Case for Green Buildings Grows Stronger for Owners, Occupants

Evidence continues to stack up in the form of updated studies by CoStar Group, CB Richard Ellis, McGraw Hill Construction and other commercial real estate leaders that green practices are reducing long-term operating and occupancy costs, improving occupant health and boosting employee productivity – though not all those variables are fully understood or measurable as yet. 

Those were among the findings of the spring update of “Current Trends in Green Real Estate,“ the latest presentation on sustainability presented jointly by CoStar Group, the U.S. Green Building Council (USGBC) and this month, CB Richard Ellis, which explored the experiences, views and expectations of landlords, tenants and other occupiers on such issues as indoor air quality, water and energy efficiency, building materials and the relative economic costs and benefits of green practices at the property and investment levels. 

“The kind of benefits we see from green building might include increased tenant retention, faster absorption and higher rents based on higher productivity as tenants gain experience in better work environments,“ said Norm Miller, vice president, analytics, CoStar Group. “Right now, there are clear advantages through increased absorption and higher rents for most but not all markets, and there’s a significant payoff for long-term oriented owners. But we’re going to continue to monitor and study these benefits and costs.“ 

Miller delivered an update on the economics of green real estate at the CoStar webinar, while David L. Pogue, national director of sustainability for CB Richard Ellis, spoke about the Los Angeles-based firm’s industry-leading sustainability efforts. Chris Pyke, USGBC vice president of research, detailed the latest information regarding USGBC’s LEED certifications, including results from a new Comfort & Productivity Index, designed to measure the attitudes of owners and occupants of buildings certified for LEED for Existing Building Operations and Maintenance (LEED-EBOM). 

Sustainable buildings were likely to generate stronger returns for investors than traditionally managed properties, with owners anticipating a 4% higher return on investment (ROI), and an additional 5% increase in building value, according to the results of an ongoing study involving CB Richard Ellis, the University of San Diego and McGraw Hill Construction based on a national office portfolio managed by CBRE. 

In the second year of the study, just under 80% of the owners surveyed believe that sustainable properties perform well in attracting and retaining tenants, bringing a 5% increase in occupancy and a 1% increase in property income. Team members of CBRE along with Miller and other researchers presented the findings at the USGBC Greenbuild Conference in November. 

“We think [sustainability] is the right thing to do, the good thing to do. But at the end of the day, we needed to begin demonstrating some hard outcomes,“ Pogue said. 

CBRE expanded the study beyond buildings with the Energy Star label to include buildings with LEED EB (Existing Buildings) certification from USGBC. The study surveyed 156 institutionally owned buildings managed by CBRE in 10 mamjor U.S. markets representing 52.5 million square feet. The buildings had a strong average Energy Star rating of 88 and more than 50 of the buildings were designated LEED EB. McGraw Hill queried 588 tenants about their attitudes and experiences in green buildings. 

The survey found that while sustainable practices and attitudes vary considerably across different types and sizes of organizations, nearly 80% of publicly traded firms implemented at least one green practice. Large publicly traded companies already in LEED buildings felt that occupying green space was important to their current employees and their public image. 

“Clearly, the publicly traded companies felt more strongly [about green practices] than either the privately held companies or the nonprofits, privately held companies being the lowest,“ Pogue said. 

The CBRE/USD/McGraw Hill survey also found: 

  • Green buildings demonstrate higher average occupancy levels than the general market.
  • LEED and Energy Star buildings show higher rental rates. Non-LEED buildings had 4.81% lower average rents than the broader market while LEED buildings were 7.38% higher.
  • Nearly half of commercial building owners expect to see heightened green building activity in three years compared to 2010. “There is momentum in the marketplace, at least among the institutional owners we represent,“ Pogue said.
  • Institutional owners are mostly investing in green practices with the expectation of an economic payoff, with 93% of those surveyed anticipating a decrease in operating costs, while 79% and 73% expected to attract more tenants and receive better building ROI, respectively.
  • Just under 80% of owners agree or strongly agree that LEED status can be achieved affordably with low-cost features. Pogue estimated the average cost to upgrade existing buildings to LEED (EBOM) of the 100 or so buildings CBRE has managed at about 25 cents per square foot.
  • Owners are driven most by holistic business benefits rather than looming government regulation or social goals, with nearly 80% citing energy reduction and 72% citing competitive advantages from offering ‘green’ features. Building managers are driven overwhelmingly by cost savings. There is no tree hugging among property managers.

Preliminary findings suggest occupants have high satisfaction rates with green upgrades, with 75% saying they remain satisfied well after the projects are completed. Nearly 95% of building managers reported higher tenant satisfaction immediately after green upgrades. About 16% of occupants reported tangible productivity increases. 

Occupants cited building day lighting and views, access to public transit and healthier indoor air quality as features they desired, green building features the USGBC’s Pyke cited as a priority in LEED certifications. 

Pogue cited research partner McGraw-Hill Higher Education’s move to a LEED Silver building in Dubuque, IA as a case study for occupier attitudes about efficient buildings. Some 93% of workers reported being more satisfied after moving to the green building; while 61% said they were more productive; 55% reported producing higher quality work and 12% observed being healthier, with fewer sick days. Overall, 74% thought LEED certification is important and produced higher employee engagement in corporate activities. 

“This is a real-world example of a corporate occupier who moved into a LEED space and was able to track the results. Our goal this year is to get more of these kinds of corporate experiences,“ Pogue said. 

The study shows that the market for new and retrofitted green buildings is growing dramatically, with 35% of all new construction in 2010 being green. Energy efficiency is good business and reports of tangible business benefits such as increased ROI, occupancy and rent from green projects are becoming more consistent and measurable over time, Pogue noted. 

The value of LEED is recognized in the marketplace and while measuring and benchmarking energy efficiency and benefits remains a challenge, the consensus in the industry is that it will be critical to uncovering the real value of sustainable practices, Pogue said. 
There’s still a false perception out there that green building costs significantly more, Miller said. 

“We’ve talked to developers, subs, architects, engineers. Those that have experienced higher costs are less experienced — the more experience the team has, the lower the cost,“ he said. 

Miller pointed out that while rent premiums for landlords in green building vary by market and tenant mix, they average between 5% and 8% nationally. Miller noted that as of Dec. 19, 2010, the General Services Administration (GSA) no longer are entering into leases of 10,000 square feet or more unless the building is Energy Star labeled. 

“The buildings that hit the Energy Star score but haven’t applied yet have a big incentive if they want GSA as a tenant,“ he said, adding that GSA is having trouble in some markets finding buildings that meet the criteria. “Even though GSA isn’t allowed to pay more than market rent, when you have tenants like that, you’re more likely to see rent premiums.“ 

Buildings with higher LEED or Energy Star scores also tend to see faster absorption into the market. 

Some studies, including CBRE/McGraw Hill’s latest survey, have noted overall higher overall vacancies in LEED buildings. However, Miller said it’s most likely because those building tend to be newer and hit the market at the wrong time during the recession and downturn. 

Capitalization rates are about 50 basis points lower on LEED versus non-LEED buildings, Miller said. However, many appraisers don’t fully understand the value and impact of certification — or they simply don’t have enough sales comps in their market to make a judgment. 

“It’s going to take time before appraisers recognize the value we see from our data,“ Miller said.