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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   April 2015

Green Practices Gain Ground

Commercial lenders and originators can’t afford to ignore sustainable building

Sustainable building practices aren’t merely a fad, as forward-thinking state and local policies continue to demand greener initiatives. In today’s culture, Americans are bombarded with slogans and advertising campaigns that focus on greener living. Terms and catchphrases like “carbon footprint,” “net-zero energy space” and “save the planet” are now so commonplace that they verge on losing their advertising effectiveness. Still, the trend is clear: The push for greener practices, no matter the market, is here to stay.

The good news is that green initiatives are no longer as cost prohibitive as they were a decade ago. The energy-efficient practices that were once viewed as expensive and therefore novel ideas can now be of economic benefit for all builders, and commercial buildings appear to be the trendsetters in this regard.

According to the Institute for Building Efficiency,  energy-efficient commercial buildings — or those that possess green-building attributes — generate numerous economic advantages over buildings that lack these qualities. These advantages include increased resale value and rental rates, higher net operating income and occupancy rates, and lower operating expenses. The question is not whether commercial projects should include green initiatives; it’s to what degree they should be incorporated.

Green’s growth

Of course, green practices weren’t always as popular as they are today. Sustainable building practices have come a long way since the back-to-the-land movement took hold in the late 1970s, but the first peak of sustainable building came about in the ’70s when Jimmy Carter hung first-generation solar panels on the White House during the midst of the OPEC oil crisis.

Years later, in the midst of low oil prices, many green practices were abandoned, and Ronald Reagan had the White House solar panels removed. Back then, no one would have guessed that sustainable building practices would one day become the gold standard in commercial real estate.

President Obama recently re-installed the White House’s solar panels, a sign that green initiatives were once again gaining ground. Forbes environmental columnist William Pentland reported that, in 2010, green building accounted for a third of all commercial building projects, generating some $54 billion. Pentland also noted that green building has continued its upward trend ever since.

Originators should check with municipal officials
to see what sustainability requirements
and incentives might exist.

This growth in green practices offers real rewards and, according to the Global Real Estate Sustainability Benchmark, the commercial real estate sector reduced its energy consumption in 2013 by 0.8 percent, carbon emissions by 0.3 percent and water consumption by 2.3 percent. Riding on this success, some experts predict that green building will eventually reach between $120 billion and $145 billion in new construction — not including retrofitting projects — and is now on the cusp of moving beyond gold-standard status to become something of a necessity.

Expanding requirements

The push for greener initiatives has not escaped governmental agencies, either. Government regulations, as well as some of the larger commercial real estate investment organizations, are now demanding that projected energy usage of commercial real estate projects be disclosed.

According to a report by PricewaterhouseCoopers, six states — Maine, New York, Washington, South  Dakota, Kansas and California — now have laws in place that require certain energy-usage disclosures of commercial and multifamily real estate projects. As of this past February, Vermont, Maryland and Oregon had similar legislation pending.

On Capitol Hill, the jury is still out on what to do to mitigate the potential effects of climate change, but the growing consensus encourages green-building practices on both the state and local levels. A national or international cap-and-trade system may be beyond Congress’ legislative reach, but urban mayors around the world aren’t waiting. Some of the most important metropolitan communities are mandating that new building projects contribute to reductions in greenhouse gases.

For example, in 2012, New York became one of the first cities to require the disclosure of energy use for large buildings. Many cities have since followed suit, including Boston, Chicago, Minneapolis and Philadelphia. Such public disclosure of energy use pushes  developers to do everything possible to keep their projects from ending up on the bottom of the list.

In the political arena, sustainability is not valued equally across party lines, but the Environmental Protection Agency’s Energy Star efficiency program is just two years shy of its 25th anniversary, having survived several changings of the guard in the White House and on Capitol Hill. Meanwhile, the U.S. Green Building Council’s popular LEED certification system has survived for 15 years. With each passing year, these two popular programs become more entrenched in the fabric of the commercial real estate market.

For commercial players, the time for a wait-and-see approach has passed. The market has weathered several recent energy-related storms; we’ve watched oil prices reach over $100 a barrel in the aftermath of 9/11, and then crash again in the economic meltdown of 2008. Commercial real estate buyers need stability in overhead costs, and their originators should help them look past today’s low oil prices and understand the long-term value of energy-efficient space.

What now?

Key Points

Green practices in
the commercial arena

  • Green initiatives aren't as cost-prohibitive as even a decade ago
  • In 2010, green building generated $54 billion
  • Green building may reach $145 billion in new construction
  • A project's energy usage must be disclosed in six states at least
  • Numerous green-building incentives exist
  • Know that not all green-building options are created equal
  • Sustainable building translates into sustainable business

The term “green building” is admittedly broad and can conjure up all sorts of images, from mud yurts to geothermal- heated skyscrapers. It’s important to remember, however, that sustainable real estate development doesn’t need to be an investment in a costly or unproven form of technology, nor does it require an all-or-nothing proposition. There is much to be gained by even a modest investment in sustainability, and there are resources to help commercial real estate investors improve on new building designs or retrofit plans.

Taking a cue from the slogan “Think global, act local,” originators should check with municipal officials to see what sustainability requirements and incentives might exist for new developments in a given locale; programs vary wildly depending on where a client plans to build. For example, North Dakota municipalities, which have a desperate need to build infrastructure to cope with the state’s oil boom, most likely will have few such requirements, while many West Coast communities have set the bar higher.

Many municipalities also have different definitions of the term “sustainable.” Commercial or multifamily building projects might be considered sustainable in some places if they happen to be near a public transportation route, while others might only achieve that designation by creating all the energy they need through solar power.

After exploring all the local options, check state and federal levels for available incentives, including those that can be found in the IRS tax code. Finally, contact the U.S. Green Building Council and reach out to real estate investment trusts that focus on sustainable building to discover the trends and requirements to get a “green certification.”

If you are thinking about financing or obtaining financing for a sustainable building project, remember that not all green-building options are created equal. Passive solar design most likely will require much less capital investment than a geothermal heating system. It’s important, however, to calculate the benefits of each investment in the long term and to accurately quantify how much each sustainable measure might benefit the deal’s bottom line.

•  •  •

Although environmentally sensitive building practices are becoming increasingly popular, the term “environmentalism” is becoming ever less so. A recent poll from the Pew Research Center found that those surveyed from the millennial generation were much less likely to identify as environmentalists than those polled from the previous three generations. Despite this, millennials may be much more likely to embrace sustainable living practices, such as giving up car ownership.

The takeaway here is that green- building practices haven’t gone mainstream simply because people have adopted environmentalist philosophies. In reality, sustainable building practices translate into sustainable business practices, and sustainable business practices translate into longevity. If there was ever a time for commercial builders, investors and originators to embrace their inner green spirit, now is the time.


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