There have been considerable efforts to improve the environmental standards of apartments, office buildings and shopping centers, but hotels have their own special challenges.
The Urban Land Institute’s Center for Sustainability and Economic Performance recently looked into the growing emphasis on green-building and sustainability practices in the hospitality sector. Ultimately, green initiatives can increase the value and cash flow of an asset, which in turn can affect its financing options. One of the authors of the ULI report, Billy Grayson, spoke with Scotsman Guide about this emerging trend.
In terms of sustainability, what is the track record for hotels?
It’s uneven. I would say hotels have a very strong business case for caring about sustainability. Not only do they pay all their bills directly, but they can’t pass [the costs] through to their tenants or their residents. So, they have to cover all their operating expenses for energy, water and waste. And the customer base is becoming more aware of sustainability as a concept. More of them are looking for their guest experience to be with a hotel that cares about the environment and society, and more of them are voting with their feet in terms of wanting to stay at hotels where they feel like the hotel cares about sustainability.
Do hotels face any special environmental challenges?
You have little control over how the guest uses your hotel and sometimes you have less ability to influence that behavior. And structurally with hotels, you often have a situation where somebody is building the hotel and looking to sell it in two to three years. Then the person who eventually owns that hotel may not be the same person as the brand that is managing the hotel. So, with that split of responsibility and control, you can have some challenges in implementing a holistic sustainability strategy.
Is this primarily an operational challenge or because of how hotels are constructed and equipped?
How you build the hotel is really important from a sustainability perspective. You know, what materials you use, how operationally efficient the base building is, and what sort of features and elements you put in. One of the big trends we’re seeing in sustainability is the repurposing of historic buildings and adaptive reuse of spaces, which may not seem, at first blush, a sustainability strategy. But, you know, reusing spaces is a great way to reduce your environmental impact.
How does improving sustainability increase the property value?
If you can reduce your operating expenses, you’re increasing your profit or, in real estate, net operating income. If my energy bill for a hotel is two bucks a square foot and, through an energy-efficiency initiative, I can get that down to $1.80 per square foot, I just created 20 cents per square foot of profit. And if I can prove that I can sustain that operating efficiency over time, you apply a cap rate and that increases the overall value of my asset. When I sell it, I’m selling the value of the building plus those future cash flows.
It doesn’t work as perfectly in hotels as it does in office buildings or in retail, just because guest behavior fluctuates. But it’s a general real estate strategy, the ability to track and capture cash flows over time and use that as part of the valuation of a building.
Going forward, will sustainability become a standard consideration for hotels?
Things like LEED (Leadership in Energy and Environmental Design) certification definitely have their place in hospitality, just like they do for shopping malls and other asset classes. It’s probably less of a driver than it would be in office buildings, where corporate tenants are specifying that you have to have LEED certification if you want them to be a tenant in your building. The ownership side of hotels are investing in renewable energy. They’re exploring creative ways to reduce their environmental impact. They’re doing things with sustainable water use and sustainable landscaping that are really innovative and interesting.
