The Business Case for Going Green

March 26, 2008
While many are still waiting on the business case for green, they might not want to wait too long.

Occupiers were the early adopters of sustainable real estate; today, they still carry the flag. With rising energy costs, pressure on aging public infrastructure, climate change, pending regulation, increased focus on corporate social and environmental responsibility, and competition among organizations to attract and retain talent, still nothing seems to be a greater catalyst to making the decision to go green than having a tenant (the larger, the better) demanding a building with defined green attributes — or, better yet, USGBC LEED® certification.

While many are still waiting on the business case for green, they might not want to wait too long. The Green Building Council of Australia recently released its Valuing Green: How Green Buildings Affect Property Values and Getting the Valuation Method Right report. Australia’s green building program is called Green Star and now comprises 30 percent of its new building stock. Below are the valuation assumptions for Green Star buildings as found in Valuing Green: How Green Buildings Affect Property Values and Getting the Valuation Method Right:

  • Possibility of lease renewals increases from 50 percent to 75 percent.
  • Time between re-letting space decreases from 12 to 6 months.
  • Terminal yield drops from 6.25 percent to 5.75 percent.

And, while a rent premium cannot be guaranteed for a Green Star building, a non-Green Star building’s rental growth assumptions drop from 3.5 percent to 2 percent.

Since many large, multi-national firms have requirements to reduce their carbon footprints and they lease space in third-party-owned buildings, it only makes sense that they’re making plans to fulfill related business obligations. I’m seeing a number of environmental impact qualification surveys accompany requests for proposals in the procurement of leased space. Accordingly, the California Sustainability Alliance is developing a toolkit and process to assist tenants with the procurement of green leased space, including measuring different green criteria through use of a scorecard, as well as suggesting specific lease language to use in negotiations. Scott Muldavin of the Green Building Finance Consortium (GBFC) attended the National Association of Industrial Office Parks (NAIOP) Sustainability conference last week and learned about similar coordination among corporate users to establish green lease requirements. (By the way … the GBFC has, in my opinion, the best resource page in the industry on green buildings.

Then, there is the recently released IPD Environment Code — an environmental code developed by IPD Occupiers, a UK-based benchmarking and research services company focused on corporate occupiers. This code sets a new global standard for measuring the environmental performance of corporate buildings anywhere in the world, and provides a practice framework for collecting, measuring, analyzing, and reporting on the environmental performance of real estate portfolios. It has been thoughtfully designed to support an organization’s corporate reporting and disclosure requirements, and to align with the Global Reporting Initiative’s “G3 Sustainability Reporting Framework.” It was even developed using existing national and international approaches to building management and sustainability such as ISO 14001, BREEAM in the United Kingdom, LEED in the United States, CASBEE in Japan, and others.

The IPD Environment Code is relevant to all building types: owner-occupied and leased space. For leased premises, it includes collecting environmental data for the common areas, as well as tenant premises. Data collection is broken into two primary areas: core measures and qualitative measures. Core measures cover energy, water, and waste. The qualitative measures are a series of rated questions that form an Environmental Health-Check or Scorecard. In addition to expanding on energy, water, and waste, the qualitative measures cover transport and travel, equipment and appliances, health and well being, and adaptation to climate change.

The code provides a data-collection framework and suggests key environmental performance indicators: strategic indicators, tactical indicators, and qualitative indicators. Strategic indicators include environmental budget indicators and annual change indicators. The report advises property occupiers to monitor their environmental impacts in the same way as their financial budgets and, therefore, refer to environmental “budget” indicators that represent the total carbon, energy, water, and waste produced by the organization through its buildings. Annual change indicators reveal changes/trends in the annual aggregate impact of energy, water, and waste. For example, waste could be increasing at the same time that the percentage of waste recycled is also increasing. Tactical indicators take the energy, water, and waste measures, and break them down into use per square foot, per occupant, and per operating hour to drive operational performance and establish comparisons to national and international standards. The qualitative indicators measure the percentage of buildings or floor space that, for instance, have a travel plan, use HCFCs, are located within 1 mile of a public transport station, have low-flow fixtures, have lighting controls, have undergone a flood risk assessment, etc.

An entire chapter in this code is dedicated to the subject of bringing together building owners and tenants “Towards Environmental Totality.” The IPD Environment Code is geared for the occupiers who are “driving the bus” at this point, though data collection and assessment must involve facility managers and property owners. My advice: Build it green and they will come.

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