With less cash for bells and whistles and the threat of recession bearing down on investors, is green building too expensive to make sense?
In fact, as investors hold properties for longer periods and tenants become more interested in renting green spaces, green building is a better deal than ever for both investors and developers, according to Greg O’Brien, senior vice president of commercial real estate and development company Transwestern.
Regency Centers based in Jacksonville, Fla., for one, will bet $100 million this year on LEED-certified green building projects, or one-fifth of the total $500 million in retail construction it will begin this year. By 2010, more than half of Regency’s new projects will be green.
Regency is a proponent of green building even though it costs more than conventional construction and even though retail tenants, who will reap savings of 20% to 30% on their energy bills, aren’t yet willing to pay more for green real estate. The only immediate return Regency will see on its investment is the ability to brand itself a green developer and the chance to build proficiency in meeting green standards.
It’s an investment for the future,” says Scott Wilson, vice president of construction for Regency. “Being in the forefront has advantages.”
That’s especially true as the economy teeters on the brink of recession, says Wilson. Real estate developers and investors that don’t get green buildings into their portfolios could be left behind by the markets. The danger will only worsen if the economy slows further, reducing the number of potential tenants.
“The risk is that one of those tenants is coming into your space and they won’t even look at a brown [not green] building,” says Transwestern’s O’Brien.
Green building is rapidly becoming associated with newness and quality, according to O’Brien. For example, in many primary and even secondary markets, nearly all of the new Class-A office buildings started this year will be LEED-certified.
In addition, the vast majority of Fortune 500 companies have made major commitments to lower the amount of carbon they put into the atmosphere. An average of 40% of those corporate carbon emissions come from real estate. Travel, including commuting time, accounts for another 40%. Companies that lease LEED-certified offices near public transit will have already gone a long way towards meeting their commitment to fight global warming.
LEED-certified office space already leases up faster than space in standard buildings, according to Sally Wilson, global director of environmental strategy at CB Richard Ellis (CBRE).
It’s only a matter of time before green buildings begin to achieve higher rents and lower turnover rates than comparable conventional buildings. O’Brien expects that green office space will earn a rent premium of 7.5% or more, in addition to saving office landlords at least 7.5% on their energy costs.
Stronger income will increase sale prices at these buildings. Within 12 to 24 months, LEED-certified office buildings will earn prices at least 10% higher than comparable projects without green improvements, says O’Brien. Developers can achieve the benefits of green for less than they might think. “I went into this thinking the premium would be 15% to 20%,” says Regency’s Wilson. The actual extra cost adding green building ideas to Regency’s developments has ranged between zero and 2%.
The crisis in the global capital markets will only speed up the process by depriving short-term investors of the high-leverage, low-interest capital that they had depended on, O’Brien says. “The idea of buying and flipping a property in two years has gone by the wayside.”