Green Buildings

Going Green: Value Enhancing for Environment and Economy

Friday, October 25, 2019

By: Robert J Meulmeester, MRICS

It is a fact: buildings – residential and commercial - are a major contributor to climate change. In the United States, those buildings account for 40% of energy consumption as per the U.S. Energy Information System. According to the “Global Status Report 2018” coordinated by the United Nations Environment Program, buildings and their construction together account for 36.00% of global energy use and 39.00% of energy-related carbon dioxide emissions in 2017 of which the breakdown is shown in the following exhibit.

The 39.00% carbon dioxide emissions can be broken down into 1) 28.00% carbon dioxide emissions due to day-to-day energy use, e.g., computer powering, lighting, heating, and cooling; and 2) 11.00% carbon dioxide emissions generated through manufacturing building materials, transporting materials to construction sites, and the actual construction process. Within urbanized areas, the contribution of carbon emissions is demonstrably higher. For instance, buildings and industry account for 79.00% in the City of Philadelphia as per the “2019 Annual Report” for the Philadelphia 2030 District by Green Building United.

As widely reported, the planet has been battling climate change predominantly caused by the greenhouse effect which is a result of greenhouse gas (“GHG”). The primary GHGs in the Earth's atmosphere are water vapor, carbon dioxide, methane, nitrous oxide and ozone. As mentioned before, buildings and their construction are a major contributor globally. According to “Drawdown” edited by Paul Hawken from Project Drawdown 2017, refrigeration including space cooling is the largest contributor to GHGs. In fact, as per the “Global Status Report 2018”, space cooling and appliances and other plug loads, e.g., computers and other electronic devices, comprise the fastest‐growing building energy uses. Space cooling has also grown in energy intensity per unit floor area.

Interestingly, diminishing the adverse environmental impact on climate change by buildings per the implementation of sustainable building standards, is a value enhancing tool when considered from an economic perspective. This is beneficial for investors and users, i.e., corporate and residential users alike.

In this article, various studies were reviewed to understand how those investments are both good for the environment as well as the economy. Oftentimes, it is assumed that anything environmentally friendly is counter economic progress which is overall unfounded shortsightedness and contrary to market data.

The Value of Green Buildings

Ample research has been conducted over the last decades to explore the benefits of “green”. Several are discussed below and are also summarized in the following exhibit that shows premiums in combination with other monetary impacts as part of green building investments for both new construction as well as green retrofits to existing buildings versus non-green – conventional - buildings.

“The Economics of Green Building” by Piet Eichholtz, Nils Kok and John M. Quigley published in August 2010 already determined certain economic advantages of sustainably built buildings per a sample of Energy Star[1] and LEED[2] certified office buildings compared to non-certified conventional office buildings between 2007 and 2009. Their research concluded to overall higher occupancies as well as rental rate and sale price premiums. Notably, in times of economic downturns as this research was conducted during the Great Recession, the certified buildings were resilient as overall returns for those buildings were not significantly affected as opposed to conventional buildings.

According to a more recent study, buildings with sustainable certification outperform similar non-green buildings in terms of rental rates, occupancy levels, tenant satisfaction scores, and the probability of lease renewals. This was the outcome per “Green Certification and Building Performance: Implications for Tangibles and Intangibles” by Avis Devine and Nils Kok published in the Journal of Portfolio Management Special Real Estate Issue September 2015. In this study, 10 years of financial performance data across a Bentall Kennedy-managed office portfolio totaling 58 million square feet in Canada and the United States was analyzed. Specifically, the findings indicated that LEED certified properties in the United States benefit from an average of 3.70% rent premium and a 4.00% higher occupancy over comparable non-certified properties. Energy Star certified buildings benefit from an average 2.70% rent premium and 9.50% higher occupancy than non-certified buildings. The improved metrics can result in 8.00% to 10.00% premium in asset value compared to non-certified buildings.

