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« previous: 80-20 is out. What will co-ops gain from the new rules?   |  next:  Frank Gehry: Nice building. Then what? »

Tuesday, January 15, 2008

Why build green properties?

I get to sit in the editor's chair as we welcome Lexington Blood posting his debut entry here on Lex gives us some insight into why real estate development is going green. I had a customer ask to see only green buildings for the first time this week, a sign to me that consumer sentiment may be transforming right now. Better understanding of sustainable design will lead to greater demand, and change that's sustainable in the marketplace too. The benefits of green development are something that we'll be looking at on even more so in the future. There is a lot to gain for everyone. —Peter

will sustainable development mean more sustainable profitability too?
green buildinggreen city Fast forward to the year 2030. Now picture yourself with a building in downtown New York City. It a beautiful mixed-use building with an A-list restaurant on the main floor, office space above and stylish luxury apartments. When you bought this property back in 2008, it was still considered a trophy, but not anymore. You’re in the cross-hairs of New York City’s environmental agencies, because your building is not energy efficient or environmentally friendly. In fact its exactly the opposite, it has high quality imported finishes and materials that are high in ‘off gases’. It has incandescent light bulbs throughout the entire building, an energy wasting HVAC system, poor air quality because of out dated ventilation system, underrated insulation, and your building doesn’t have solar power or any other proactive carbon offsetting systems. The writing is on the wall. If you don’t begin with a sustainable approach when developing, buying or selling any property, be it residential, retail, industrial or commercial, you will be facing costly liabilities. Because of high-energy costs, buildings are becoming increasingly expensive to operate. With this in mind, developers, owners, and property managers can benefit from the slightly higher initial cost to go green because future cost increases will be limited and tenants will be happier because of it. We’ve heard that green development makes sense socially and environmentally, but does it make sense economically?

There seems to be a disconnect between perception and reality. Detailed in this report on Energy Efficiency in Buildings: Business Realities and Opportunities, respondents to a 1,400 person global survey conducted by the World Business Council for Sustainable Development had many misconceptions about building green. They estimated the additional cost of building green at 17% above conventional construction. This is more than triple the true cost difference of about 5%. At the same time, survey respondents put greenhouse gas emissions by buildings at 19% of the world total, while the actual number is 40%. The fact is, sustainable materials are becoming practical materials. Most of these, such as solar panels & LED or Fluorescent lighting make more sense because they increase the value with lower operating cost and reduce the carbon footprint. Developing with a green conscience provides long-lasting buildings, clean and safe environments for those who choose to work, live and shop around them.

Although the average cost to building green is 5% higher than conventional construction, it is arguable that the sustainable building will be worth at least 5% more than its conventional neighbor, and appreciate at a faster rate. Not only does developing a green smart building offer better value, it offers a tremendous opportunity to differentiate the finished product to consumers when it is brought to market. It is possible to dramatically decrease energy demands while delivering world-class design. Discerning consumers will realize that non green homes are heading toward obsolescence faster than the floppy disk. If they don’t go green now, they are destined for an upgrade later.

the regulatory environment

Keep in mind large cities will continue to put increasing pressure on developers and owners to develop green buildings. Local Law 86 of 2005 already requires most New York City construction and renovation projects to meet certain standards for green building. Projects that cost over $2,000,000 must achieve a LEED Silver or higher rating. Projects of higher value are subject to even more stringent regulations. Both consumers and investors will be increasingly concerned about the possibility of their real estate investment growing in obsolescence instead of value, as time goes by.

The financial markets are taking notice, including investment banks, hedge funds, mutual funds, and even Fannie Mae and Freddie Mac have programs that allow people to qualify for a conforming loan to purchase a more expensive personal residence, if it meets their standard energy efficiency tests. Investment banks and entrepreneurs are gearing up for the ‘carbon credits’ market, which has already reached $40 billion worldwide. Put simply, individuals, companies, and countries could offset their C02 emissions by purchasing ‘credits’ from others that are releasing less green house gases than regulated maximums. This is an additional potential revenue stream and something to keep an eye out for in 2008.

the social benefits

Green real estate development really does make economic sense— even more so when you consider the political and social impacts of being environmentally responsible.

  • Decreased consumption of diminishing energy resources
  • Economic independence from foreign energy sources
  • Less pollution of water and air
  • Less material waste
  • Protection of unique plant and animal communities
  • Reducing urban sprawl

Developing green is growing faster than any other real property trend. Today, about 20% of architects, engineers, and developers have been involved in building green projects, compared with only 9% of owners and tenants. So if you have the foresight to develop and build green now, and you'll be ahead of 80% of the other developers, architects and builders out there, and 91% ahead of the other owners out there.

related links:
World Business Council for Sustainable Development (WBCSD)
Energy Efficiency in Buildings: Business Realities and Opportunities (.pdf 1.75MB)
US Green Building Council (USGBC)
NYC Sustainablity Laws and building regulations
NYC Local Law 86 of 2005

recent posts:
video: Alex Steffen on bright green cities
spending green, saving green

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