Sustainable Real Estate Kevin Chiang

Sustainable Real Estate
Kevin Chiang
Outline
1. The state of sustainable RE
2. Major rating tools
3. Costs and benefits of being green
4. Why being green can’t be easier?
5. A case—Equity Office
Sustainable RE
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Sustainable RE addresses the impacts of the build
environment at the site, neighborhood, and global
levels.
The main issues are: energy efficiency, accessibility
to public or clean transportation options, healthy
indoor environmental (e.g., air) quality, reuse of
materials and use of sustainable materials, building
preservation and reuse (smart growth), water
efficiency, and stormwater management.
It is coming!
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Regardless of whether you believe that global
warming is true, the uncertainty and the threat itself
has already forced law makers and corporate
executives to act.
The 2003 EU Energy Performance Directive requires
the disclosure of energy performance.
Many states, e.g., Oregon, in the U.S. now offer
subsidies and tax benefits for eco-labeled buildings.
Many cities, e.g., Baltimore and Sacramento, have
incorporate green standards into their building
codes.
Yes, it is coming!
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Pressure from environmental or societal
constraints.
Example: the draught in California leads to
the following new incentive and regulation:
(1) prohibit new homes and developments
from irrigating with potable water unless
water-efficient drip irrigation systems are
used, (2) cash for grass.
California water and development
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“New homes and developments can’t be built unless
they meet landscaping requirements that mandate
the use of drought-resistant plants and recycled
water for irrigation.”
“Homebuilders already have to follow an existing
strict code that limits water use that mandate lowflow toilets, faucets and showers. Homes built there
in the last 10 years are 50% more water efficient
than older homes.”
Source: Housingwire.com, 04/02/2015
Why uncertainty triggers business
action?
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Holding cash flows constant, shareholders’ wealth
increases (decreases) when the risk profile of the
firm decreases (increases).
The threat of global warming (a shock/risk to energy
price and firms’ operating costs) introduces a
corporate driver to reduce firms’ exposure to
energy, water, and natural resource price shock.
An effective way to do so is to reduce the use of
energy, water, and natural resource by adopting
sustainable RE practices.
The 2008 Economist Intelligence
Unit survey (1,254 executives)
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This study focuses on corporate sustainability.
About half of respondents named RE-related
sustainability goals/issues to be their leading priority.
These goals include (1) improving energy efficiency
(19%), (2) improving the local environment around
facilities (14%), and (3) reducing greenhouse gas
emissions and/or waste/pollutants (13%).
Buildings are responsible for nearly ¾ of a firm’s
total greenhouse gas emissions, excluding
manufacturing.
EIU survey, II
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57% of executives said the benefits of
pursuing sustainability out-weight the costs.
More than 80% of executives expect a
minimal benefit to profitability.
They believe sustainable practices can (1)
reduce costs, (2) open up new markets, and
(3) enhance firm image.
The Jones Lang LaSalle and
CoreNet Global survey (2008)
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¾ of firms (corporate tenants) consider
energy and sustainability issues as a “major”
or “tie-breaker” factor in making location
decisions.
Corporate tenants report greater scarcity of
green space that meets their needs today
than a year ago.
The rise of eco-labeled buildings
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LEED (Leadership in Energy and
Environmental Design) certified projects
represent 6% of new commercial
construction.
≈50% of new project registrations are LEED
projects (2013 Dodge Report, McGraw Hill
Construction).
It takes about 2 years from registration to
certification.
The impact of the build environment
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Buildings account for about 40% (commercial
18%, residential 22%) of U.S. energy
consumption.
Buildings account for about 68% (commercial
33%, residential 35%) of U.S. electricity
consumption.
Buildings account for about 38% (commercial
17%, residential 21%) of U.S. CO2
emissions.
Major rating tools
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Globally, there are several dozens of rating
tools.
In the U.S., LEED and ENERGY STAR are
the two most important rating tools.
Like any rating tools (hotels, mutual funds),
they are not perfect tools.
Projects may not driven by best practices for
a particular site and use, but by scoring
points.
LEED
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Certification is based on scores in a number
of category: sustainability of location, water
efficiency, energy and atmosphere, materials
and resources, indoor environment quality,
and innovation and design processes.
Based only on design and construction.
The LEED thresholds are primarily absolute.
4 levels: Certified, Silver, Gold (a popular
level), and Platinum.
ENERGY STAR
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This certification requires a building to
achieve energy use in the best quartile of
buildings in their business category.
It also has air quality requirement.
It requires monitoring a year of energy use
for certification.
ENERGY STAR is rather an easy target
because most commercial buildings are
relatively inefficient.
Differences in LEED offices and
ENERGY STAR offices
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LEED offices tend to be smaller (median:
100,000 sf), shorter (median: 5 stories) ,
younger (median: 5 years), and rather
diversely located.
