U.S. Economic Downturn: A Boom or Bust for Sustainable Development?
The question may be not if Corporate America can afford to go green, but rather if it can afford not to go green.
California has once again grabbed the horns of change led by a governor committed to implementing meaningful but costly policies; now other states are following its lead. But how will the current economic downturn affect the momentum already achieved? In the face of job losses and increasing vacancies, will Corporate America pay to go green? Without compelling justification, will institutional investors continue to pay a premium for sustainable development?
A Popular, But Still Fragile Movement
Sustainable development isn't a new trend, but it has truly attained broad acceptance at the peak of this economic cycle, as developers and investors look to create their own competitive advantage among Corporate America with new product that justifies higher rents to cover the cost of inflation our industry has absorbed over the last decade. The residential boom not only caused significant escalation in land values, but also - combined with worldwide development activity - drove commodity prices to a point where new office development simply didn't underwrite in most markets. As the residential boom cooled, so did price escalations. A period of relative normalcy during 2006-2007 allowed commercial development to boom again, and then the bottom fell out.
The housing and subprime meltdowns have pushed buyers of existing product out of the market with no debt products that make underwriting sense available. New development has slowed as job losses and recession fears have put the capital markets on hold until a clear bottom to this cycle can be called. In the face of increasing vacancy and falling rents, the cost inflation is back again, driven by world demand for energy and energy supply uncertainty. Dramatic construction cost increases have returned and are expected to continue in labor, copper, fuel, petroleum-derived components, and concrete for the foreseeable future.
The United States is caught in the throws of our second great energy crisis, the first occurring from 1974 to 1982. The origins of the current crisis can be traced to 2003, as the power shifted to the OPEC providers. Now, in 2008, it's hard to see a clear end in sight. Whether this is our new reality or merely a speculatively fed bubble poised to burst is yet to be determined.
Tenant Decision-Making in a Changed Environment
Many of the benefits of green and high-performance buildings accrue to the tenants, not the owners and investors, unless they are evident in higher rents - and that has been the show-stopper. Lower employee absenteeism and turnover, fewer headaches, and higher productivity are a few justifications for corporations to pay higher rental rates. The challenge is that only a small number of high-performance buildings have been in place long enough for the data to be compelling to many corporate decision-makers. In a time of cost reductions and layoffs, lower rents become attractive; however, data supporting the benefits of sustainable development are finally becoming less anecdotal and more empirical. Recently published data underscores that green does pay off in the form of higher occupancy rates, rental rates, and sales price per square foot.
Perhaps most importantly, developers are beginning to master the maze of LEED® certification and the premiums associated with it. Early issues related to cost premiums were primarily due to a lack of planning and education, but slowly more developers and investors are embracing sustainable development and have learned that cost premiums of going green can be dramatically reduced by initiating an integrated design approach from the outset and leveraging knowledge across a large platform. A key consideration for tenants is to realize that because a building is LEED-certified does not mean that it will bring all of these benefits to its employees. Tenants will have to become equally sophisticated in understanding what their leasing alternatives in the new generation of buildings really mean.
Green Goes Mainstream
Numerous Fortune 500 companies have led a market transformation focusing on corporate responsibility and the health benefits to their employees, including Bank of America and Best Buy. Food distributor Sysco and Shell Oil are both developing corporate campuses outside of the City of Houston to drive down energy costs and attract employees. Sysco is also taking measures to cut down the power usage at its warehouses. The Houston Chronicle quoted Shell's director of real estate as saying, "In the future, you won't find Shell in a non-green building."
Similarly, software giant Adobe's headquarters facility, which spans three office towers and one million square feet in San Jose, has initiated more than 70 separate energy and conservation projects to improve the site's environmental sustainability. The effort has reduced indoor water use by 22 percent, landscaping water use by 76 percent, electricity by 35 percent, and natural gas by 41 percent.
When building their flagship store in the Pacific Northwest several years ago, outdoor retailer REI used recycled products and salvaged wood wherever possible, including 76 percent of its previous site's building materials. In addition, the facility was designed so that water from the roof is used to charge the waterfall that runs through the natural landscaping surrounding the outside of the store, masking the sounds of the nearby highway. The company is now piloting its first sustainable concept store in Boulder, Col., using all three solar strategies available for architectural design: passive solar, solar thermal, and solar electric, which is resulting in 20 percent less energy usage.
Landlords and architects are following suit. "As landlords have continued to institute a wide range of environmentally sustainable practices throughout their properties, an increasing number of tenants in the market have made `green' leases a priority when searching for office space," said Sally Wilson, Global Director of Environmental Strategy at CB Richard Ellis. "Be it replacing existing infrastructure with more energy-efficient appliances, establishing clear guidelines and receptacles for recycling, or something as easy as turning lights and computer monitors off at the end of the day, many landlords are working hard to provide environmentally friendly working conditions for existing and potential tenants."
"Energy-saving techniques including natural lighting and ventilation dramatically increase the building's performance and reduce consumption well beyond code requirements," said Bert Gregory, president and CEO of Seattle-based Mithun architectural firm. "It also creates a much more delightful place to work, filled with daylight and fresh air. Buildings that use less energy have better air quality and are driving demand in cities like Seattle, Portland, and San Francisco. As long-term costs savings from green building become apparent, the marketplace will get the message: You can be green and profit, too."
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