Green Building Law Blog
Valuing Green--CBRE Makes The Financial Case For Building Green
CB Richard Ellis, the worldwide behemoth of real estate services, issued a report which addresses "the economics of sustainable buildings." Their conclusion? Basic level of certification adds between 2-3% to the cost, higher levels of accredidation add 5-7% of construction costs. This is fairly in line with other cost estimates which have been issued. However, there were some other interesting conclusions from the report:
- Although developers will reap some rewards in terms of higher rents and enjoy higher rates of rental growth,the rates of rent additionality is about the same as the excess development costs (2-6%), so the additional rental value is essentially a wash.
- Improvements in energy savings can be between 10-50%, a major number.
- Residential customers will pay some premium for green, but not necessarily the actual cost of the green improvements
- Extra value will need to accrue from the investment markets for the lower risks and higher valuations of green buildings.
How should this study effect decisions making at the policy and business level?
- The potential market benefits from greening buildings have not solidified--this means that incentives can still be powerful tools to motivate green projects. The incentive may be the tipping point.
- Energy savings, and measurement of the realization of energy savings, is an important factor in "pencilling out" green improvements. From a policy perspective, this puts even more value on reporting and disclosure of building performance measures.
- Policy measures need to be different for commercial and residential sectors to motivate green. There may need to be different levels of incentives applied to motivate different segments.
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Shari Shapiro, Esq., LEED AP
Suite 300, Liberty View, 457 Haddonfield Road, P.O. Box 5459
Cherry Hill,
NJ
08002-2220,
Most LEED® certified buildings today were registered when compliance with ASHRAE 90.1 for energy was required, which is essentially the same as what most state codes require of all new buildings anyway. Thus, claims of lower energy costs compared with any other new building are simply not supported in general. Yes, later versions of LEED® require small improvements over the worst possible building designed to ASHRAE 90.1, but who does that intentionally?
If indeed these LEED® buildings have energy costs so much lower than competitors do in the market, one would think the total rental costs would also be lower, not higher than the norm in the market. Also missing from the discussion is what owner occupied buildings are finding.
Of course, developers should engage CBRE to make this happen.
Interesting point from Larry that lower energy costs should mean lower rent. In theory on a triple net lease that makes sense, but I think CBRE's point was more that even in a tough market, green buildings have an attraction for tenants that they are willing to pay for.
On the grander point, great link Shari. I have some questions about methodology on some of these studies, especially the hue and cry when a counter piece of information comes out. We really should all be collectively looking to get a good handle on cost/benefit as these measures start to really kick in.
Shari,
I am at the us GBC congressional advocacy day right now and we are going to be pitching attainable incentives for green retrofits in meetings tomorrow.
More to follow.
Mark
I'm curious about the finding that because additional construction costs about equal additional rents that it is 'essentially a wash'. This seems like a faulty comparison where construction costs are a one-time affair, while rent is a lifetime recurring cashflow. Seems a more apt comparison would be total cost of ownership vs. rent increase, and there you would find higher first costs offset by significant reductions in operational costs (10-50%!).
I've long wondered by CBRE and its ilk don't use these studies to commission the construction of buildings for management by CBRE et al., since they know so much about what the market wants, what is cost efficient to operate, and how to optimize the confluence of the two.
Shari,
I've enjoyed the discussions on your site.
My interest and concern is on the certification of the best management green practices. We are all complaining the Stimlus money is not being spent quickly enough.....Wait... Wait...Wait please. Do we have enough people on the ground either in local government or private sector business that know enough about "Green Certified Practices" to be utilizing them or inspecting proper installation of such practices. I want to put people back to work, tradesmen etc. but we need proper local legislation and a system of adopted "Green" training programs for them.