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Study Confirms Higher Rents, Greater Occupancy Rates, Lower Operating Expenses for ENERGY STAR Buildings

According to "Does Green Pay Off?," ENERGY STAR rated commercial buildings have sale prices 30% per sq. ft. higher than traditional buildings.

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building with cement and carbon footprint reduction According to "Does Green Pay Off?," ENERGY STAR rated commercial buildings have sale prices 30% per sq. ft. higher than traditional buildings.

Compared to traditional buildings, owners and managers of ENERGY STAR rated buildings can expect

  • $2 per sq. ft. greater rents,
  • 2% higher occupancy rates and
  • $0.54 per sq. ft. lower energy-related operating costs

Operating expenses from energy costs varied with Energy Star-rated buildings running $1.27 per square foot per year for energy in 2006 and non-Energy Star-rated buildings running $1.81 per square foot.

Survey results are based on findings in a study released last week. Norm Miller, a professor at the University of San Diego, and Jay Spivey and Andy Florance, the research director and CEO respectively with CoStar. They compared 223 ENERGY STAR rated Class A office buildings of at least 200,000 sq. ft. with 2,077 non-ENERGY STAR buildings of the same class and size.

Buildings with the ENERGY STAR label are among the 25% most efficient of similar buildings nationwide.

Combine the higher occupancy rates, greater rents and lower operating costs, and building owners have a marketable benefit at the time of sale: sale prices 30% per sq. ft. higher than traditional buildings, according to the study.

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Contrary to popular opinion, the green movement is not purely public sector-driven. Tenants like the EPA and others within the Federal government are important drivers but so is the typical public corporation today.

The more typical tenants asking for energy star ratings, LEED certification or high performance building features are private market-based firms. Private developers are leading the way in accommodating this burgeoning demand.

Some investors like CALPERS have recently announced efforts to increase their emphasis on green over the next several years.

Some cities, like Boston or San Francisco, have mandated LEED certification, while others, like Toronto, have provided incentives for energy conservation methods.

A study by Greg Kats of Capital E Analytics in early 2007 provided the following summary of benefits from going green:

  • Productivity benefits are estimated to be as much as 10 times the energy savings from green efforts.
  • These benefits come in the form of lower absenteeism, fewer headaches at work, greater retail sales and easier re-configuration of space resulting in less downtime and lower costs.
  • Cost estimates based on a sample of 33 office and school buildings suggested only .6% greater costs for LEED certification, 1.9% for silver, 2.2% for gold, and 6.8% for platinum certification.
Talk to several developers successful at securing LEED certification and they will tell you that with a little planning it is neither that hard nor costly to hit the minimum point total for certification, which is 26 out of 60 possible points. Many points are easy such as designating minimal parking for low emission vehicles and facilitating bike racks. Others, such as teaching construction workers to toss waste into three different bins, are harder but feasible.

Leading Owners for Green Office Buildings as of Second Quarter 2007 (by # of buildings)

1 Hines 22
2 TIAA-CREF 17
3 Vornado/Charles E. Smith Comm. Rea 12
4 Silverstein Properties Inc. 2
5 Beacon Capital Partners, Inc. 5
6 The Blackstone Group 8
7 Manulife Financial 7
8 The Durst Organization 4
9 GE Capital 15
10 Maguire Properties 4

Leading Developers of Green Office Buildings (by # of buildings)

1 Hines 39
2 Vornado/ Charles E. Smith Commercial Real 14
3 The Durst Organization 3
4 Shorenstein Company, LLC 3
5 Opus Northwest Corporation LLC 4
6 John Hancock Real Estate Finance Group 2
7 The Durst Organization/Bank of America 1
8 Trammell Crow Company 7
9 Texas Eastern Corporation 2
10 Maguire Properties 3

Leading types of tenants by industry (by # of tenants)

1 Financial Institutions 968
2 Law Firms 822
3 Retailers/Wholesalers 694
4 Manufacturing 240
5 Personal Services 588
6 Insurance 305
7 Agri/Mining/Utilities 205
8 Business Services 560
9 Computers/Data Processing 245
10 Government 127
11 Accountants 196
12 Engineers/Architects 148
13 Real Estate 367
14 Communications 98
15 Medical 178
16 Transportation 70

The real barriers to go green are mostly a lack of planning and education. Included in this are those who only work to improve business practices when competition forces them to do so by market forces.

Culture plays a role as well and we observe far more environmental leadership in Europe and even Asia. Inexperience plays a role and just learning where to find the resources to “go green” are a significant hurdle for many newly curious developers.

Yet, anyone who has been through the process of going green becomes a convert and no longer sees it as difficult.

There are real economic barriers to progress. When property managers are paid extra administrative fees on passed through common area utility costs, they have fewer incentives to want to encourage energy savings. Also problematic are typical expense-pass-through net leases that do not balance out the increased rent necessary to support higher initial building and design costs with the gains that will supposedly accrue but cannot be guaranteed.

What is really needed is market transparency and better information along with measurement standards that can be agreed upon domestically if not globally. LEED is a good start, but we need more specific ratings on energy consumption similar to what is used on refrigerators, washing machines and even for cars with respect to fuel consumption. After such ratings become known, they affect behaviors and values with more certainty.

Some day we may see large property owners with green selfsustaining solar-powered mixed use developments selling off carbon credits to others.

Norm Miller is a professor at the Burnham-Moores Center for Real Estate, nmiller@sandiego.edu.

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Edited by Carolyn Allen
| real estate | commercial buldings | green building |

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