Wednesday, January 03, 2007

Seeing green...

A couple months back The Sun showed how little it knows about green buildings by asking residents how much of a "premium" the county should pay for such attributes on its new buildings. I call into question the paper's intelligence because, as I said at the time, "the future savings often outweigh the upfront premium (even accounting for the time value of money), meaning we would have actually paid a premium to be not-green."

In this month's Business Monthly, those who know about building costs weigh in. Although the story isn't up on the Monthly's website, here are a few key paragraphs.

[COPT CEO Rand Griffin] offered more numbers to contemplate: The 125,000-square-foot structure cost COPT $2.87 more per square foot to build than a regular building, "but we think that the operating costs were dropped by 50 cents per square foot," Griffin said. "That equates to a five-year cash payback, if you look at it that way."
So, in five years, well short of the intended life span of pretty much every structure but tents, the up-front premium actually results in a savings, something most of us may assume to be true intuitively. Developers, however, don't rely solely on intuition when running the numbers on a project.

Here's more:
While stating that the premium to build green has dropped from 8% to 20% down to just 1% or 2% in a decade, [Urban Land Institute senior fellow Ed McMahon] acknowledged that a number of builders are building green but are not certified because the process is time consuming and the process itself costs money. McMahon still said the time to hop on the bandwagon is now.

"If your development firm is not building green within the next three years, your property will be losing value in the marketplace," he said, adding that green construction will be a prerequisite for any class A building.

..."One developer said to me that the biggest cost of financing their own building," McMahon said, "had been the cost of their own ignorance."
With several jurisdictions already mandating green technology for public and large private buildings -- including Montgomery County, whose requirements are among the strictest in the nation -- and an expressed desire from new County Executive Ken Ulman to foster a more sustainable and innovative county, it seems pretty certain that green will be a requirement in the very near future in Howard County.

What remains to be seen, however, is how far Howard County will go. With developers catching on to green buildings, it wouldn't make much sense for us to require what the market is already doing on its own. Rather, the function of any local green building mandate should push the market -- through a balance of requirements and incentives -- towards environmental sustainability or even restoration (not coincidentally, a focus of the Howard County Tomorrow group I'm involved with).

Examples of regulations leading the market instead of following it might include requirements for green technology in residential buildings, green neighborhoods, and other practices that enhance, rather than degrade, the environment.

16 comments:

FreeMarket said...

Hayduke- your conclusion is correct, but your numbers are a little bit off. The five year payback period referenced by Rand Griffin does not include the time value of money. Using a discount rate of 5%, building green takes 7 years to pay for itself, which is still a short period and makes economic sense. However, this does not include interest expense on the additional costs of building green which would lengthen that period. However, if energy costs increase, the building green would obviously pay for itself faster.

Anonymous said...

Another factor you overlooked that tilts the scales the opposite direction of TVM is that green buildings often have higher lease rates per square foot. In other words, the landlord gets to charge more for the same space, thereby shortening the time to recoup any additional costs to build green.

David W. Keelan said...

Question. Who pays the operating costs of the building? The occupant or the developer? If it is the developer then do they have any incentive for saving on operating costs if the break even point is beyond 7 years?

I know it is a catch 22 in that green technology gets less expensive when more people are using it, but other than forcing green technology onto developers what other incentives are there? Didn't Guzzone sponsor legislation in the County Council providing tax breaks for using Green Technology in residences ENRCB67-2006
http://co.ho.md.us/CountyCouncil/CCdocs/ENRCB67-2006.pdf

That is great for the home owner - but what about developers of commercial property?

Hayduke, does the County have any such incentives?

wordbones said...

Anon,
The higher lease rates attained by green buildings are more a reflection of the increased land cost and building costs. Since the LEED (Leadership through Energy and Environmental Design) initiative is still relatively new, most green buildings have are newer and therefore more costly than older buildings. Also, the additional cost of going green is factored into the lease rate. The bottomline is that these higher rates do not necessarily translate into higher return for the developer.

David,
As in everything, it depends. Some leases require the tenant to pay the operating costs while in others it is factored into the lease rate. Most Class A office buildings factor operating costs into the lease rate. These rates are referred to as "full service" lease rates.

-wb

Eldersburg1976 said...

Interesting discussion... there is an example of a new/proposed LEED development in Eldersburg on my blog:
http://eldersburgtoday.blogspot.com

It seems the office/retail markets are slowly seeing the value of green.

Eldersburg1976 said...

