It’s a Bigger Deal than You Think, Part 1: Location

Aug. 27, 2008

By Mychele Lord

The age of sustainability will impact our real estate decisions. If you ask the various sources of investment capital—large commercial real estate lenders and investment managers—green is being incorporated into the deal. Green is not a real estate strategy foremost, but is becoming a component of investment criteria. Some lenders are mainstreaming green into their underwriting, risk management, and appraisal processes. Investment managers are taking a pragmatic approach to green—chasing the low-hanging fruit and staying true to the economic bottom line. Building occupants (tenants), on the other hand, are evaluating how real estate decisions impact their carbon and environmental footprints.

So, how should climate change, rising demand for energy, and the regulation of greenhouse gases impact real estate decisions today? A new set of criteria is emerging that impacts real estate in three primary categories: location, physical attributes, and operational practices. For example, an asset's location, how it was built, and how it's operated all contribute to the carbon footprint of the asset. Our underwriting parameters need to be extended to consider the air quality of the city in which the real estate resides, the asset's Statement of Energy Performance (SEP) as provided by ENERGY STAR® Portfolio Manager, and the commitment level of building management and the tenant base in such operational practices as purchasing environmentally preferred products and waste reduction.

Real Estate Valuation 101 tells us, "location, location, location." It's even more important when you incorporate green into your calculations. Following emission-reporting standards, such as the Greenhouse Gas Protocol Initiative, companies (tenants) seek to reduce their carbon footprints and calculate their emissions from operations, including their leased space and employee commutes. Location becomes paramount to any strategy to reduce employee commutes. Telecommuting is also a strategy for employers to reduce their total emissions.

In underwriting, favor real estate located in dense, urban areas; in walkable and bicycle-friendly communities; and near public transportation, as these locations can significantly reduce carbon emissions per employee. The number of companies voluntarily tracking and reporting their overall emissions in programs (such as EPA Climate Leaders and the Carbon Disclosure Project) continues to increase. Real estate located in cities with strong public transportation system ridership and a high degree of mixed-use real estate will become more valuable as energy prices rise and a market-based cap-and-trade system for regulated greenhouse-gas emissions is established in the United States.

The Washington, D.C.-based Urban Land Institute—in partnership with Smart Growth America, the Center for Clean Air Policy, the National Center for Smart Growth, and the University of Utah—recently published Growing Cooler: The Evidence on Urban Development and Climate Change. This book is a must read for anyone making real estate decisions. The authors report that Americans are driving more, and—because we are driving more—our vehicle miles traveled (VMT) will cancel out even the newest fuel-efficiency standards. Their conclusion is that real estate—where and how we develop—must be part of the solution to address greenhouse-gas (GHG) emission reductions. The solution, the authors argue, is smart growth. Compact urban development, transit-oriented development, and new urbanist neighborhoods are a low-cost, climate-change strategy. If we don't quickly contribute willingly, then we run the risk of regulation.

Cities are under increasing pressure to maintain certain air-quality standards. More than 852 mayors have now signed the U.S. Conference of Mayors' Climate Protection Agreement. Their joint effort is to clean the air in America's cities and specifically meet or exceed goals established by the Kyoto Protocol—namely a 7-percent reduction in greenhouse-gas emissions from 1990 levels by 2012. Mayors recognize that air quality is critical to their economic development strategies. Earlier this year, the EPA increased its smog standards. Smog, or ground-level ozone formation, increases the temperature in our cities, which, in turn, adds to cooling loads; smog also presents health threats to people and ecosystems. The EPA has an alert system for communicating daily air quality to the public called the Air Quality Index (AQI). As greater restrictions are placed on air quality and GHGs, more cities will require environmental impact statements from private real estate developers so the carbon impact of the proposed real estate can be accounted for.

In the absence of federal leadership, cities and states across America are taking action to green America's cities. The American Institute of Architects published a resource, titled Local Leaders in Sustainability: A Study of Green Building Programs in Our Nation's Communities, that examines the current state of green-building laws in American cities as of 2007. And, building codes continue to change rapidly. California's new Green Building Code—Part 11 of Title 24—was released in July. It covers residential and commercial real estate, and is voluntary at this time, though some components are mandatory for residential construction. After the public-review process, changes will likely be made to the code before it's released in 2010, at which time, it will be fully mandatory. The California Green Building Code covers all buildings and will be reviewed annually. New York City replaced its building code with the Intl. Building Code (IBC) as of July, and has developed voluntary green-building standards. And, a task force has been established to green the city's new building code. Adoption is expected in 2009.

How will non-green or brown cities compete with green cities for federal transportation dollars, corporate relocations, and capital-investment dollars? When our nation transitioned from the industrial age to the technology age, which cities boomed and which were left behind? As we move into the age of sustainability, I suggest that those cities and states making a big deal about green today will be the economic centers of tomorrow.

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