Eco-Friendly Commercial Real Estate
November 25th, 2013 by Diane Moore
The rising popularity of green buildings can be construed as the real estate industry’s way of addressing environmental concerns. As defined by the US Environmental Protection Agency (EPA), a “green building” is a structure created through environmentally responsible and resource-efficient processes. This may be a simple definition, but it is hardly so. In order to carry a green system project, the recognized rating system must certify it.
Examples of stunning green buildings around the world include the UCSB Bren School of Environmental Science & Management (LEED Platinum) in the US, the Manitoba Hydro Building (LEED Gold) in Canada, and the Namba Parks in Japan.
These commercial buildings are part of a long-term global green building trend. According to a market report published by McGraw-Hill Construction, 60% of construction professionals anticipate that their work will be green by 2015. This has increased by 32% from 2012, and it’s expected that it will have a steady rise.
Top Driving Forces of Worldwide Green Buildings
What are the factors that have caused the increase in popularity of green buildings? In the same McGraw-Hill Construction report, the company listed the following as the top triggers of this trend.
- Client demand
- Market demand
- Lower operating costs
- Branding /public relations
- Right thing to do / corporate responsibility
- Market transformation
Of all these driving forces, client demand and market demand came on top as the lead or most important triggers. In other words, both the investors and the market consider going green as a profitable business opportunity.
Green Real Estate – Benefits to Investors
An increasing number of reports suggest that owning green or sustainable buildings can result in several key benefits. Let’s see the main ones:
1. Higher rents
A plaque showing a green certification is enough for a building to command a higher rental rate. In an extensive research conducted by Piet Eichholtz and his peers, market comparisons of LEED-certified buildings in the US showed the following positive effects:
- Commercial spaces with a green label will rent for approximately 3 percent more per sq ft
- This effect is consistent, but it varies across buildings and locations
- Sales prices of green buildings are higher by about 16%
Many tenants are willing to pay a premium price for a space (whether office, retail, or warehouse) in a green building. They want to house their employees in a place that can help them lower their operating costs and provide higher productivity.
The bottom line is, tenants would be willing to extend their lease agreement in a green building. Therefore, investors can enjoy a more stable cash flow.
2.Less building operations
One of the most important benefits of going green is reduced energy dependence. In the long run, this leads to significant operational savings and an increase in an investor’s net income.
According to an article published by World Property Channel, the energy consumption of a typical office building can fall within the 15 to 25% range of the total operating expenses. When a structure is certified as sustainable, it has an efficient lighting, water, and ventilation systems.
Some of the techniques or concepts implemented in sustainable buildings include thermal mass, shading, daylighting, and natural ventilation. Shading reduces cooling loads, while daylighting reduces heat and electrical loads.
3. Enhanced reputation
Back in 2007, a survey was conducted by a Cisco company called Tandberg. The results showed that 53% of consumers in the world (or about 1.1 billion people) are inclined to make purchases from a brand with a strong environmental reputation.
Clearly, consumers have a positive perception of certified green buildings. To them, the holder of a green plaque is a socially responsible company. This perception is not without a solid basis. In fact, green buildings reduce water use by 25%, improve indoor air quality, and lower greenhouse gas emissions.
The enhanced reputation brought by going green can be used to generate free publicity. For instance, the owners of 8 Brindabella Circuit in Australia are enjoying a surge in prospective tenants. All this is possible because of the Green Star certification the building received.
4. Increased return of investment (ROI)
Recent studies showed that the ROI for sustainable or green buildings is higher than standard structures. McGraw Hill Construction estimates the difference to be 19% for both new and existing construction projects.
According to Schneider Electric, the increase in ROI is to be expected. After all, green buildings decrease operational expenses within the 8.5 to 13.6% range. Also, it is expected that green buildings have higher occupancy rates.
5. Risk mitigation
Before a building can be called “green,” it needs to satisfy green building requirements set by a reputable rating system such as LEED. Categories to satisfy this system include water efficiency, materials and resources, indoor environmental quality, energy and atmosphere.
To demonstrate risk mitigation, below are some of the features of 8 Brindabella Circuit, Australia’s first Green Star-certified project.
- Efficient recycling and management system
- Low volatile organic compounds (VOCs)
- Refrigerants with zero ODP
- Waterless urinals
- External shading
- Thermal insulants with zero ODP
Waterless urinals can reduce bursting of water pipes and water leakages. These water-related damages can cost an average amount of $7,000 per claim in the United States. Highly efficient cooling and heating systems can prevent chances of over-heating unlike older HVAC systems.
6. Tax incentives and credits
Investors can get a tax deduction for energy efficient commercial buildings under IRS 179D or EPACT. Section 179D allows owners to enjoy up to $1.80 per sq ft in deductions. This applies for those who retrofitted their properties with energy efficient upgrades (HVAC, lighting).
