Sustainability White Paper

Key Trends in Green Development & Investment B ASED ON 2008 U RBAN L AND I NSTITUTE (ULI) C ONFERENCE ON S USTAINABILITY   M AY 2008

Jonathan B. Stern , MBA, M.Arch, LEED AP [email protected]

 

Key Trends in Green Development and Investment

E XECUTIVE S UMMARY Purpose

The purpose of this paper is to focus attention on important trends that are occurring and will continue to influence: • •

Increasing real estate development and investment in green, and Growing market demand and value of sustainable projects.

The points highlighted in this paper are culled from presentations and discussions with industry leaders in real estate, finance, architecture and construction, at the 2008 Urban Land Institute (ULI) conference on sustainability. “Green” topics are currently a focus of almost every industry and the media. At the same time, it is hoped that the trends presented in this paper will provide a unique perspective of further value, development and investment in sustainable and green projects, over the next 10 to 20 years.

Trends In addition to the impact of the goals and standards set by LEED (Leadership in Energy and Environmental Design), Energy Star and other forms of eco-efficiency on the real estate industry, there seems to be four important trends that are driving broader approaches to developing and investing in sustainable real estate projects, as depicted in the following diagram.

•Where vs. What •Long‐Term Vision •Urban Re‐Generation •In‐Fill Development •Innovative Financing

•The Current Frontier •"Zero" CO2 Emissions •Systemic Thinking •Market Opportunities

Higher  Urban  Density

Evolving  Work  Paradigm

Going  Beyond  LEED

Growing Market   Demand  & Value  

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•Up‐Front  Collaboration •Leadership / Support •Higher A/E/C  Performance &  Innovation

•Health & Productivity •Energy Costs &  Uncertainty •Functional  Obsolescence

Key Trends in Green Development and Investment

H IGHER U RBAN D ENSITY “Where you choose to develop is more important than what you develop”. - Peter Calthorpe, Principal, Calthorpe Associates Keynote Speaker at 2008 ULI Conference on Sustainability

Building green or energy efficient buildings does not seem to completely address the critical impact of ever-increasing commuter distances between home and work, and growing numbers of passenger vehicles. This impact is captured by a metric called Vehicle Miles Traveled (VMT), which has been identified as one of the key contributors of carbon emissions, as depicted in the box below.

Vehicle Miles Traveled (VMT) Based on current patterns of suburban development, increased CO2 emissions from longer commutes and more passenger vehicles, are projected to offset any positive reductions in emissions achieved through green building initiatives, bio-fuel efficiencies and lower fuel mileage (mpg) standards, over the next 20 to 25 years. The following chart illustrates the projected increase of VMT in the U.S. (see black line), with the observation that that though CO2 levels in 2030 are projected to be lower than today (see top red line), increasing VMT may still cause emissions to be significantly higher than identified target CO2 levels (see bottom red line). 160 140

Vehicle Miles Traveled

120

20 30 New 45 mpg Fuel Greenhouse Gas: -15%

100

19 90 CO2 Level 80

Target CO2 Level Projected CO2 Level

60 40 2005

2010

2015

2020

2025

2030

Source: Growing Cooler: The Evidence on Urban Development & Climate Change, E. Reid

As a result, efforts to construct new or to renovate existing buildings to LEED standards (i.e. “… what we develop”) may not be sufficient to achieve broader global goals of reduced carbon emissions, as long as those buildings or communities continue to encourage longer commutes and increasing VMT.

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Key Trends in Green Development and Investment By contrast, developing and investing in denser urban areas with increased transportation options (i.e. “Where we choose to develop …”) would afford significantly less driving; encourage more efficient uses of public transportation between home, work and play; and greatly reduce VMT and CO2 emissions. To this effect, public entities, private developers, A/E firms, contractors and investors are likely to find meaningful and profitable opportunities in projects that comprise some, or all, of the following components: •

Urban re-generation, in-fill and transit-oriented development (TOD) projects,

•

Brownfield and ‘gray’-field (e.g. abandoned or under-utilized commercial, outdated urban malls, etc.) sites, and

•

Atypical financing structures (e.g. tax credits, TIFs, economic development incentives and public-private financing), including less traditional stacking of equity and debt.