An interesting Article:

http://www.bdcnetwork.com/article/CA6401318.html

A growing number of municipalities are engaging in the practice of “LEED creep.” It starts with governments requiring LEED certification for public buildings—perfectly OK, since they're being built with taxpayer dollars—but before long, private projects are also put under LEED mandate.

Imposing LEED on private projects only serves to turn off developers, building owners, and the real estate industry to the true goal of encouraging more green buildings.

Hayduke said...

David: As far as I know there are no policies or tax cuts compelling commercial developers to go green. It won't be long, however.

FM: Good catch.

E-1976: The story you link to sounds like it was written by someone who's about to get passed by the times.

wordbones said...

Hayduke,

Agreed. By the time government gets around to mandating LEED certification for new construction it will already be firmly established by market forces.

Any commercial developer who is not pursuing a LEEDs certification track for a new project will find themselves at a distinct disadvantage when marketing the space to prospective tenants.

-wb

Eldersburg1976 said...

hayduke: yes and no... this article was in one of the various design magazines that come across my desk. this is of the better known ones. LEED is definitely not the cure all some people claim it to be. It is a movement in the correct direction but (being involved in a few LEED projects myself) I have mixed feelings about the process as a whole.

once the market sees an added benefit (increased rents, etc), it will become standard practice in the industry. Right now, LEED makes sense for the top 5% of building structures.. it is difficult to apply and justify for the 95% of the current building market. The education level of the majority of building owners, landlords, and tenants are not high enough to correctly apply LEED standards over the life of the building as it is set up to do. The common tenant and building owner is not interested or able to follow the requirements as currently required in the standard.

Anonymous said...

Other green building incentives for developers and occupants:

"By providing a healthier, more productive working or living environment that costs less to operate and maintain, you'll attract tenants more quickly -- and hold on to them. Lease-up rates for green buildings typically range from average to 20 percent above average.

For Hines, a leading real estate development, investment and management company, sustainable design has contributed to an 8 percent higher occupancy rate in its green buildings relative to the non-green buildings of its competitors." Link.

Resale value of green buildings is also higher, in some cases increasing market value tenfold the green building upgrade costs. Link.

Eldersburg1976 said...

anon: I agree with your statements and the articles you quote. however, 90% of building owners are only concerned about 1st costs.... a owner of a 10,000 strip mall doesn't care that the HVAC units are inefficient and use CFC-based refrigerants. The tenants pay for the energy bills and maintenance of the space. Chances are the strip mall will have 3 owners in 10 years and the builder wants to get it built as fast as possible and at the cheapest price to be able to charge rent as soon as possible. Most smaller tenants aren’t versed enough on the values of green buildings to realize that the higher rents they see are more than off-setted by the lower operating costs of the space.


From my experience the State and Federal Mandated energy efficiency standards for equipment have given the industry the biggest green bang for the buck. This forces the equipment manufacturers to produce more efficient equipment and removes the lower efficiency equipment from the market.

Anonymous said...

eburg,

Did you just say that 90% of building owners and most smaller tenants are stupid? That's how it sounded to me.

If so, then those are very profitable businesses for less stupid people to enter.

Seriously, a much higher percentage of people in business can and do understand the values being discussed here.

Eldersburg1976 said...

anon:
Didn’t mean to imply that they were “stupid”.. just have different priorities. I can not count how many times I’ve seen energy efficient equipment VE’d (value engineered) out of the project because lesser equipment can be installed cheaper.

Right now, it is a still unfortunately a rare sight that a building owner or tenant makes energy efficiency and green buildings a high priority.

Some of the larger users have started to see the “green” light. This is a good sign.

I’d like to see the LEED standard simplified as I believe more people would jump on board if they did not need to jump through so many hoops. We would be ahead if we had 50% of the buildings being 50% more efficient than 5% of the buildings being 80% more efficient.

Anonymous said...

LEED is already structured to be usable on a high percentage of projects. It has tiered certifications: Certified, Silver, Gold, and Platinum, each with a corresponding number of points necessary to attain. The criteria are pretty simple.

Anonymous said...

anon, i agree with Eldersburg76. I am a LEED certified professional and his experiences with building owners are realistic. The ratio may not be 95/5 but it is close.

Eldersburg1976 said...

Anon(s): I am a proponent of Green Buildings and LEED. I've written about them on my own blog Eldersburg Today on multiple occasions and enjoy the conversations I've seen on this blog. Hayduke has a history of excellent posts/discussions. My only point (that I haven't protrayed as eloquently as I liked) as we have a long way to go before Green Building Technologies are the standard in the industry. More must be done to facilite this in the industry.