Pitfalls and Challenges of Green Commercial Real Estate
Green structures can be easily declared as the future of commercial real estate. But to achieve a higher adoption rate and increase green building activities, the industry has to address its own share of challenges. Below is a list of the challenges and pitfalls of green commercial real estate.
1. Additional financial costs
There are conflicting conclusions regarding the construction cost of LEED-certified buildings. But in a report by the US Green Building Council, an acknowledgement was made concerning the difficulty in determining the real cost of green buildings. The report says that green buildings are often labeled as too costly, but in actuality, there is insufficient technical information to back up this claim. Nevertheless, a cost analysis of 33 LEED projects revealed that green structures have an average cost premium of 2%.
Although there are additional financial costs associated with environmentally sustainable developments, here are some important findings to consider.
- The World Green Building Council says that the cost premium for building green is not as high as what is originally perceived or propagated.
- On the other hand, studies have shown that green buildings do not need to cost more than standard structures. Some ways to reduce construction costs include adopting green strategies, hiring an experienced construction team, and using an integrated design process (IDP).
- It is perceived that the cost premiums of LEED-certified projects will reduce over time.
2. Lack of government incentives
This may contradict what was first said about tax incentives, but it is important to note that Section 179D is only applicable for the United States. In other countries, firms report that their government lacks programs that encourage green building projects. Case in point: Brazil.
3. Rating systems are not present in many countries
Rating systems such as LEED, DGNB, BREEAM, and Green Star offer the following benefits:
- Encourages the creation of better-performing buildings
- Provides competitive edge
- Encourages integrated design team
Unfortunately, these rating systems are used only in a few countries. Examples of countries that have adopted at least one of these systems include Australia, South Africa, Germany, US, UK, Norway, Singapore, and Brazil.
4. Maintenance and tenant operations
In a green building, there are specific terms that occupants need to comply with to maintain the building’s sustainability status. Some of these terms can dictate what type of green building products and services to use (e.g., electrical and moisture protection, green furnishings, waste management). Conflict arises when the lease agreement has provisions that can be too broad and are not objectively measured.
Green Building Forecasts Around the World
Green building activities around the world vary deeply. In this section, we take a look at the emerging trends and forecasts in key countries, and which sectors in these countries are expected to grow during the next few years.
The UK is home of the biggest populations that are into green buildings. For instance, it was in the UK where the BREEAM or Building Research Establishment Environmental Assessment Method was founded. Secondly, statistics show that 52% of UK firms are heavily engaged in going green, and it is expected to rise in the next three years. Opportunities for renovations of existing buildings are huge.
The green building activity in Germany is higher than the United Kingdom. There are future green projects slated for new commercial buildings, renovations, and new institutional buildings.
Two of the most important triggers for green buildings in Germany are branding/public relations and lower operating costs.
Strong growth is to be expected in Singapore, especially in the following sectors and projects: retrofits of existing buildings, new commercial buildings, new high-rise residential, and new institutional buildings.
Just like most countries in Asia, Singapore’s trigger factors are related to environmental reasons. Three of the leading factors include improved health, reduced water consumption, and natural resource conservation.
United Arab Emirates
UAE has one of the most active markets currently engaging in green building. Many of the big players say their projects are already green, while the rest are expected to be complete by 2015. Sectors with expected growth include public projects (hospitals, office buildings), new commercial buildings (hotels, retail), and community projects.
Although it looks like UAE is on the right track, it has to face the challenges on market demand and initial first costs to succeed.
South African firms have a positive outlook about the green commercial real estate market in the country. They expect that in the next three years, tremendous opportunities will flow in.
Growth is expected to be concentrated on commercial buildings. Expect projects related to the office, retail, and hotel sectors. Also expect more green projects in the residential sector.
Australian firms are expected to increase their green building projects in the next three years. They are confident and satisfied with their own rating system called Green Star, which should help them achieve a green label.
In the next coming years, projects will be focused on new institutional buildings, commercial interiors, and retrofits of existing buildings.
Companies in the United States are investing in green buildings because they are positive about their paybacks. They may have to deal with higher initial costs, their investments are triggered by client demand and internal corporate commitment. Growth in the following sectors is to be expected: new commercial buildings, retrofits of existing buildings, and new institutional buildings.
The changing demands of the new generation have given birth to new strategies and high-performance green buildings. According to analysis reports, these buildings are seen as long-term business opportunities. Based on projections, countries such as the UK and the US will have a positive outlook for green building. Though sustainable structures can cost more than the standard building, there’s no doubt that they are highly profitable.
For building owners and investors, some of the highlighted benefits of green commercial real estate include risk mitigation, higher rents, lower operating costs, and enhanced reputation. The long-term benefits are higher ROI and high retention rate. For tenants, benefits include lower operating costs, better productivity, and a safer workplace.
However, to reap all the sustainability benefits, best practices must be adopted and followed. From the design stage up to the entire process of erecting the building, investors must partner with the right people whose expertise can help achieve the desired goals.
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