E VOLVING W ORK P ARADIGM   Successful development and investment in sustainable buildings, in terms of stronger assets with longer term cash flows and increased environmental and energy efficiencies, requires commitment on the part of firms and individuals to, not only build differently, but to think and work differently. Leading participants at the ULI conference spoke emphatically about several important project / organizational dynamics that have driven success and value in their sustainable projects: •

Upfront collaboration - from all parties (i.e. developer, architect, engineer, contractor, product manufacturers, public entities, debt and equity investors) at the earliest stages of a project, “to build the best building possible and to learn from previous efforts”.

•

Increased overall collaboration - generated from the need to work together to achieve LEED or other sustainable efficiencies, encourages opportunity for the project team to work more effectively in other areas of the project.

•

Leadership to push limits - and create more effective and cost efficient solutions. This could be the developer, architect, consultant, contractor or key investment partner.

•

Demand higher performance and innovation - from architects, engineers, contractors, manufacturers, etc. to go beyond conventional solutions and to push for out-of-box ideas for increased energy efficiency and human comfort. Page 4

Key Trends in Green Development and Investment

Douglas Durst, Co-President, The Durst Organization (New York, NY) At the 2008 ULI sustainability conference, Douglas Durst commented about a new work paradigm that his firm embraced to develop two of New York’s most innovative and pioneering high-rise green office projects. 4 Times Square (The Condé Nast Building)

In 1995, Durst undertook to build a 48-story, 1.6 million sq. ft. officebuilding in Midtown Manhattan, which was completed in 1999 and is recognized as the United States’ first “green” highrise office building.

One Bryant Place (Bank of America Tower)

In August 2008, Durst will open a 2.1 million sq. ft., 954-ft. tall skyscraper that will be Bank of America’s NY regional headquarters and a LEED-Platinum certified building.

Durst’s Comments − “In 1995, we knew that we wanted to do green, but didn’t know how or what”. − “As a result, we utilized off-sites meetings to bring all team members together, to think through green”. − “Initially, the tenants of 4 Times Square didn’t understand. Today, One Bryant Place is LEED Platinum, and there is high tenant demand … (as) green buildings begin to distinguish themselves”. − “The process is to work collaboratively, not confrontational. No blame pointers”. − “To a tenant, operating costs of a building are 4%, but the cost (i.e. salaries and benefits) of the workers occupying a building are 80%. Therefore, the payback on cost of improving work efficiency is great”.

G ROWING M ARKET D EMAND & V ALUE The construction cost to build green or LEED buildings seems to have become much less of an issue. Several successful developers at the ULI Conference spoke about their ability to find cost effective solutions that have minimal or no cost premium, and yet provide long-term energy savings and other strong market benefits. In addition, data begins to point toward cost premiums less than 7% for building LEED at the higher end of Platinum certification, and less than a 2% premium for LEED Gold and Silver. As the cost of building green becomes less of a concern, the value of building green is becoming more apparent as indicated by the following points: •

Nearly all Class A office buildings built today in the U.S. are LEED-certified, otherwise a building risks becoming functionally obsolete over time. Page 5

Key Trends in Green Development and Investment (By example, potential functional obsolescence of non-LEED building might be comparable to the introduction of HVAC systems in the 1950’s and 60’s. At first, tenants did not pay any rent premium for being in a building with HVAC. However, by the 60’s, tenants would not consider a building that did not have HVAC. At present, LEED seems to fall into a similar paradigm.) •

In LEED certified buildings: a) occupancy rates are higher, b) lease up time is shorter, c) permitting can often be expedited and d) there are more opportunities for receiving density bonuses.

•

As energy prices continue to rise, energy efficient green buildings will have increased tenant demand, and it will be a market differentiator in down markets.

Market Demand / Value of LEED - CoStar Group 2008 Study The CoStar Group, a commercial real estate research firm that tracks data for over one million buildings in the U.S., reports that Gold and Platinum LEED-certified buildings have energy savings approaching 50%, and that sales price per square foot of LEED buildings is more than 50% higher than comparable non-LEED buildings.  

