Sustainable Buildings Are Investments in Your Portfolio — and Your Legacy
- Credit & Lending
Sustainability and eco-consciousness are — as you have probably heard by now — becoming a bigger issue not just in the political arena, but as a result, in the business world. Carbon footprints of businesses are being examined across industries, and in the commercial real estate (CRE) world, developers should heed this trend not only when considering the environmental impact, but also the financial benefits of funding sustainable buildings.
While green buildings may placate consciences — according to a survey by wealth management firm Boston Private entitled "Why of Wealth," 35 percent of business owners want to foster change in the world — that's not all they do. People are likely to pay more in rent if they know they're living in or operating businesses out of environmentally sound properties. In the past, many CRE developers eschewed green investments in favor of exterior improvements that enhanced the overall look of the building, according to Deloitte experts. Now, applying eco-friendly upgrades could be the smarter business decision.
"A retrofit during tenant turnover can yield immediate return on investment by attracting new tenants and possibly higher rents, and typically makes re-leasing empty space easier," the consultancy wrote. One expert quoted in the piece noted that even if a building has no vacancies, landlords can yield returns by working alongside tenants to implement green technologies. In places where renters prioritize environmental stewardship, they may be willing to pay more to ensure that their lifestyle aligns with their values.
Even those who don't consider sustainability a top concern may be drawn to buildings that promise it. Energy-efficient developments benefit the environment and lower utilities expenses, which is among consumers' top concerns regarding a property.
Focus on Sustainability
With increased focus on carbon emissions, the commercial real estate industry is being called to account. CRE properties are among the biggest consumers of water and energy resources in the U.S. and are responsible for 40 percent of the country's carbon dioxide emissions. This means CRE developers have an enormous responsibility — and an incredible opportunity — to lead in implementing innovative green strategies.
"When the planet continues to be stressed by environmental outputs and energy usage, every bit helps. Every building that can contribute to the solution, or reduce its impact, in part or in full, is a benefit, since built structures are one of the largest contributors to environmental impacts. One by one the gains can grow over time, which is encouraging," Alex Shing, the CEO of Cottonwood Group, said.
PricewaterhouseCoopers (PwC), in a report titled "Real Estate 2020: Building the Future," predicts that by 2020, all CRE buildings will be subjected to sustainability ratings. Beyond meeting certain technical benchmarks, developers will need to build all new construction with an eye to overall sustainability, meaning that they support good quality of life, according to PwC. Potential criteria for judging the latter might include access to green spaces, inviting areas for socialization, and good air quality. And many local ordinances already exist requiring environmental offset for commercial development.
In its "Emerging Trends in Real Estate" report, focusing on the U.S. and Canada in 2019, PwC notes that real estate investment trusts (REITs) could play a pivotal role in the CRE industry in coming years. Awareness of and sensitivity to corporate responsibility in investments — impact investing, as the field is generally known — has grown in recent years, and environmental, social and governance issues are a particular class that interests impact investors. This has pushed REITs to place further emphasis on environmental impact when investing in the commercial real estate market.
"REITs are being scored on energy efficiency, carbon footprint reduction, and conservation policies," the report notes. "At least one global REIT asset manager excludes companies that do not have a qualifying score on the Global Real Estate Sustainability Benchmark (GRESB)."
Capturing the Green Premium
PwC's Real Estate 2020 report also highlights the "green premium," in which eco-friendly buildings are commanding higher prices. They note that in California, single-family homes that are certified by organizations such as LEED or Energy Star netted 9 percent greater sale prices than homes that were not.
Although buildings don't need certification to be advertised as sustainable, obtaining it reassures tenants that it means environmentally sound standards, according to IPE Real Assets. It also provides building guidelines for developers, thus ensuring that sustainable practices are applied throughout the building process instead of as an afterthought. Investors may prefer to back these properties as well. Certified buildings are more likely to attract tenants and have lower operating costs, and they can earn 15-30 percent higher sale prices, IPE Real Assets notes.
The Case for Certification
Developing sustainable buildings can also yield financial rewards beyond sale prices and tenant interest. The U.S. Green Building Council found that in the U.S., LEED-certified buildings saved $1.2 billion in energy costs, more than $715.2 million in maintenance expenses, and $149.5 million on water.
Though while the economic incentives for certification are substantial, they're not always easily won. U.S. Green Technology reported in 2016 that LEED certification can be a lengthy process due to backlogs and agency inefficiencies. Development itself can also be a challenge in areas where construction companies are not equipped to accommodate green building standards or don't share a developer's commitment to environmentally responsible building. Depending on the market, CRE developers may face challenges finding qualified architects, meeting government requirements, and ensuring that maintenance staff can manage the technologies involved in sustainable building.
But as green building becomes increasingly commonplace, the barriers to development are likely to drop. The benefits, however, will only increase.
The opinions expressed and information contained in this article are given in good faith, may be subject to change without notice, and are as of the date issued. The accuracy and completeness of this information is not guaranteed. Since each client's situation is unique please review your specific objectives and needs with your advisor and/or tax planning professional.
- Credit & Lending