How Smart Building Owners Can Find the 'Green' and Stop Singing the Blues

How Smart Building Owners Can Find the 'Green' and Stop Singing the Blues

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.

The 18-story Laidley Tower in West Virginia. Courtesy of BGK-Integrated Group
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.

NYC's more than 75-year-old Empire State Building provides a very visible example of a major energy retrofit that includes new windows, insulation, rebuilding cooling plant chillers, and a Web-based dashboard tenants can use to manage their own energy use. Former President Clinton praised the project as a way to show property owners worldwide that green buildings are "good economics."

In acknowledging that upfront costs may deter owners of older buildings from tackling green projects, the Empire State Building's owners point out that they expect to recoup project costs in about three years, while the project's designers estimate an approximately 50 percent energy use reduction within the first two years. Overall, the $20 million green project is expected to reduce energy use by 38 percent annually, and save approximately $4.4 million a year, while attracting larger corporate tenants willing to pay higher rents.

For existing building owners, green programs do not have to be done on a large scale; but can be digested in bite-sized pieces over time. In describing its energy initiatives, Google notes that it starts with "the low-hanging fruit by [making] building efficiency investments with a 2.5 year payback." Even modest green projects can yield major reductions in water and energy use and expenses, with many of the costs offset by tax credits and other incentives.

Aside from tangible paybacks through reduced consumption and costs, there are equally important intangible benefits from green projects. Those include greater appeal to tenants; increased worker productivity; and positive branding as a "green" owner or company (understanding that tenants and consumers alike are becoming more and more inclined to seeking and paying more for green space and products).
The 24-story One American Place in Louisiana. Courtesy of BGK-Integrated Group
What Risks Do Building Owners Face By Not Going Green?

Irrespective of project size, it is almost axiomatic that the value of a building after "greening" will go up. Conversely, avoiding green initiatives will almost certainly portend a decline in value over time.

First and foremost, energy costs are destined to rise. Failing to adopt energy saving programs will mean lower net operating income and depressed values for older, less efficient buildings.

Second, not being green puts owners at a competitive disadvantage. A joint study by Charles Lockwood and Deloitte Touche, LLP ("The Dollars and Sense of Green Retrofits -- Sooner is better than Later, And it Could Cost Less than You Think") notes:
"[Many building owners] may simply be unaware that a green option exists ... [or] contend that green adds too much … cost … or that green's return on investment (ROI) is too low or unclear. Deloitte believes that organizations taking this overly cautious approach should reconsider. We believe that within the next three years, companies that do not have green workplaces will be at a competitive disadvantage from higher operating costs, lower productivity, declining attraction and retention of skilled workers, and an increasingly negative brand image. In addition, owners and investors in conventional buildings will be less able to compete in the marketplace as green buildings become tenants' preferred choice."
It also appears that the U.S. is moving to a "cap and trade" system that may penalize building owners failing to reduce greenhouse gas emissions. The current administration is pushing for such a system under which the government would limit (cap) emissions from facilities, and companies not able to operate within allotted emission quotas, would have to buy (trade) carbon credits from other companies not using their quotas. A cap and trade system in the U.S. would be a benefit for green business owners -- giving them an asset (carbon credits) to sell or trade. Conversely, the system would penalize those failing to control facility emissions.

Green Programs Don't Just Increase Values, They're Also Good for the Environment and Economy

While green projects help building owners save money and increase property values, they also help solve some pressing environmental issues. In the U.S. buildings use more than 70 percent of all electricity and 12 percent of potable water; generate over 30 percent of all waste and 35 percent of all CO2 emissions; and in total consume more than 39 percent of all our national energy -- outpacing cars, trucks, planes and other forms of transportation by about 12 percent, with CO2 emissions from buildings over the next 25 years projected to grow faster than any other sector (with existing buildings outnumbers new ones by over 100:1). Green building programs can reduce energy use by 30 percent to 50 percent; carbon emissions by approximately 35 percent; water use by approximately 40 percent; and solid waste by approximately 70 percent.

