50 less energy and was ready to go in 45 fewer days Of course a real estate market shift doesn t happen unless it s profitable and this shift is no exception Green buildings generate significant economic benefits According to the McGraw Hill 2006 SmartMarket Report they deliver 3 5 higher occupancy rates 3 higher rent rates and an average increase of 7 5 in building values they also improve return on investment by 6 6 on average Some green buildings do much better Significant sales premiums are also possible In Chicago the John Buck Company spent 270 million constructing 111 South Wacker Drive a LEED gold certified 51 story tower in the Loop district Completed in late 2005 when the Loop market was struggling with an 18 vacancy rate for Class A office space the building leased quickly to prestigious tenants In January 2006 it was sold to a German investment fund for 386 million a 116 million profit One South Dearborn Street a LEED silver certified 40 story office tower has done even better Upon its completion in mid 2006 One South Dearborn was 93 leased while the Loop market faced a 14 3 Class A office vacancy rate The 200 million green tower also set a new Chicago sales record besting 111 South Wacker when developer Hines Interest sold it to Olen Properties Group for 344 million a 144 million profit Municipal and state governments are hastening standard buildings demise While dozens of U S cities several states and over a dozen Federal agencies have mandated LEED ratings for new construction and renovation of public buildings Boston Pasadena and Washington D C passed laws in 2006 requiring LEED ratings for many new private buildings As the market shift gathers even greater momentum in coming years standard buildings will become the real estate industry s version of the buggy whip Rapid and massive obsolescence has challenged the world s commercial real estate markets before When earlier innovations were introduced into commercial buildings like central air conditioning in the 1950s and 1960s all properties lacking this innovation quickly became outmoded and their value fell as top
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