Putting a Value on Sustainable Buildings
The biggest question today in the world of sustainable buildings revolves around the 'value-add'. As more owners commit to green buildings, they are demanding hard facts on what they are getting for their sustainable investment. And, not surprisingly, the focus quickly moves to energy and energy retrofit projects, since they represent the biggest cost and the biggest potential return.
In this issue of Global Sustainability Perspective, we focus on the myriad approaches to retrofit projects, including the issue of financing.
It's not as simple as it appears, and it takes a disciplined approach that considers many factors that supersede the potential of any particular project.
1. First, engage a professional energy engineering firm to conduct an 'energy assessment' to determine how your building is performing today and where problems may or may not exist. It may be possible to solve a particular problem through a procedural change that costs nothing or very little. There is still a lot of 'low hanging fruit' in most buildings. The energy assessment also establishes a baseline against which progress can be measured. Very important.
2. Second, benchmark energy performance, using one of the various accepted systems, such as ENERGY STAR in the United States, for measuring energy efficiency and allowing comparisons to similar buildings. Our experience is that the focus this brings to a property operations team, alone, will reduce energy consumption 2-3% per year.
3. Third, if multiple energy reduction projects are under review, consider commissioning an 'energy model'. This is an advanced method for reviewing various projects, but provides an analysis of the synergistic aspects of multiple projects. Too often, this concept is overlooked, and separate projects, designed in isolation, are over-designed at extra cost.
4. Fourth, look at incentives and rebates. Governmental agencies and utilities are offering significant awards for energy projects.
Once the value of a project is proven, it's time to consider financing options. And, don't overlook internal sources for funding. In many of the companies we work with, if we can make the financial case for an energy investment, funding is often available.
Putting the puzzle together, rather than looking at the individual projects and pieces, is the best way to maximize the return and optimize the value. And, value is what is driving sustainable buildings today.
Sustainability and the Impact on Value - A UK Perspective
The impact on value of sustainability continues to be a conundrum for property investors and valuers in the UK. At every point in time, the property market is subject to many dynamics which influence the evaluation of an asset's current value. At present, these factors are a shortage of supply of prime investments and strong demand in the City and West End of London, particularly from international investors. This contrasts with a lack of demand for secondary properties from either occupiers, given the weak economy, or investors, given the lack of finance.
Sustainability in the current market situation is therefore, to a certain extent, lower down the agenda for investors. As a result there is little evidence of property purchasers paying a premium for more sustainable buildings. However, investors need to be aware of the sustainability risk that can lead to increased obsolescence and declining returns in the future.
Jones Lang LaSalle has undertaken analysis, on behalf of a number of investor clients, of the impact on returns caused by sustainability risk through the use of a discounted cashflow model and Monte Carlo simulation analysis. The findings can demonstrate the susceptibility of properties to sustainability risk through the impact on the service charge, rental voids, forecast rents and yields, and how these can influence the anticipated internal rates of return.
'Current Market Value' reflects the existing market dynamics, but going forward, given advances in building specifications and changes in occupier and investor demand, properties will be considered against sustainability criteria in order to mitigate the potential negative impact of this risk on returns.
What's the ROI on LEED certified buildings for owners and investors?
Many property owners and investors might prefer a sustainable portfolio built to LEED standards but - particularly in a sluggish economy - are unsure whether the financial benefits will justify the cost.
What does it cost?
In a recent analysis of multiple new buildings around the world, international construction company Davis Langdon found that the average LEED building cost just below 2% more than the average non-LEED building – in monetary terms, slightly over $20,000 per $1 million of construction cost. In analysing LEED costs, individual green products and features sometimes cost more than traditional alternatives, but the overall project does not have to be more expensive. A great deal depends on whether the development team views LEED as an 'add-on' to the project or an intrinsic element of the design and development process.
In Jones Lang LaSalle's experience as project and construction managers, we've observed that a collaborative process that results in a greener building also results in a better performing building overall, reduced construction costs and development time.
The Design-Build Institute of America has studied the effectiveness of different ways of constructing green buildings. They found that integrated project delivery methods - including those that involve a project or construction manager - are more successful overall than traditional design-bid-build methods at achieving or exceeding anticipated LEED levels. An effective collaborative approach to green development can achieve LEED compliance while actually costing less than a similar non-LEED building using a less efficient method.
Are there incentives to defray the cost?
In the U.S., green tax incentives can also offset the upfront costs by 30-50% or more. Existing tax incentives include deductions of $0.30-$1.80 per square foot for HVAC and lighting systems that meet defined standards.
What are the energy savings?
For anyone who plans to lease a large space for a long time, one of the strongest cases for LEED building can be found in utility cost savings. A study reported in the GreenBiz Group's 2011 Green Building Market and Impact Report found that the average energy savings for LEED new construction projects built in 2009 - weighted according to savings by type of project and its share of certified floor area - has been over 32%. For a large office building, these energy savings typically recoup the additional cost of a LEED-level construction within a few years.
In The Cost-Effectiveness of Commercial-Buildings Commissioning study sponsored by the Assistant Secretary for Energy Efficiency and Renewable Energy (U.S. Department of Energy), researchers found that of 150 existing buildings studied, the combined building energy savings from sustainable retrofits were 18% with a corresponding payback for incremental green building costs of just over eight months. After that, annual savings ranging from about $45,000 to as high as $1.8 million per building would appear directly on the bottom line.
How does LEED certification impact rental rates and vacancies?
A much greater ROI for owner and investors is likely to be from the rent premiums and vacancy reductions that LEED-certified buildings are obtaining almost across the board. In five 2010-2011 studies cited in the 2011 Green Building Market and Impact Report, LEED buildings were found to command between 5% to 17% higher average rents than non-LEED buildings. In our own research analysis for the Philadelphia market, Jones Lang LaSalle created what we call a 'Green Gauge' market indicator that compares area submarkets and building types. We found that green buildings - defined as those with LEED or ENERGY STAR certification - overall received almost a $4 per square foot rent premium.
Three of the five studies in the report also measured improvement in vacancy rates. The findings showed that vacancies in LEED compared to non-LEED buildings range from no difference to 7% lower at certified properties. Jones Lang LaSalle’s Green Gauge found an average vacancy drop of over 3%, as well as a much faster absorption into the market.
Can a LEED investment be recouped when a building is sold?
Available data suggests that the small incremental addition to construction costs for LEED building is multiplied many times over when a certified building is sold. The five studies in the Green Building report reported sale price premiums of 8.5% to 25% - all well above the less than 2% average premium for green construction. Even in a down economy, one study found that "the large increases in the supply of green buildings between 2007 and 2009, and the recent downturns in property markets, have not significantly affected the returns to green buildings relative to those of comparable high-quality investments".
If anything, as time goes on, new buildings not designed to LEED standards risk not only lower market value, but also obsolescence, as an ever-greater number of properties are certified. Just as you wouldn't design a new building to an aesthetic standard of 30 years ago, owners and investors should also consider how not constructing a building to LEED quality will increasingly 'date' an asset in the future.
Considered as a whole, a LEED-certified building—constructed with efficient, integrated collaboration among the stakeholders—should be as green for ROI to your budget as it is for the environment.