As I witness the fate of Detroit automakers, I can’t help but see potential parallels between the automotive industry and the real estate industry. It would have cost U.S. automakers more money – and cut into their profits – to make more energy-efficient vehicles that were better for the environment, but Detroit believed it wasn’t what their customers wanted.
Most of the real estate industry and its capital sources are waiting on “enough” quantifiable data to build new or retrofit existing buildings to high-performance green buildings that are healthier for occupants and better for the environment. Most are still unsure whether it’s what customers want, or whether customers (tenants) will pay enough to justify the added investment. Foreign automakers made the switch and made money.
It’s time to shift our thinking from seeking to quantify green returns to assessing the risk of not making sustainable choices.
Waiting on the Numbers to Value Green Buildings
The luxury of waiting on enough numbers to make a risk-free change is no longer. The risk is not in going green, but in failing to go green. Detroit’s big three automakers failed to make difficult but necessary changes.
Studies of first-cost green premiums consistently hover in the 0- to 2-percent range. Post-occupancy studies support reduced operating costs and higher absorption, occupancy, rents, and sales prices; however, there’s not enough quantifiable data to draw statistical conclusions to be inserted in traditional valuation models. Yet, data and common sense tell us that these studies are directionally correct.
Implementing green practices that improve efficiency and the environment is a sound business strategy. Move from looking for the value-add of a green building to underwriting the added risk of a non-green building.
A comprehensive report titled Globalization and Global Trends in Green Real Estate Investment (prepared by Andrew J. Nelson, vice president at Chicago-based RREEF Research, September 2008) identifies at least three major types of risk for investors:
- Market risk: Rising standards will make inefficient buildings obsolete over time.
- Regulatory risk: Governments may quickly alter the playing field and cost/benefit calculators.
- Environmental risk: Physical damages attributable to climate change may alter risk profiles.
According to Nelson’s report, global trends in green real estate investment hold the following implications for investors:
- Rapid transformation will move the market toward green-only construction.
- Studies uniformly conclude that green buildings command higher rents and occupancy rates, lower utility costs, and lower capitalization rates.
- Urban infill sites will be increasingly valued.
- Markets will flip from a green premium to a discount for obsolete construction.
- Immediate risks are to older, inefficient buildings whose obsolescence will be reflected in lower rents and occupancy.
- The greatest opportunities for green building investments will be in the United States due to its large stock of aging investible real estate and sizeable population growth.