When it comes to commercial building and the environment, the challenge of making buildings more eco-friendly is more acute than in the residential real estate sphere.
It really comes down to scale: commercial properties tend to be larger than residential ones. And so, if the property is larger, so is the environmental impact.
That said, the market value of commercial and institutional green building in the U.S. is only about 50 percent of the roughly $20 to $40 billion residential green building market in 2010.
Nevertheless, the commercial real estate world has shown significant interest in green building in recent years. As of April 2009, the U.S. Green Building Council had certified 2,476 commercial projects, according to a Cushman & Wakefield report titled “High Performance Green Building: What’s It Worth?” [PDF] The report also noted that at that time, the U.S. Green Building Council had projects seeking certification in all 50 states and 91 countries.
According to the 2008 report entitled “Does Green Pay Off?” [PDF] by Norm Miller, Jay Spivey and Andy Florence, astute investors in the commercial real estate world have been enjoying ‘extremely high payoffs’ by seeking LEED certification on entire portfolios of buildings.
“Costs to upgrade existing buildings to various LEED certification levels allow for great economies of scale when a large number of similar buildings are being retrofitted,” the report said.
However, the authors also noted that the benefits of green building may not yet result in higher base rents in some markets.
“Most of the benefits accrue to tenants and tenants require proof before they are willing to share in the cost of investments that theoretically will help them be more productive or save money,” the report says. “Only in recent years have tenants started to fully appreciate the benefits of clean air, more natural lighting and easier to modify spaces.”
While green building may not yet result in higher base rents, the authors of the report said that almost every developer who invested in LEED or Energy Star buildings mentioned faster absorption rates for their buildings.
On the tenant side, a 2007 Corporate Real Estate Smart Market Report from McGraw-Hill Construction stated that 44 percent of C-level executives believe green buildings help attract and retain employees. The perceived benefits for employees includes cleaner indoor air as well as improved health and well-being for employees. The same report went on to say that a PNC Financial Services Group study found employee retention and satisfaction at green facilities was 50 percent higher than traditional facilities.
For all these reasons and more, the 2009 Ernst & Young Business Risk Report [PDF] stated that in the next construction cycle in the United States, virtually all new major office buildings will be green and tenants will be better informed. Because of this, the risk report said, existing Class A buildings will likely suffer a negative impact on their value if they are not retrofitted to be LEED compliant.
That fact should motivate lots of building owners to upgrade to LEED certification standards in the near future. Even so, commercial building and the environment still have a long way to go before they live in harmony. The U.S. government, however, is working to move things in that direction.
The Department of Energy organized the Net-Zero Energy Commercial Buildings Initiative [PDF], which has a stated aim of establishing marketable, net-zero energy commercial buildings in all U.S. climate zones by 2025. The group defines net-zero commercial buildings as those that generate as much energy as they consume.
That would be a huge step in helping the environment.