Transcript Does Green Still Pay Off? 2010 CoStar Update

Wednesday, April 13th, 2011
Sustainable Real Estate Economic
Overview and Update
By Norm Miller, PhD, Research Professor at the
University of San Diego, NAIOP Distinguished Fellow
and Editor of the Journal of Sustainable Real Estate, see
www.josre.org
• My contact: [email protected]
• PS. Most of my talks are economic and
strategic outlooks but I have been type cast
within NAIOP. 
Preface on Regulation Vs. the Market
• 1. The market can efficient absorb the burden
of regulation if it is clear and known a priori.
– For example: design regulations on colors and
materials, heights and density, etc.
– The rationale may be defendable in some cases.
• Endangered species, clean water, clean air…
• 2. Disclosure and market transparency help
the market work better while penalties and
incentives and fees distort the market.
– i.e. affordable housing and bonus density
Sustainability is enhanced by enlightened
planning (something that rarely exists)
• Mixed use and more density can do more
good than LEED silver or gold requirements
and since when do we rely on a 3rd party nonprofit for regulatory minimums? (But planners
for years encouraged separation of uses or
more recently used green nooses to force up
land costs and density)
• Rigid transport planning can work in dense
markets but not most markets, i.e. Atlanta.
(We’d be better off encouraging private market alternatives
and using gas taxes to discourage use of oil consumption.)
Key Economics of Green Topics and
Conclusions
• Green does not cost significantly more except for the novice.
• We are still early in the main streaming of more efficient
buildings.
• Rent premiums vary by market and tenant mix presence.
• Modest absorption advantages seem clear.
• Vacancy is a function of vintage.
• Operating expenses are not always less but energy costs
and water costs are less.
• Green leases: enforcement, risks and sharing the benefits
is important and there are some great lessons from NAIOP cases here.
• Green Feature investments often have high hurdle rates.
• Residual values: Cap rates are lower but appraisers are naïve.
LEED while dominant is still evolving,
weights, hurdles and components will change:
• Energy Conservation (windows, lights, solar power
technology evolving, air drying disks prior to cooling)
• Rain Water recycling and indigenous plant landscaping
(importance varies by local market)
• Toilet designs are evolving as are showers and sinks.
• Non-toxic materials used in construction.
• Indoor air quality, waste management.
• Personalized under floor air controls.
• Modular components that can be easily removed and
possibly re-used.
• Electric plugs that no one uses….YET!
Source: CoStar Group
Top Ten Greenest States/Dist Based on
LEED LQ
1
2
3
4
5
6
7
8
9
10
Source: CoStar Group
DC
OR
VT
WA
CO
MA
ME
NH
IL
CA
10.74401
3.046486
2.677839
2.38976
2.348295
2.085985
2.031732
1.36629
1.233565
1.226033
New Opportunities and Demand
Drivers
Energy Star® Requirement for Lease Acquisition
 Energy Star® Requirement addresses Section 435 of the
Energy Independence and Security Act (EISA).
 Effective December 19, 2010, no Federal agency shall enter
into a contract to lease space in a building that has not earned
the Energy Star® label in the most recent year except for the
following:
o Size of lease is 10,000 rentable square feet or less
o No space is available in the delineated area that meets the
functional requirements of an agency, including location
needs
o Agency will remain in a building they currently occupy
o Lease will be in a building of historical, architectural, or
cultural significance verified by listing or eligibility for listing
on the National Register of Historic Places
 Cost Effective Energy Efficiency Upgrades are required in
NON-Energy Star® Buildings
13 7/21/2015
13
Energy Star® Rating
•Buildings can earn an Energy Star® label - similar to appliances
•The Energy Star® rating relates to the level of a building’s energy performance
(relative to other similar buildings; there are 23 categories for benchmarking
purposes, including offices, warehouses, courthouses and data centers)
•Labeling is based on EPA’s established National Energy Performance Rating
System which analyzes a building’s past 12 months of utility consumption
history and existing systems
•Points are earned on a scale of 1 – 100
•Buildings achieving a score of 75 or higher are eligible for Energy Star® label
•Energy Star® labels expire 12 months after being granted, but can be renewed
•The CoStar real estate database identifies Energy Star® and LEED® buildings - including their space availability and pricing. EPA’s www.energystar.gov site,
updated regularly, lists all Energy Star® buildings by address or building
category.
