The Benefits of Building Green
Norm Miller recently co-authored an academic paper along with two Costar executives. It is the first piece of research to compare the costs and benefits of developing green commercial real estate. This is quite an interesting article and well worth the read. Here is an excerpt of the findings:
Here we reveal the first systematic study, as opposed to case studies, that addresses questions on the benefits of investments in energy savings and environmental design. We compare Energy Star office buildings, many of which are LEED certified, with non-Energy Star rated buildings. Essentially, Energy Star buildings are those within the 25% most efficient buildings for energy conservation. To date, most studies on the benefits of green investment are case studies, which are difficult to generalize from. Most surveys on the costs are from the USGBC and as such some developers are skeptical of the bias. We have no reason to be biased here in presenting our initial findings, laying out research questions to be addressed and providing some insights on the leaders in this arena.
Contrary to popular opinion, the green movement is not public sector-driven. Rather, the typical tenants are private market-based just as private developers are leading the way. Some investors like CALPERS have recently announced efforts to increase their emphasis on green over the next several years. Some cities, like Boston, have mandated LEED certification, while others, like Toronto, have provided incentives for energy conservation methods. We need more studies on the best practices and this paper is intended in part as a call for more research.
The real barriers to go green are mostly a lack of planning and education. Included in this are those who only work to improve business practices when competition forces them to do so—the “Who Moved My Cheese?” mentality.”3 Culture plays a role as well and we observe far more environmental leadership in Europe and even Asia. Inexperience plays a role, and anyone who has been through the process of going green becomes a convert and no longer sees it as difficult. There are cynics about the benefits relative to costs but even Louis Pasteur4 had to prove repeatedly that immunization was possible against viruses while the prevailing medical community resisted all progress until overwhelming evidence was provided.
There are real economic barriers to progress. When property managers are paid extra administrative fees on passed through common area utility costs, they have fewer incentives to want to encourage energy savings. Also problematic are typical expense pass through leases that do not balance out the increased rent necessary to support higher initial building and design costs with the gains that will supposedly accrue but cannot be guaranteed. Benefits from more flexible and adaptable buildings are starting to become known as well as energy savings, and we are starting to find tenants willing to believe claims of potential benefits. Still, many public companies are starting to initiate and support resource and energy conservation policies, and if they are serious, they should be willing to seek out more environmentally friendly buildings. Perhaps we are now witnessing the evidence of such trends and those buildings that do not reflect more efficient operating abilities will become obsolete much faster.
What is really needed is market transparency and better information along with measurement standards that can be agreed upon domestically if not globally. LEED is a good start, but we need more specific ratings on energy consumption similar to what is used on refrigerators, washing machines and even for cars with respect to fuel consumption. After such ratings become known, they affect behaviors and values with more certainty. We need such a rating system for energy consumption along with systems that provide information on building adaptability and resource impact. Some day we may see large property owners with green self-sustaining solar-powered mixed use developments selling off carbon credits to others.
What is truly interesting is that the average extra cost of building green is between $3 and $5 per square foot, while the total benefit was calculated to be $52.90 to $71.30. The total 20 year net benefit is between $52 and $65 per square foot!
This means that if you develop a 100,000 square foot building it will cost you an additional $300,000 and over 20 years it is expected to add an additional $5,200,000 in benefits. Not a bad return on investment!
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Comments
Michael,
Yes, here is a working link:
http://www.sandiego.edu/business/documents/USDEconofBeingGreen.pdf
Thanks for pointing this out - I fixed the link in the article too.
Do you work on all real estate product types? What are you seeing on the tenant side of the business with respect to green space? Are they willing to pay a premium on rents for the social benefit as well as the competitive advantage it provides?
Do you have another link to the full article - the above one isn’t working. I co-own a small real estate development, investment, and consulting business committed entirely to green building. I’m a LEED AP and we use stats like this all the time with potential investment and consulting clients. We’re finding that you can discuss environmental benefits until you turn blue but its the financial metrics that usually get people to listen!