ENERGY STAR offices tend to be large
(median: 220,000 sf), tall (median: 10
stories) , older (median: 20 years), and
located in major metropolitan markets.
Costs of LEED
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2 types of incremental costs.
Hard costs: about 0.6 for certified-level, 2% for silver- and goldlevel, and 6% for platinum-level.
Soft costs (about 1%): additional design, documentation,
commissioning, code-compliance delays, etc.
Commissioning: the process of ensuring building systems (e.g.,
HVAC, electrical systems, mechanical systems) are designed,
installed, functionally tested, and capable of being operated
and maintained according to the owners’ operating needs.
The median total cost is about 3%.
Developers tend to perceive a higher incremental cost (10% or
more) than this.
Costs of ENERGY STAR
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Two approaches are usually sufficient for most new
commercial buildings to meet an ENERGY STAR
target.
1. Appropriate lighting design. Most buildings are
over-lit and under-controlled. Too much energy use
increases air-conditioning and ventilation costs (to
remove waste heat).
2. Building commissioning (to address design flaw,
neglected maintenance, equipment degradation,
etc.).
The incremental cost is about 1.5%.
Productivity and green buildings
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Healthier and happier mainly due to natural
light, good ventilation, and the absence of
organic compounds (LEED puts more
emphasis on this than ENERGY STAR).
Fewer sick days (2.88 days) for workers; i.e.,
higher productivity.
Financial benefits of LEED
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LEED commercial buildings consume about
25-30% less energy than comparable
buildings.
Rent premium. 4 estimates (4.4%, 9.68%,
17.3%, 50.5%).
Occupancy premium. 4 estimates (2.7%,
4.8%, 9.4%, 17.9%).
A lower cap rate?
Median IRR estimate: 116%.
Financial benefits of ENERGY
STAR
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ENERGY STAR commercial buildings consume
about 40% less energy and emit 35% less CO2 than
comparable buildings.
Rent premium. 4 estimates: 8.6%, 8.9%, 8.9%,
18.9%. A better new estimate: 7% (AER, 2010).
Occupancy premium. 4 estimates: 2.7%, 4.2%,
9.4%, 11.0%.
Property value increases as much as 16% (AER,
2010).
Median IRR: 119%.
Barriers to sustainable RE, I
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Knowledge gaps, e.g., developers tend to
overestimate the cost of being green
because they have not done so; residential
consumers tend to place higher value on the
size of space and amenities over (less
visible) energy efficiency and indoor air
quality.
Barriers to sustainable RE, II
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Ownership structure and operating cost
responsibility. If developers will be selling
the property immediately after completion of
construction, they tend not to participate in
sustainable practice. Or, if the tenants are
responsible for utilities, owners may not want
to participate in sustainable practice.
Barriers to sustainable RE, III
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Funding issues. It may be difficult to
package or sell non-traditional, sustainable
mortgages to the secondary markets.
New learning curve for developers, local
government officers, and build professionals.
Some local government offices are not
equipped to handle green permitting and
approvals, which may cause delays and
introduce risk.
Learning curve
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Between 1995-2000, the premium to build a
LEED silver building dropped from 3-4% to 12% in Portland, Oregon and from 2% to no
premium at all in Seattle.
How local governments can help
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Monetary incentives: tax breaks, grants, etc.
Non-monetary incentives: dedicated
staff/officers for green projects, technical
assistance, expedited permitting, floor area
ratio bonuses.
Example: Chicago offers technical
assistance, faster permitting, density
bonuses, and green roof grants.
The case of Equity Office (the
largest REIT)
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The things that EO is doing:
Green cleaning (avoiding harsh chemicals)
at the same cost.
Day (not night) cleaning, which saves
electricity.
Recycle carpet.
Low-flow toilets.
Landscaping sprinklers do not come on
when it rains.
Equity Office
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The things that EO is doing:
Use fluorescent bulbs.
Install automation system, e.g., economizers
for the rooftop heating and cooling units.
Use nighttime outdoor cool air to cool the
building.
Occupancy sensors for lights off.
For all these things that have done, EO is
looking at a 2-3 year payback.
Equity Office
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EO wants to and will do more, but the current
RE condition is harsh; financing is not easy.
When considering a retrofit, EO is looking for
a less than 2 year payback.
EO treats sustainability seriously. “Go green
is not just a fad”. “There is a lot of
legislation getting kicked around.”
More prospective tenants of EO are asking
whether the building is a green building.
Local residential market
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Based on Burlington and South Burlington
“Energy Efficient Open Houses” tour.
“Simple” sustainability upgrades for 2 rental
properties.
$4,000 cost on insulation improvement of
wall, attic, and basement.
Reduction of heating cost from $1,000 to
$700 per month.
A payback period of about 2 years.
Acknowledgment
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The majority of the materials in this note are
from the Journal of Sustainable Real Estate.
Please visit the Journal’s website at
www.ARESnet.org.