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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   April 2017

Is Green Your Color?

Environmentally sustainable real estate is on the rise

Is Green Your Color?

Environmentally sustainable real estate is on the rise around the world, with consumer demand a primary driver in the U.S., even though perceived initial cost still constitutes a significant obstacle, according to a report on green-building trends. New data, however, shows the financing costs for some green office-property developments are not significantly greater than for non-green construction projects. Commercial brokers across the country that have clients looking to go green should learn about the new financial realities of green financing because it’s clear the trend is not limited to eco-hip coastal states.

The 2016 green-building trends report by construction industry data provider Dodge Data & Analytics, found that green building globally will more than double in the next three years, with many respondents forecasting that more than 60 percent of their projects will be green by 2018. In addition, the leading sector for green-building growth around the world is commercial construction, the report found.

More interesting to brokers who must find financing for these green construction projects is that the initial costs are not out of line with the costs of non-green construction. Consider these brief case studies that demonstrate the costs and benefits of environmentally friendly construction on office buildings in Illinois, Idaho and New York that went green.

Illinois case study

Chicago’s trendy River North neighborhood is home to an eight-story concrete loft office building that houses the Chicago offices of cloud-communications company Fuze and digital-media company RhythmOne. It was classified as a Class B building by the Environmental Protection Agency’s Energy Star certification system.

The retrofit of this building transformed a 100-year-old steam boiler from an environmental challenge into an environmental asset with the installation of new igniters, tubes, heating elements and insulation. Other changes included improving the cooling tower’s efficiency and placing $80 modulating control valves on the tenants’ steam radiators as a cheap way to regulate room temperature and curb energy use.

The Environmental Defense Fund (EDF) described this project, which was financed by a $35 million loan in 2015, as one of the buildings driving energy efficiency in Chicago. It was part of the Retrofit Chicago project by the New York-based EDF and the city of Chicago to reduce commercial energy use in participating buildings by 20 percent over five years.

Another Chicago building that is part of the same initiative is a 50-story office tower that once was home to United Airlines. Retrofitting for this all-electric, Class A building was financed by a $150 million loan in 2013. It has been described by the EDF as one of Chicago’s most energy-efficient buildings.

The retrofit of this building transformed a 100-year-old steam boiler from an environmental challenge into an environmental asset.

By instituting practices such as collecting and analyzing energy-use data and adjusting the building automation system to pre-cool the building in the summer and pre-heat it in the winter during off-peak hours, building management decreased electrical expenses 47 percent between 2009 and 2012, and the management team has committed to an additional energy reduction of 26.5 percent by 2018, according to the EDF.

Idaho case study

The 11-story Banner Bank building in Boise, Idaho, was built on a former brownfield site in 2006 and became the state’s first multitenant office building to receive a Leadership in Energy and Environmental Design (LEED) platinum certification, the highest-level green-building certificate offered by the U.S. Green Building Council.

The 180,000-square-foot building uses 50 percent less energy and 65 percent less potable water than a conventionally constructed building of similar size, yet was built at the same cost and in the same amount of time as a comparable property, says Nebraska-based building architect HDR.

The Banner Bank building also features geothermal, hot-water heating, evaporative pre-coolers and under-floor air vents. Its water-filtration system “captures stormwater from downtown Boise streets and parking lots” and uses the rainwater and “gray” water from the building to flush toilets and urinals, according to the U.S. Green Building Council.

New York case study

The Bank of America Tower development team “sought to demonstrate that ecological principles and economic principles can be made compatible,” according to the Massachusetts-based environmental nonprofit Green Education Foundation. To achieve this balance, the 55-story Manhattan skyscraper included green features that cost extra only if those features would pay for themselves through reduced operating costs within five years.

Built in 2009, the 2.35 million-square-foot skyscraper was financed by a $1.3 billion loan issued in 2010. The sloping exterior walls and floor-to-ceiling windows admit extra sunlight into the building, while a filtration system cleans the air before it enters the building and again before it goes back out. The sunlight and clean air actually offer a financial benefit as well as an environmental one, because studies have shown that employee health and productivity can be affected by indoor environmental quality.

Real estate professionals typically expect green construction costs to be higher than they actually are.

The slope of the building also makes it easier to capture rainwater, which is used for cooling and flushing toilets, and allows more light and air into the surrounding neighborhood, the foundation says. The rainwater-collection system and use of waterless urinals are estimated to save 100 million gallons of water per year.

The building also conserves energy by using an onsite power plant fueled by natural gas to provide 70 percent of its annual electrical power needs and all of the building’s hot water. Waste heat from the plant also powers chilling machines that cool the building. In addition, 83 percent of construction waste was recycled.

Costs and benefits

The 2016 Dodge Data & Analytics study mentioned earlier surveyed more than 1,000 respondents from 69 countries, who reported both environmental benefits — such as reduction in energy and water consumption — as well as financial benefits.

The financial element could become increasingly significant because federal and state government incentives for environmentally friendly measures are potentially at risk under the new presidential administration. Shortly after taking office, President Donald Trump placed a freeze on Environmental Protection Agency grants and contracts and ordered expedited environmental approvals to fast-track infrastructure efforts.

U.S. respondents to the survey say they expect a 21 percent reduction in operating costs for new green buildings over five years (somewhat less for retrofit or renovated buildings) and an 11 percent cost reduction over one year. Building owners globally report that green buildings provide a median 7 percent increase in asset value over traditional buildings, with about a quarter of respondents saying they expect the value to increase more than 10 percent.

A 2015 U.S. Department of Energy review of energy-efficiency studies that sampled thousands of buildings nationwide found higher rental and occupancy rates for LEED and Energy Star certified buildings, as well as higher sales prices and lower utility costs. Rental rates were found to be 15 percent to 17 percent higher for LEED-certified buildings and 7 percent to 9 percent higher for Energy Star-certified buildings, compared to similar properties that did not have a green-certification rating. In addition, sales prices rose 10 percent to 31 percent for LEED-certified properties and 6 percent to 10 percent for Energy Star-certified buildings, according to the review.

As for the initial costs, multiple surveys have found that real estate professionals typically expect green construction costs to be higher than they actually are. A 2010 study in the Journal of Sustainable Real Estate, for instance, analyzed a survey of 120 lenders, equity investors and developers, and found that a fifth of respondents thought the cost of constructing an environmentally sustainable building would be more than 10 percent higher than a comparable non-green building, and more than half thought it would be more than 5 percent more expensive.

Several analyses of actual construction costs of environmentally sustainable buildings, however, have found they can cost roughly the same to build as standard buildings or only slightly more (less than 2 percent of total costs). Other studies go a little higher, estimating up to 6 percent additional construction costs. The greening of the Bank of America building in the New York case study reportedly added only 5 percent to the cost, and that was for the highest LEED-certification level.

•  •  •

All told, multiple studies indicate there are a lot of potential bonuses to going green: higher rental and occupancy rates, higher sales prices, lower operating costs and healthier workers. Once commercial mortgage brokers realize that initial construction costs for sustainable buildings are often lower than expected, demand for environmentally friendly real estate is growing and ongoing cost savings are created through energy efficiency, they may just find that green is their color.


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