“World Green Building Trends 2018” by Dodge Data & Analytics reported for newly constructed green buildings an 8.00% decrease in 12-months of operating costs, 14.00% decrease in 5-years of operating costs, a 7-year payback time for green investments and 7.00% increase in value in 2018. It further reported for green retrofits of existing buildings a 9.00% decrease in 12-months of operating costs, 13.00% decrease in 5-years of operating costs, a 6-year payback time for green investments and 5.00% increase in value.

Also, as reported by RentCafés article “Green Apartment Construction Blossoming, Yet Renter Survey Shows $560 Rent Premium is 5 Times Higher than Most Would Pay” published on November 28, 2016, Yardi Matrix rent data shows that green-certified apartments cost on average an extra $560 per month or 33.00% more than new non-green apartments. They are also smaller, offering 73 fewer square feet of space than regular new apartments. More precisely, new non-green apartment units (built in 2009 or later) average 955 square feet in size and cost $1,700 per month across the United States. Green units built during the same period average 882 square feet in size and $2,260 per month. The rent differences maintain across all asset classes (high-end, mid-range or affordable-priced apartments).

It should be noted that the above referenced research findings are overall generic, and indicative at best. After all, real estate is heterogenous; every building is unique and so are its green features including its associated cost and eventual impact on the various metrics as summarized above. Nevertheless, green buildings appear to indicate an overall superior performance which benefits the bottom line for both investors in real estate and (corporate and residential) users. Although rental rates for specifically the users may be higher, the users should be able to benefit from lower utility cost and superior indoor environmental quality enhancing productivity and revenues as also further explained below.

The Extended Value of Green Buildings

The earlier discussed value enhancing capacity of green buildings through energy‐efficiency, resiliency and sustainability is significant resulting in a beneficial benefit for real estate investors and users. Moreover, there is an extended economic value through job creation, increased productivity, reductions in local air pollution and poverty alleviation. As summarized below, per the “Global Status Report 2018” based on “Multiple Benefits of Energy Efficiency” by the International Energy Agency, green buildings enable:

Improved energy access: Energy efficiency is vital for improving energy access by increasing the available bandwidth in energy networks, improving reliability and reducing costs for access to secure, affordable and sustainable energy.
Better health and well‐being: Energy efficiency measures can support good physical and mental health, primarily by creating healthy indoor living environments with improved air temperatures, humidity levels, noise levels and air quality.
Poverty alleviation: Energy efficiency retrofitting of low‐income housing offers a more enduring solution to energy poverty than continuous support through energy subsidies.
Increased comfort: Improved insulation, heating, cooling and ventilation systems are beneficial to improving thermal comfort and air quality, consistently improve mental health, and significantly reduce respiratory diseases, cardiovascular diseases and allergies.
Higher employment: Energy efficiency employment in buildings and construction helps increase economic productivity, creating direct and indirect jobs.
Greater productivity: A healthier and more comfortable work environment improves productivity and decreases employee absenteeism.

Impact

Considering the obvious impact of the built environment to climate change and the observed benefits from green buildings, it appears that the steadily expanding support for green buildings is unstoppable just like other forms of innovation. Obviously, there was a time that plumbing was a novelty. One either boards the innovation train or gets runover in the long run. If not green, you lose out in competitiveness.

Hopefully, innovative measures to implement green features to the existing building stock as well as construction of entirely new green buildings will come fast enough. We do need that to eventually offset the adverse environmental impact from conventional buildings to stop climate change. This is imperative for our well-being and enjoyment of planet Earth in our later years and that of future generations. And yes, while doing so, let’s make a few extra dollars!

Footnotes:

[1] Energy Star is a program run by the U.S. Environmental Protection Agency and U.S. Department of Energy that promotes energy efficiency. This program which provides certification to buildings and consumer products which meet certain standards of energy efficiency.

[2] LEED stands for Leadership in Energy and Environmental Design which is an ecology-oriented building certification program per a rating system to encourage the adoption of sustainability run under the auspices of the U.S. Green Building Council (“USGBC”). LEED concentrates its efforts on improving performance across five key areas of environmental and human health: energy efficiency, indoor environmental quality, materials selection, sustainable site development and water savings.

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