Investing in Green Real Estate: Wishful Thinking or Best Practice?

Investing in Green Real Estate: Wishful Thinking or Best Practice?

by Josh Slaybaugh, Trade Up 1031, Inc.

There are millions of people across the country committed to living green in their own homes. They recycle and do their best to eliminate drafty windows and doorways, even if their main motivation is to save a few dollars on the monthly electric bill.

When it comes to building green, commercial and industrial properties are increasingly being constructed with energy savings in mind as well. And just like at home, when it comes to business, the push for environmentally friendly construction is guided less by philosophical and more by financial motives.

Do green buildings make good investments? Do the increased costs of constructing and certifying a green building yield positive investment returns? Despite the growing recognition of sustainable practices, green products, and high-performance technologies in building design and construction, concern within the industry continues.

“There definitely are hurdles when it comes to the perception of cost,” notes architect Dan Heinfeld, president of LPA Inc., Irvine, CA.(3)

Greg Kats, principal of Capital E, a Washington, D.C. consultancy focusing on clean energy, has come up with some concrete answers to the question of cost. The 2003 study The Costs and Financial Benefits of Green Buildings, in which Kats is the lead author, reports that “LEED Bronze buildings had an average cost premium of less than 1 percent. Silver buildings averaged a 2.1-percent cost premium, while Gold buildings had an average premium of 1.8 percent. Platinum buildings accounted for a 6.5 percent cost premium.” The report concluded that the average premium for all 33 studied green buildings was slightly less than 2 percent ($3 to $5 per square foot).

Another study, Costing Green: A Comprehensive Cost Database and Budgeting Methodology, July 2004, by Lisa Fay Matthiessen and Peter Morris of Davis Langdon, Santa Monica, CA, notes that the cost per square foot for buildings seeking basic LEED certification - not the Bronze, Silver, Gold, or Platinum levels - falls into the existing range of costs for buildings of a similar program type. (5) Overall, the costs are relatively insignificant compared to the benefits that will be accrued by the occupants of the building.

Green building consultant Jerry Yudelson agrees. “We’re learning how to do high-performance buildings on conventional budgets, so we’re cracking the cost barrier,” he says. Add to that energy savings, productivity gains, marketing and public relations benefits, and faster lease-ups, “and you have growing recognition of the business case for green in all dimensions.”

So, building costs may increase slightly on projects aiming for Bronze, Silver, Gold, or Platinum LEED certification, but it is estimated that high tenant satisfaction and consistent lease-ups will lead to buildings with higher-than-normal-occupancy, and thus, potential for greater net operating income (NOI) and appreciation.

Don’t discount the affect green buildings can have on those working within them. Thomas Aguer of Aguer Havelock Associates says that, “Studies are showing the increase in efficiency of employees [in green buildings]. People working in these clean buildings are healthier, happier, and more productive, and that’s going to get corporate America’s attention. Social responsibility is great, but when you show them [corporations] that they will be 2 to 5 percent more efficient, that’s a huge number when you run that out on a major international corporation with hundreds of thousands of square feet.”

What about existing buildings like a 40-year old, 500-employee Class A office building in Center City Philadelphia? Can owners of existing buildings afford the rehabbing process required to enjoy the benefits of sustainable facilities, lower energy and water costs, healthier work environments, and lower operation costs? Absolutely.

The JohnsonDiversey global headquarters in Sturtevant, Wisconsin spent $73,000 – or 27 cents per square foot – to implement a series of green improvements in their 277,400 sf building. These included measures to increase energy efficiency, as well as instituting a recycling program, revamping its cleaning processes, and even collecting storm water for landscape irrigation. The result? The company has achieved annual net savings of $137,320 – or 49 cents psf – and a 15-year life cycle net savings of $4.87 psf. It’s reduced its energy costs by $90,000 a year, uses two to four million fewer gallons of water a year to irrigate landscaping, and recycles more than 50 percent of its site-generated solid waste.

The bottom line: Green building is not only affordable, but profitable. More importantly, Wall Street has noticed and is taking action. Of the 300 REITs in the U.S., 41% are actively pursuing energy efficiency and green building upgrades and another 27% plan to do so, said UBS, citing the industry newsletter Progressive Investor.(9) "We believe the green movement will continue to gain momentum as pressure from governments, tenants, customers, shareholders, and the public continues to grow in the coming years," said a report authored by James Feldman, Alexander Goldfarb, Jeffrey Spector and other analysts for UBS’s REIT team.

Everything points to rapid expansion of green building and rehabbing. The infrastructure is coming together, local governments are enacting green regulations, and consumer demand is growing exponentially. So the next time you’re looking to diversify your real estate investment portfolio, look into green buildings. You too can do more to promote green initiatives than just using CFL light bulbs in your house.

About Trade Up 1031

Trade Up 1031 is a nationally recognized leader in real estate investing, particularly tax-deferred investments. The firm provides comprehensive consulting, property acquisition and disposition services. Investors are offered a wide range of real estate opportunities through the firm’s network of top-tier Tenant-In-Common sponsors, developers, builders and commercial brokers. To learn more about Trade Up 1031 or to sign up for a free monthly newsletter, visit www.tradeup1031.com or call (866) 661-1031.