7/21/2015
7/21/2015
14
14
What should drive LEED
development?
•
•
•
•
•
Absolute rent levels or
Rent differentials?
Mandates by local or state government?
The GSA?
Fear of Obsolescence?
A classic combo of all of the
above: Potomac Yard 1&2 Leed
Gold Building
654,000 GLA at 60% leased Nov of
2005 and 90% leased Sept of 2010
Source: CoStar Group
99% occupied
Buyer: USAA
Source: CoStar Group
The Ill-Conceived Green Notion
• Some developers in the past five years have taken
a marginal B- location, perhaps just outside the
prime submarkets and skimped dollars on
location and then spent a little extra to go for a
superior level LEED building, even GOLD.
• This does not always work.
• An inferior location is not offset by going green,
except in rare cases, where substantial excess
demand exists and/or there is a mandate by the
government to lease green.
Source: CoStar Group
Paybacks and Risks of Green
Feature Investment
• What do you investors want in terms of
payback in years?
Source: CoStar Group
Why such a high rate of return
required?
Source: CoStar Group
The risk of jumping in too fast on
green ‘features” or products
LED 1/1/09
CFL
Incandescent
50,000 hours
10,000 hours
1,200 hours
13
23
100
$89.99
$5.95
$1.95
600
1200
5000
Cost of electricity (@
0.20per KWh)
$120
$240
$1,000
Bulbs needed for 50k
hours of use
1
5
42
Equivalent 50k hours
bulb expense
$49.99
$29.75
$81.90
$12.00
$123.00
$281.75
$1,204.90
Light bulb projected
lifespan
Watts per bulb (equiv.
100 watts)
Cost per bulb
KWh of electricity used
over
Source: CoStar Group
50,000 hours
Labor to replace at $3
per bulb
Total cost for 50k hours
$209.99
The risk of jumping in too fast on
green ‘features” or products
LED 6/1/10
CFL
Incandescent
50,000 hours
10,000 hours
1,200 hours
13
23
100
$49.99
$5.95
$1.95
600
1200
5000
Cost of electricity (@
0.20per KWh)
$120
$240
$1,000
Bulbs needed for 50k
hours of use
1
5
42
Equivalent 50k hours
bulb expense
$49.99
$29.75
$81.90
$12.00
$123.00
$281.75
$1,204.90
Light bulb projected
lifespan
Watts per bulb (equiv.
100 watts)
Cost per bulb
KWh of electricity used
over
Source: CoStar Group
50,000 hours
Labor to replace at $3
per bulb
Total cost for 50k hours
$169.99
The risk of jumping in too fast on
green ‘features” or products
LED 9/1/2010
CFL
Incandescent
50,000 hours
10,000 hours
1,200 hours
13
23
100
$29.99
$5.95
$1.95
600
1200
5000
Cost of electricity (@
0.20per KWh)
$120
$240
$1,000
Bulbs needed for 50k
hours of use
1
5
42
Equivalent 50k hours
bulb expense
$49.99
$29.75
$81.90
$12.00
$123.00
$281.75
$1,204.90
Light bulb projected
lifespan
Watts per bulb (equiv.
100 watts)
Cost per bulb
KWh of electricity used
over
Source: CoStar Group
50,000 hours
Labor to replace at $3
per bulb
Total cost for 50k hours
$129.99
It’s not irrational to wait on buying the
• I phone 5
• An LED Bulb when prices are dropping fast
• Solar cells, etc.
• Until such time as the items start to become
commoditized or
• When tax credits seem to be temporary and
the economics are compelling
Source: CoStar Group
Are occupants more productive?
• Human costs dominate business costs and if buildings
with better light and air can be more productive then
we should be able to justify higher rents.
• A recent American Journal of Public Health July 15,
2010 study by Michigan State (Singh, Syal, Grady,
Korkmaz) suggests health benefits do correlate with
LEED feature affecting ventilation, temperature,
lighting, acoustics, and environment. They found
reduced absenteeism and other benefits.
• Another study last year by Miller and Pogue in
JOSRE.org also found some positive results last year
and concluded that management matters a great deal
on this question.
Source: CoStar Group
Thank You
• Norm Miller at [email protected]