Jenny R. Massey, Senior Project Manager, Bingham Economic Development Advisors (Apr/May 09)
With the economy in its current state, the only "green" companies are interested in is money - especially how to save money. According to Area Development's 2008 Corporate Survey, the environmental regulations factor fell in the importance rankings from number nine in 2007 to number 14 in 2008. This doesn't mean that environmental regulations or even green developments are not important; it means that companies have been forced to take a look at spending.
It is a well-known fact that when tough times hit, companies tend to get more creative when it comes to decisions about money. There is a general feeling of "wait and see" as well as holding on to as much capital as possible. Companies are revisiting project plans and timelines. If projects are moving forward, it is difficult for companies to justify higher up-front costs or longer timeframes for green development or environmental mitigation if well-understood traditional development costs less and can be completed more quickly.
This doesn't mean that green trends are going to halt - or that environmental regulations aren't important - they are important. Environmental activities are now being considered by companies as they assess their working relationships with other companies. A new corporate responsibility is manifesting itself, and market competition is forcing the adoption of green practices. Additionally, the government's environmental regulations, use policies, and disposal requirements are becoming stricter, while economic incentives are being offered for green activities.
However, until there is a better understanding of what "green" means to industry and to banks that fund development, and until the economy sees an upturn, companies trending toward green may consider it an image factor and more stringently pursue it when times are better.
Cost Savings Will Drive Site Decisions
According to the Area Development survey, it could be argued that eight of the top-10 factors are cost-related. Closer access to highways will help companies save on transportation costs. Low tax rates, tax exemptions, incentives, and cheaper energy will contribute to bottom-line cost savings. Concerns about construction costs and availability of land signify that companies are weighing the options of land acquisition with new construction against renovation of existing buildings. The construction materials and labor required for building rehabilitation will cost less than for new construction - not to mention the additional cost savings on infrastructure and utilities that are already in place. Also, by foregoing construction of a new facility, companies can simply avoid any site that has wetlands or that needs environmental mitigation subject to environmental regulations.
Labor-related factors complete the top-10 list: availability of skilled labor and low union profile. Few dispute that the union advantage results in organized workers earning more than their nonunion counterparts. It could be argued that this is a problem for companies that are concerned with labor costs in an intensely competitive economy. But competitiveness is linked to productivity and quality, as well as labor costs.
Labor costs can parallel with low unit costs, not simply wages. For example, a worker producing one gizmo an hour who earns $7.50 hourly has a unit labor cost of $7.50 a gizmo; while a worker producing 10 gizmos an hour who earns $20 hourly has a unit labor cost of $2 a gizmo. In this case, higher wages result in lower labor costs and may actually serve to increase productivity and quality.
If one considers the sixth-ranked factor, availability of skilled labor, together with availability of unskilled labor (number 18) and training programs (number 19), it would seem that companies are focusing on hiring skilled employees who do not need a lot of training. This also contributes to cost savings.
Time is Money
In a traditional development, a company could buy vacant farmland and build from the ground up. It would need to engage in environmental due diligence and/or mitigation, infrastructure installation, utilities set-up, and, finally, permitting and new construction. This scenario is becoming less and less desirable because timelines are shorter than in the past. Site decisions are being made quickly, and, in turn, timelines to be operational are also accelerated. This leaves little time for environmental due diligence and associated traditional development issues.
Shovel-ready sites are preferred by companies that want to build because any environmental issues have already been mitigated, infrastructure and utilities are already in place, and, many times, incentives are also pre-negotiated. Companies are interested in knowing what they are getting into, and they don't want to invest a lot of time finding out.
Tight budgets and timeframes do not allow for delays that often lead to greater risks and higher costs. A general lack of expertise and resources for green development increase the cost of initial design and construction of green projects. Moreover, sustainable construction principles may not be well understood by the design professionals undertaking the project. Costs for environmentally sustainable construction products may also be higher than for traditional materials. Public approvals, permitting processes, and building codes may not be equipped to handle green construction and can also cause delays.
Higher initial costs can be effectively mitigated by the savings incurred over time due to the lower-than-industry-standard operational costs that are typical of a green constructed building. Many local governments have also adopted green incentive programs that include tax credits or exemptions, density bonuses, reduced fees, priority or expedited permitting, free or reduced-cost technical assistance, grants, and low-interest loans. These types of savings do take many years to realize, however; and if cost savings are important, they may not be pursued until it becomes economically feasible to do so.
Achieving a Balance
In sum, there is a need to balance environmental concerns with cost concerns. Each company has to perform an analysis of its unique situation to discover what works best for its project. Cost savings and labor issues are driving recent projects, but with the current administration's focus on green development and company participation in a new environmental corporate responsibility, green trends will continue to increase. Also, costs of green development should fall as green principles become understood in the wider arena of architects, attorneys, bankers, developers, and equity providers.