April Issue: Investment—Green Values
- Apr 13, 2015
Back in the infancy of the green building movement, around 2000, commercial property investors were often skeptical of its newfangled ideas. Now that sustainable practices are the industry standard, investors embrace them enthusiastically, although at the same time, they continue to take a critical view. The gist: Not all green features are created equal.
“Sustainability as an end in itself doesn’t necessarily have intrinsic value, except to the extent that it lowers operating costs, increases occupancy or increases the rent that tenants will pay,” noted Russell Ingrum, a vice chairman with CBRE Capital Markets. Metrics for reckoning the financial impact of green practices are far more sophisticated than they once were, but the task remains complex.
“In our experience, there’s no single path toward sustainability or one preferred green feature,” explained Jennifer McConkey, operations and sustainability director at Principal Real Estate Investors. “Still, the ability to perform a payback analysis on energy and water efficiency improvements, for example, makes these initiatives attractive, since the value can be calculated and verified.”
Commanding a Premium
Hines global sustainability officer Gary Holtzer told CPE that responsible investment integrates environmental, social and governance risks with opportunities that impact long-term returns. “In the U.S., sustainability is a part of nearly every RFP, from institutional investors and also for major tenants seeking space,” he noted. “Sustainability is increasingly synonymous with quality and Class A status. In Europe, the Royal Institution of Chartered Surveyors now specifically lists sustainability as a factor that valuers must account for in property valuations for clients.”
Dan Winters, senior fellow for business strategy and finance at the U.S. Green Building Council, said that “investor demand for green buildings continues to increase with the emergence of multiple lines of evidence fueling this market segment.”
Last July, The Irvine Co. paid $850 million for 300 N. LaSalle, a 1.3 million-square-foot LEED Platinum trophy tower in Chicago; at the time, the price was a record for an office asset in the city. In another record-setting deal, TIAA-CREF and Norges Bank Investment Management bought 800 17th St., N.W., a 364,000-square-foot office building in Washington, D.C., for $392 million last October. The price for the LEED Platinum-certified property translated to $1,075 per square foot, believed to be the most ever for an office property in the nation’s capital. Many factors influence pricing, but the premiums commanded by these properties leave little doubt that sustainability carries significant weight with investors.
In fact, the Houston Business Journal recently found that LEED-certified buildings command sale prices 14.4 percent higher than the market average ($222 per square foot compared to $194 for non-certified properties). Other 2014 research strongly suggests that LEED-certified buildings create a signaling effect that dictates the competitive price scale for local markets.
Investor confidence is proving out: The business journal further reported that LEED-certified buildings have a 29 percent higher gross rent per square foot than their non-certified counterparts ($39.16 compared to $30.31) and enjoy lower vacancy levels.
And tenant satisfaction, a major factor in the renewal and expansion decisions that affect market value, appears to be linked to sustainable features. That was a central finding of a recent DTZ study. Drawing on data compiled by Kingsley Associates, DTZ evaluated 61 office buildings in Greater Washington, D.C. The researchers analyzed the links between tenant satisfaction and participation in three programs: LEED for Existing Buildings certification, the U.S. Environmental Protection Agency’s ENERGY STAR initiative and the Sustainability and Energy Scorecard created by the U.S. Office of
Management and Budget
ENERGY STAR-certified buildings scored 30 points higher on average than non-certifiied buildings. Participation in the OMB program was a wash for tenant satisfaction, but LEED-certified buildings averaged 10 points higher than their non-certified counterparts. Moreover, properties with multiple certifications scored significantly higher than those with only one.
- “This research confirms that sustainability impacts how tenants perceive their workplace,” commented Marla Maloney, president of asset services for DTZ in the Americas, in a statement announcing the findings. “It also bolsters previous research linking sustainability to improved property values and returns. Sustainability isn’t only a measure to improve our built and natural environment, it’s also a sound business practice with a positive impact.”
- What Investors Want
- Though evidence is mounting that sustainability adds value, that raises a question: Which green elements appeal most to investors? Public transportation, to name a big one. “There have been multiple studies that show higher occupancy and higher rental rates associated with buildings with close access to mass transit,” Ingrum asserted. “Of course, land owners know this, and so costs are higher here, as well.”
- Rich Bachia, a senior vice president for technical services with Brookfield Office Properties, agreed. “A location near transit hubs and major roads is a huge key,” he said. Public transit access in Washington, D.C., is vital, while in Denver, San Francisco and Seattle, people prize the ability to ride their bikes to work. “In (Los Angeles and New York City), indoor air quality is a top requirement, along with major roadway access.”
- At Hines, he added, sustainability features are considered according to the strategy for each investment, client and partner goals and local market dynamics, Holtzer explained. “For example, a building that is perceived as less sustainable than neighboring buildings may create an opportunity to improve the sustainability of the asset and reposition the building,” he noted.
- Recycling programs and improving indoor air quality are worthy, but showing a return is difficult, noted Principal’s McConkey. “Ultimately, sustainability measures should align with the market, the investment strategy of the asset, and the goals of the investment fund,” she said.
- Although the office sector is the longtime leader in sustainable practices, other categories are beginning to catch up. Take industrial properties. “There are some investors that stretch on pricing if the property has a LEED certification—as long as it checks all the other boxes for that investor’s criteria—especially when the investor has sustainability as one of its core values,” reported Michael Kendall, senior vice president with CBRE Capital Markets.
“Beyond the cachet that a LEED certification brings, anything that drives down operating expenses (thereby increasing NOI) will encourage investors to push pricing. This typically comes from increased energy efficiency, extended useful life of roof or mechanical systems, and decreased water consumption.”
For the long run, another investment trend to watch will be the evolution of what it means to be green.
“Sustainability is more than just enhancing environmental performance,” said Holtzer. “Resilience to hurricanes and earthquakes, the health and safety of occupants, renewable energy sources, and the hiring and management of contractors who incorporate sustainability into their own business practices are among the sustainable features that can make an investment more attractive.”