Beyond saving resources, green projects will stimulate overall economic recovery -- critical to reviving real estate values. As the current administration has repeatedly noted, green technologies and projects are a key to creating jobs and tax revenues.

Images courtesy of BGK-Integrated Group.

To put things in perspective, we need to focus on the importance of buildings and the construction industry to the overall economy. Over 10 percent of the U.S. GDP stems from building construction. Construction activity in 2008 declined by over 39 percent for residential and 17 percent for commercial buildings, and construction worker unemployment rose to over one million.

Greening existing buildings would benefit almost every aspect of the overall economy. By some estimates, green renovations projects by only 6 percent of U.S. homeowners and 3 percent of commercial property owners (approximately 5 percent of all building owners) would inject over $1 trillion into the economy, and create more than 9 million new jobs in construction, design, technology, and a host of related industries: truly a win-win for the environment and the economy.

When Should I Start 'Greening' My Building, and How Do I Do It?

Building owners using the poor economy as an excuse to put off green projects risk losing the competitive edge critical to retaining old tenants and attracting new ones. As their tenants seek more efficient buildings and energy costs continue to rise, those owners will face declining occupancies and rents, and eroding profits.

To stay profitable, therefore, the best time to start "greening" a property is now. The costs of doing so are far more affordable (especially on an after-tax basis) than many suspect. Those costs can often be quickly recouped through almost immediate savings on energy and maintenance.

There are many ways to green a building. Some are as simple as changing light fixtures and bulbs; making sure lights and equipment are turned off at night or when not in use; and engaging tenants in recycling and energy saving initiatives. More comprehensive programs may include HVAC upgrades, new windows or insulation, use of software management programs, and achieving Energy Star or LEED designations or certifications.
The 10-story Montlimar Place in Alabama. Courtesy of BGK-Integrated Group
How does one start?

There are many free resources that provide both broad overviews and specific programs for green-focused owners and managers of commercial properties. One of the easiest ways to begin is by looking at the numerous "green-centric" Web sites. A short list includes the U.S. Green Building Council, Energy Star, the Alliance to Save Energy, the Green Building Initiative, American Institute of Architects -- green advocacy, and the Alliance for Planet Protection.

While tapping free resources can provide much information, engaging a qualified energy professional to evaluate a property is probably the best next step. A building assessment can be a very sound investment in understanding a property's energy efficiency and other shortcomings, and ways to overcome them. An expert can make project recommendations, and provide guidance about financing and funding (including grant and other incentive programs, and utility company energy repurchase programs), and federal and state tax considerations. There are many companies qualified to provide building assessments, and some will undertake initial surveys at little or no cost in the expectation of performing the ultimate contracting work or selling energy savings equipment or services.

Based on a comprehensive property evaluation, there are also many ways to complete and pay for green projects.

Some energy service companies (ESCO's) will actually pay all or a part of the up-front project costs, with repayment to be made out of energy savings over time. Other companies will install solar or other energy systems at a property, and get repaid over time by selling power back to the owner at an agreed-upon rate. Many local utility companies have meter "roll-back" or energy repurchase programs that pay building owners for excess electric capacity.

Finally, in addition to energy tax credits, energy buy-back and other programs that now exist, there are also a number of potential incentives on the drawing boards to facilitate green projects. ( E.g., the Building Owners and Managers Association International and The Real Estate Roundtable support a proposal for $3 billion in building energy efficiency incentives; and the USGBC supports spending $15 billion to green schools and a federal, $75 billion green building, revolving loan fund program.)

No matter what green path a building owner takes, it should at least start moving down it now. Anything done today to green a property will help its owner better survive the current downturn and benefit from the next market up-cycle. Embracing green programs will not only save owners money and increase the value of their properties, but will also help reduce greenhouse gas emissions and stimulate the very economic recovery that is critical to raising property rents, occupancies and values -- the best refrain to today's commercial real estate blues.

Andrew T. Nichols is the president of BGK-Integrated Group, part of a 200-employee organization with five regional offices and over 240 properties in 28 states.

Images courtesy of BGK-Integrated Group.