Browse
Engage
Research
As the housing market starts to show some signs of life, the media is turning its sights on commercial real estate. The economy clearly poses challenges to commercial property owners, and many are singing the blues.
What they may not realize is that even in the current down cycle, there is plenty of green.
Each day, owners lose a small fortune paying for energy wasted on lighting, heating and cooling inefficient buildings. That same wasted money could, instead, be spent on green projects to enhance building operations, net operating income and value.
Challenges of a Recession and Rising Energy Costs
Real estate is subject to the same economic forces affecting other investments.
As consumers stop shopping, retail tenants have less money for rent and less need for space. When businesses contract, there is less demand for office, industrial and other facilities. And as employment and wages trend downward, tenants strain to pay the apartment rent (especially the high end). Rising tenant defaults and vacancies and declining rents challenge property owners struggling to pay debt service or faced with maturing mortgages.
Add to those challenges the prospect of rising energy costs. Fluctuations in oil and gas prices over the past year have been stupendous, with crude oil prices falling from $145.31 to $52.38 per barrel between July 2008 and this past March. As with land, oil is a depleting asset. Once China, India, Brazil, the U.S., and other nations step up manufacturing, and automobile ownership increases in emerging nations, prices for fuel will rise as well. Even with low oil prices today, electricity costs are still going up. In the U.S., electric demand outpaces supply, and most utility providers are seeking rate increases. For property owners and tenants, controlling escalating energy costs can be a key to surviving a downturn and prospering on the upside.
 |
Rays of Hope on The Horizon
So, where is the good news?
First, unlike the housing boom/bust, there has been relatively little overbuilding in many commercial real estate markets. While demand for commercial space may fall short of the supply over the near term, the tides will turn. With little new construction, once businesses start recovering and expanding, and consumers start spending, space will be at a premium.
Second, the future portends rising inflation flowing from the federal government's cash infusions under its stimulus programs. A shortage of available space, plus inflation, could lead to significant increases in rental rates and property values within a moderately short period of time.
Making Hay While The Sun Isn't Shining
While there are rays of hope for economic recovery, commercial real estate owners need to deal with the here and now.
To property owners singing the blues because they are struggling to pay for operations and debt service, the thought of spending for "green" programs may seem farfetched. But owners with the vision to plant "green" seeds today may be able to reap rewards relatively quickly without undue financial strain.
Planting those seeds may not take as much work and money as many expect. Green projects can be affordable, and even at modest levels, give owners and tenants greater control over operating costs and comfort. But for owners of older buildings, failing to take green measures may quickly lead to functional obsolescence and loss of a competitive edge in the marketplace.
What's So Special About Green Buildings?
Green buildings command higher rents and sales prices; are more efficient and less costly to operate; provide healthier work environments; and appeal to growing numbers of tenants demanding "green" space and willing to pay a premium for it. There are many degrees of "greenness," but the two standard bearers are the Energy Star program of the Environmental Protection Agency, and the Leadership in Energy and Environmental Design system of the U.S. Green Building Council.
Energy Star benchmarks buildings based on their energy-efficiencies, and recommends cost-effective ways to become more efficient. LEED looks at energy efficiency, as well as overall sustainability (including building materials, design, transportation programs/amenities, recycling and water re-use, low-flow plumbing fixtures, etc.). LEED also has specific programs tailored for new buildings, existing buildings and tenant space, and awards Silver, Gold or Platinum certifications based on degrees of sustainability.
According to the EPA, Energy Star buildings use almost 40 percent less energy; emit 35 percent less carbon; have at least 2 percent greater occupancy and $2 per square foot higher rents; and sell for premiums as high as 30 percent over competing buildings.
In an April 2008 study, CoStar found that certain LEED-certified buildings have $11.24 per square foot in higher rents; 3.8 percent higher occupancy rates; and sell on average for $171 more per square foot than competing buildings.
Images courtesy of BGK-Integrated Group.