Energy Star Buildings non‐Eng. Star Energy Star

+ / ‐

non‐LEED

LEED Buildings LEED

+ / ‐

Occupancy Rates (%) 2006 ‐ 1st Qtr. 2008 ‐ 1st Qtr.

86.9% 87.9%

90.0% 91.5%

3.1% 3.6%

88.3% 87.9%

91.1% 92.0%

2.8% 4.1%

Rental Rates ($/SF) 2006 ‐ 1st Qtr. 2008 ‐ 1st Qtr.

$24.69 $28.15

$26.33 $30.55

$1.64 $2.40

$27.03 $31.05

$33.69 $42.38

$6.66 $11.33

Sales Price ($/SF) ‐ based on 6% Cap Rate 2006 ‐ 1st Qtr. $219.00 $281.00 2008 ‐ 1st Qtr. $227.00 $288.00

$62.00 $61.00

$264.00 $267.00

$402.00 $438.00

$138.00 $171.00

Source: http://www.costar.com/partners/uli.pdf

 

G OING B EYOND LEED Important to the longer term goals of building sustainability and unlocking additional value in green development and investment, consideration is being given to: •

Whether LEED is becoming a market standard, and eventually might become a part of the building code, and

•

How developers and investors can move beyond LEED standards, to achieve higher efficiencies (i.e. cost savings) and further untapped market value. Page 6

Key Trends in Green Development and Investment The following three items highlight opportunities for developers, investors and A/E/C firms to drive value through attaining higher standards of energy efficiencies and lower CO2 emissions beyond those established by LEED and Energy Star: 1) Generate “near-zero” levels of CO2 emissions – to not only comply with accepted sustainable building practices, but go beyond compliance: 1) to achieve lower operating costs through higher efficiencies, and 2) to appeal to growing market demand for increasingly innovative and green spaces. 2) Think systemically – about an integrated strategy for all building systems, i.e. building envelope, MEP systems, use of natural site resources, natural & artificial lighting, interior finishes, construction methods, materials sourcing, etc., in addition to projects’ integration with broader communities and global markets. 3)

Mitigate effects of uncertain energy prices - to maintain and increase property value, and to be ahead of quickly evolving trends in sustainable development and investment.

Growing Organization Focus on Sustainability Bob Willard, noted author of The Sustainability Advantage, characterizes five stages of growth that companies across all industries are taking, as they develop broader concepts of sustainability, and its contribution to their bottom line and business models, as illustrated in the diagram below.

INTEGRATED STRATEGY

COMPLIANCE Regulatory Enforcement

PRECOMPLIANCE

BEYOND COMPLIANCE

Enhanced Market Value

LEED Certification

Means: Contribute to Better World

Energy Efficiencies Threat of Functional Obsolescence

Ends: Be a Successful Company

PURPOSE / PASSION Values-Driven Management Means: Be a Successful Company Ends: Contribute to Better World

These five stages chart the focus on sustainability that companies can incorporate into their organization, as they seek to bridge the gap from Compliance to increased value-based visions of Integrated Strategy and Purpose/Passion. Source: Communicating the Business Case for Sustainability; Bob Willard

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Key Trends in Green Development and Investment

A F INAL N OTE A telling perspective of our ability, as members of the broad real estate community to impact how the built and corporate environments will change by the middle of this century, is conveyed in the following statement from the Co-Directors of Princeton University’s Carbon Mitigation Initiative. It opens a realm of opportunities for us to uncover value in the way we will choose to build over the next 50 years. “The task of holding global emissions constant would be out of reach, were it not for the fact that all the driving and flying in 2056 will be in vehicles not yet designed, most of the buildings that will be around then are not yet built, the locations of many of the communities that will contain these buildings and determine their inhabitants’ commuting patterns have not yet been chosen, and utility owners are only now beginning to plan for the power plants that will be needed to light up those communities. Today’s notoriously inefficient energy system can be replaced if the world gives unprecedented attention to energy efficiency. Dramatic changes are plausible over the next 50 years because so much of the energy canvas is still blank”. - Robert Socolow and Stephen Pacala, Co-Directors, Carbon Mitigation Initiative, Princeton University  

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