Show Me the Money: Demonstrating Green Building ROI to Developers

Approximately 40% of the energy we use in the U.S.  goes toward buildings. The importance of energy-efficient buildings is gaining more and more attention, however we have to recognize that builders and developers will not risk significant capital on green upgrades without at least feeling confident that it is not going down the drain. As a former real estate developer, I have seen firsthand that the commercial real estate industry will continue to be slow to adopt green building standards until developers can see how it will increase their rates of return. There are two forces that I believe could help speed up this process: First, Consider “Pull-Effect”: Some retailers are beginning to look at the bigger picture (or respond to customer pressure) by adopting green building practices. Starbucks, for example,  says that it is looking for ways of “Designing, building and operating our stores in ways that reduce our impact on the planet. We’re incorporating everything from responsible building materials and furnishings to energy- and water-efficient measures into our store designs. To guide our efforts, we’re using the U.S. Green Building Council’s LEED® certification program as a benchmark for success.” (LEED® is short for Leadership in Energy and Environmental Design.) [1] The point here is that retailers are effectively a real estate developers’ customers, hence they have the power to affect change more than anyone.

The second option is what I call “Push-Effect” and is essentially the creation of an incentive structure, either in private markets or at the government level, to encourage developers to adopt green building practices. This is already beginning to happen in two ways: First, entrepreneurial-minded entities such as Pro-Tech Energy Solutions (http://pro-techenergy.com/) are now adopting a new model whereby they use a “Value-In-Use” approach to demonstrating the value-add to end users. What this company does is it evaluates a given property’s energy use, installs (AND PAYS FOR!) green building components (i.e. solar panels, for example), and monitors the cost savings to the developer/owner. In this way, the developer does not bear the upfront cost of installing green components, but pays for the improvements in an amount proportionate to the cost savings.

Another example of “push-driven” adoption is the bill introduced March 4 by Sen. Jeff Merkley (D-Ore.) and Sen. Mark Pryor (D-Ark.) which introduces a new program called “Building Star.”  According to EnvironmentalLeader.com, “Building Star would promote energy efficient installations in commercial and multi-family residential buildings. The program is expected to save building owners more than $3 billion on their energy bills annually by reducing peak electricity demand by an equivalent amount of power as that supplied by 33 300-megawatt power plants.”

Together, push and pull-effect promotion of green building will help encourage the decision makers – real estate owners and developers – to look toward the future and spend the capital necessary to improve the energy efficiency of our buildings, helping the country move toward energy independence.

Sources:

1) http://www.starbucks.com/responsibility/environment/green-building

2) http://www.mckinsey.com/clientservice/electricpowernaturalgas/US_energy_efficiency/

3) http://www.environmentalleader.com/2010/03/05/push-begins-for-building-star-incentives-for-commercial-properties/

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3 Comments

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3 responses to “Show Me the Money: Demonstrating Green Building ROI to Developers

  1. ryantbragg

    Very clear illustration of the market complications of a problem that is largely trying to be solved by those outside that market. By and large, commercial real estate developers are far more interested in cap rates and occupancy rates than they are with reducing GHG emissions. However, the two goals are not necessarily diametrically opposed, though scale is significant. Wal*Mart can save (or even make, in some cases) millions of dollars by installing solar panels on a store roof (http://www.environmentalleader.com/2009/04/20/wal-mart-wants-to-eliminate-all-packaging-waste-by-2025/), whereas the builder of a single strip mall will be hard pressed to explain to prospective clients why their higher rents should be offset by lower utility bills. When various clean technologies mature to the point of clearer economic feasibility, or are forced on the market by the government, this dynamic should change both real estate and all business forever.

  2. Hector Chavez

    This story will get interesting once CO2 emissions represent a monetary cost.
    The profit-oriented approach of companies is well-known, and there is no signal it is going to change in the mid term. Having said that, I just cite what the previous comment says: “two goals [profitability, environment] are not necessarily diametrically opposed”. I just would add that the monetary value of emitting CO2 is estimable, and this costs (some authority’s initiatives in between) might make the difference. For example, one can say that Katrina is a cost of CO2 emissions that are changing the climate pattern (http://articles.sfgate.com/2005-09-27/business/17391997_1_katrina-relief-congressional-budget-office-billion-cost-estimate). Under an scenario where CO2 emissions are considered the cause of climate change, it is fair enough to say that electricity companies should be charged for emitting CO2, which would represent a monetary cost. The cost of capturing CO2 has rough (but accurate enough) estimations (http://www.edf.org/documents/9347_TCEC.14.Dr.IanDuncan.pdf), and this would increase energy prices. Here is where the efficiency of a green building matters. The problem would be the general complaining for paying more for what now people are paying cheap prices. If people were willing to sacrifice some of their luxury to spend less energy (paying the same) allowing higher prices, the profit of saving energy would be attractive enough for investors.

  3. abolhouse

    I have personally felt the effects of the “pull effect” since I purchased a five star energy green home three years ago. However, the realtor didn’t use the pull effect to his full advantage. The home was not marketed as a five star green home (I saw the plaque on the wall during the open house) and I didn’t have to pay the premium seen today when purchasing a green home. However, a year later at a “Green Building” day seminar I attended my home was one of 5 featured, without my knowing!

    Obviously it is to the advantage of the real estate agent or developer to understand and capitalize on the green building status of their properties. For instance, my home was purchased at a very standard price for the East Side (which is to say I got a screamin deal for a 3 year old home). The 4 star energy green home down the street sold for nearly twice the cost of my house, is on a smaller lot, and has less square footage. That realtor was using the “pull effect” fully to his/her advantage.

    One aspect of the “pull effect” which I am not too comfortable with is the LEED certification. To achieve LEED certification, new construction must get at least 40/100 points to be certified (http://www.usgbc.org/ShowFile.aspx?DocumentID=5546). This can be accomplished without major improvements to energy minimization. In fact, some of the certification criteria are energy saving enabling features such as access to public transportation and bike locks, but aren’t inherently energy saving.

    So, are companies like Starbucks getting the certification just so their consumers feel better about their cup of joe and come back more often? It sure is one benefit to throw on top of the energy savings and tax cuts!

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