Sustainability trends have changed the real estate industry, but the cost of ‘green’ and LEED-certified real estate can be tough to swallow for developers and investors. Yet the landscape has changed while most of us were away at the recession: According to a slew of recent research, companies are showing that, rather than an earnings-drag, sustainably-designed properties can be a real boon that builds brand, differentiates from the competition – and makes profits.
Sustainability measures and monikers are proliferating in the real estate industry, beyond the pioneering Leadership in Energy and Environmental Development from the USGBC as well as the Energy Star system that’s expanded from its original focus on appliances to include entire buildings. Among the newer measures are the Green Building Challenge, Net-Zero Energy buildings, and the University of Maastricht–sponsored Global Real Estate Sustainability Benchmark, which is gaining international attention, including from NAREIT and other US organizations. Just this past April, the American Institute of Architects endorsed the International Green Construction Code, seeking a global standard. On the investment side, Responsible Property Investing (RPI) is a tenet of “creating value through improving the economic, social, and environmental profile of the investments,” and includes leading real estate funds among its followers.
Developers of Class-A commercial property are finding that tenants are not only asking for sustainability, but often presume some sort of ‘green’ standard in seeking space. The US General Services Administration has a mandate to build or occupy only LEED-certified space, and companies ranging from Silicon Valley start-ups to Fortune 500s are demanding similar qualities.
Hines, the worldwide property firm, recently reported that over 850 of its tenants joined its Hines Green Office program, which aims to reduce waste and the carbon impact of the properties it owns and manages.
RESEARCH REPORTS SHOW INVESTMENT RETURNS
It’s expensive to be green, but it can also be profitable. A 2010 UC-Berkeley study by Eichholtz/Kok/Quigley reviewed some 10,000 office buildings in the United States and concluded that a green label such as LEED or Energy Star raised the market rents and values of commercial space, including a 16 percent increased sale price.
Another study looked at how RPI office properties performed over a 10 year period and found they brought better returns and less risk. The study by Pivo/Fisher indicated that RPI properties “had net operating incomes, market values, price appreciation, and total returns that were higher or the same as conventional properties, with lower cap rates.”
On another note, a Davis Langdon study estimated upfront costs for high-sustainability design can be $1.50 to $3.00 per square foot but those outlays can also bring up to 14% reductions in energy costs alone, and recoup the investment over time.
PNC BANK'S LEED-CERTIFIED BRANCH ROI
Corporations with significant real estate operations are also leading the way, and turning the sustainability trend among consumers to their advantage. PNC Bank embarked on a plan to build more green branches. In April 2012 a University of Notre Dame study concluded that PNC’s 93 LEED-certified branches, compared with its 469 non-LEED offices, averaged $3 million more in annual revenues, or $461,300 in extra sales per employee, opened 458 more deposit accounts, and booked $994,900 more in consumer loan balances. Also, utility costs were $675.26 lower per employee at the green branches. The bank’s aggressive marketing to highlight its green branches—positioning it as a competitive advantage over its rival banks—played a strong part.
Sustainability is beginning to really matter in real estate, and for some investors and tenants, it’s evolving to become part of their minimum requirements. As consumer and client demand in sustainability continue to have an impact on the bottom line, real estate operators and investors will respond to that demand, and drive profitability for themselves and their clients.
It’s good, green business.
Gregory A. Martin, CPA, Partner, is the firm-wide leader of the real estate sector of Moss Adams’ Real Estate and Construction Industry Group and can be reached at (415) 956-1500.