Green premium? Not so, as it continues to pay to go green with commercial buildings

There's a lot of greenwash in the commercial real estate industry, fostered by pundits and proponents alike. Separating fact from fiction and reality from distortion is a challenge. Except, of course, when it comes to the facts.

Take a recent report from CoStar and the U.S. Green Building Council (USGBC): Green Premium Continues to Justify Implementation Costs for Building Owners. This one's good, and it's real.

A few snippets:

• The economic payback for building owners from 'going green' has been tested in the crucible of the worst economy since the Great Depression, and while the premiums in rental rates, faster lease-up times and lower vacancy associated with green buildings varies market to market, the corresponding increases in rental income, together with the resulting energy savings in operating the property, continue to justify the modest additional costs associated with going green in most markets.
• For tenants, a growing body of research continues to show that buildings with better air quality, natural lighting and variable temperature control yield greater productivity by employees. Also, separate metering and individual utility billing of tenants for their energy use encourages conservation and additional cost savings.
• One big change, however, has been the market shift in LEED certifications from new development. Today, much of the USGBC's certification activity has shifted to LEED for Existing Buildings (LEED-EB), which has seen certifications jump sharply from less than 15% of all certifications in early 2008 to more than 35% in second-quarter 2010.
• Class A LEED office buildings that completed construction before the recession hold a significant advantage over the national average for all Class A office buildings, with the LEED buildings averaging $28.50 per square foot in rent with an average vacancy rate of 6.5%, compared with $25.89 per square foot in average rent and an average vacancy of 10.7% for all Class A office stock.

Green is, well, green. At Octus Energy, we're acutely focused on the economic virtues of improving the operating efficiency of commercial buildings -- slash utility bills first which then drives building certifications (e.g., LEED and Energy Star).

"We do find that it does continue to pay to go green," CoStar Vice President of Analytics Norm Miller said. "In the long run buildings that do not include sustainable features run the very real risk of becoming obsolete. And it will likely be very risky to own buildings that do not have sustainable features in the future."

"We also know that tenants in green buildings enjoy higher levels of productivity and see a real benefit and value to having their employees in green buildings. Because there are still so few green buildings out there many tenants haven't experienced that impact yet. But we believe this will change in time as those markets become more educated and tenants begin to pursue the productivity benefits of green buildings," Miller said. "We expect rental premiums or energy savings to more than justify the added costs for energy saving green features like separate meters, motion detection light devices, or water savings devices."

Leading Real Estate Organizations Commit to Collaborative Action Plan for Green Leases

At Octus, we believe the missing piece to solving the commercial real estate energy efficiency puzzle is the alignment of economic incentives. CRE investors, owners and managers face a financial paradox: They recognize the value of making their buildings more efficient (increase asset values, boost NOI, raise lease rates, bolster occupancy), but if they're not paying the utility bill -- and if cash is short -- it's oftentimes difficult to make the investment.

Jones Lang LaSalle and a host of real estate investment and corporate leaders get it. To wit, they have aligned and committed to a statement of principles and a Green Lease Action Plan to resolve the challenges of energy and sustainability in leased commercial office space. The first organizations to agree to the Green Lease Action Plan include Bank of America, Beacon Capital Partners, Deutsche Bank, JPMorgan Chase, LaSalle Investment Management (the investment arm of Jones Lang LaSalle), RREEF (the real estate investment management arm of Deutsche Bank) and Whirlpool Corporation. Here's a summary of their efforts, announced in a July 26, 2010 news release:

Collectively, these organizations own or occupy leased office space in excess of 350 million square feet.

This industry leadership move is launched in association with Greenprint Foundation, a worldwide alliance of real estate owners, investors and financial institutions committed to reducing carbon emissions across the global property industry. Several participants in the Green Lease Action Plan are also founding members of Greenprint Foundation, including Jones Lang LaSalle, which is facilitating the Plan and registration process for all participating organizations.

"The efficient use of energy and other resources in buildings requires joint action from property owners and occupiers, but there are disincentives that often prevent the two sides from investing in the necessary capital improvements," said Michael Jordan, Senior Vice President of Sustainability Strategy at Jones Lang LaSalle. "We're inviting organizations to join us in addressing these energy and environmental challenges, to create business value for owners and occupiers alike."

The built environment is responsible for up to 40 percent of energy use and greenhouse gas emissions in many countries. Jones Lang LaSalle estimates that many commercial buildings can reduce energy use and the associated greenhouse gas emissions by 40 percent without affecting tenants' comfort; however, much of the achievable savings requires upfront investment that is paid back over a period of several years. In a building with many tenants that may relocate, expand or contract their space over time, it is difficult for owners and individual tenants to make a strong business case for retrofits.

The initiative to remove barriers to energy efficiency and sustainability in leased office space is based on three guiding principles:

1. Landlords and tenants should agree to operate the buildings as sustainably as is commercially feasible.
2. The value of energy savings achieved through building efficiency improvements should be available to pay for the improvements
3. To the extent feasible, usage and demand for resources throughout the buildings should be measurable and transparent to both landlords and tenants.

In endorsing these principles, leading organizations agree to:

1. Establish green lease principles to influence owner/occupier agreements and act on these principles across the portfolio over time.
2. Require leasing agents who work on behalf of participating organizations to complete a basic orientation about sustainability, green lease principles, and ways to resolve barriers to sustainability in leases.
3. Establish/adopt green site selection criteria for tenants and consider these criteria for new space acquisition.
4. Establish a standard for landlords to communicate key energy and environmental ratings to tenants and to prospective tenants and deploy this process at 50 percent of their properties within three years.

"This is not about owners or tenants making financial sacrifices to enhance energy and sustainability in buildings—it's about creating economic incentives on both sides to create win-win scenarios economically and environmentally," said Charles B. Leitner III, Chief Executive Officer, Greenprint Foundation.

"We see a clear need for a dialogue between landlords and tenants to align costs and benefits of green office space," said Lee Utke, Director of Global Corporate Real Estate at Whirlpool Corp. "As more and more tenants and landlords recognize these issues and commit to working toward a solution globally as well as nationally, we will be able to make a stronger business case for improvements in buildings."

These leading tenants and landlords have committed to the Green Lease Action Plan as an important step toward resolving the challenges, and are taking direct action to implement these concepts in the properties they own, occupy and manage. "We hope to expand the group of owners and occupiers to sign on to these principles, and accelerate our collective progress in overcoming this challenge," Jordan said.