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Evidence Backs Green Business Case
December, 2011
Research Compiles Convincing Data
By Michael Brooks and Robert Campanelli
The commercial real estate industry in Canada has a sizable environmental footprint; it is comprised of roughly 8.2-billion square feet (762 million square metres) of floor space and accounts for more than 14% of end-use energy consumption and 13% of the country’s carbon emissions. A huge opportunity exists to decrease energy consumption, increase water conservation, improve indoor air quality, and improve the industry’s overall sustainability profile; and yet the greening of Canadian commercial and institutional buildings is undeniably slow.
There are fewer than 3,000 LEED registered and certified buildings and less than 1,000 buildings certified BOMA BESt (Level 2 or higher) out of roughly 440,000 commercial and institutional buildings in Canada. That’s less than 1% of the total stock.
Even within that minority, uptake has been uneven. Downtown Class A office and government office buildings are a disproportionately high percentage of that 1%. Penetration of certified green buildings is lower in the suburbs and smaller urban centres, and in the multi-family, hotel, seniors housing, strip retail and industrial asset classes.
Yet the body of research validating the value of green buildings seems to be growing and is almost at the stage now where it is incontrovertible. The business case is there for anyone to consider, particularly with energy conservation. It’s time to sort through the literature and get a read on where things are at now.
COST
Newly constructed LEED Silver or Gold buildings have been found to be only marginally more expensive than non-LEED buildings. In the early 2000s the premium was pegged at 2% to 5% of total construction costs, but that number now seems to be coming down to between 1% and 2% (for up to LEED Gold). Larger contractors have become more familiar with construction techniques; architects and engineers are more familiar with integrated design principles and certification protocols; and owners have become more comfortable with the cost and process.
New LEED Platinum buildings may still come at a higher premium – around 5%. The application cost for LEED certification has also apparently dropped considerably as the sheer number of LEED Accredited Professionals and better systems make the market more efficient.
Meanwhile, the data on the costs of greening existing buildings seems quite variable as it depends on scope of work, the overall condition of the building and the decade in which the building was constructed. A building’s age in itself does not fully inform the cost of the project. Many older buildings perform at higher levels than some newer buildings.
Case studies are scarce. Motivators for seeking LEED EB (existing buildings) certification seem to revolve around avoided obsolescence and branding – i.e. the owners of older downtown buildings in major urban centres feel pressure to upgrade to compete with the new stock of LEED Gold buildings, as well as those in the development pipeline. Similarly, major tenants may need to demonstrate green credentials and an overt commitment to responsible environmental, social and governance related business practices through their choice of premises.
END VALUE
Certified green buildings have been found to have a higher value than non-certified buildings in North America. Green buildings have been shown to generate higher cash flows through fuller occupancy, and have higher residual and resale values (partially attributable to being green) than non-green buildings.
Certainly, tenants may benefit from lower operating costs and the potential for improved employee productivity. Although this latter point has been hard to prove unequivocally, various studies by leading researchers – which were presented as recently as October 2011 at the joint Canada/U.S Green Building Council (CaGBC/USGBC) conference in Toronto – are indeed demonstrating both qualitative and quantitative support for this expressed benefit.
A recent U.S. academic peer reviewed study found that green buildings benefit from a real estate rental premium of 4% to 5%, and that the value premium for a LEED-certified building over a non–LEED one is roughly 10%. This would seem to contradict – at least anecdotally – what most downtown Toronto office market brokers would say. The same 2008 study also found that LEED certified buildings are likely to have higher occupancy levels through economic downturns.
Data presented at the 2011 Greenbuild seminar, Do Green Building make Dollars & Sense?, by CBRE, McGraw-Hill Construction and the Institute for Market Transformation (based on the Green Building Study v3.0), reinforces the notion of increased occupancy and rental rates in green buildings. Between 2009 and 2011, USGBC LEED certified buildings saw occupancy rates increase 2.4%. In addition, the same study revealed that LEED certified building rental rates were 4.1% above the market average in 2011.
A 2008 study found that the rental premiums for green buildings were lower in the most desirable locations (downtown Class A office) partly because these most desirable locations already demand the highest possible levels of rent. However, there is new data which tends to counter earlier findings.
Nils Kok, PhD, Norm Miler, PhD, and Peter Morris put forward data in their presentation, The Economics of Green Buildings at the 2011 Greenbuild Conference, which indicated that in 14 U.S. urban markets, for both Class A or B buildings, LEED EB certified buildings uniformly garnered higher average rents than non-certified buildings. The same study showed that for LEED versus non-LEED buildings, percent leased differed, with six of the 14 cities demonstrating higher leased percentages. It will be interesting to see if these numbers continue to move in a positive direction in the coming years.
CERTIFICATION AND PERFORMANCE
The green proxy systems (e.g. LEED, BOMA BESt, Green Star, BREEAM) don’t necessarily mean the best energy performance since scoring comes from a variety of attributes. A 2009 peer reviewed study found that, on average, LEED buildings used 18% to 39% less energy per floor area than their conventional counterparts, although between 28% and 35% of LEED buildings used more energy than their conventional counterparts.
In a 2008 report prepared by the USGBC, LEED buildings were found to have 32% lower energy use intensity than base buildings and each successive level of LEED certification from Certified to Platinum had lower energy use intensity than the previous certification level. Best to watch energy as an intensity metric as well: ekWh/psf/pa.
Several researchers have investigated the primary tenant drivers in seeking office space and, certainly, there are few surprises. The primary motivations for tenants include geographic location, accessibility by public transportation, rent costs and appearance of the office building.
Tenants may not pay premium rent for a greener building, but may select from premises within green buildings if there is a choice in their market. The fact that more tenants would demand these buildings indicates that, indeed, there is a relationship between green labelled buildings and occupancy levels.
A separate 2009 US study determined these rent premiums at approximately 8% for LEED buildings and 3% for high EnergyStar score offices. The recently released Building Better Returns report from Australia concludes that high NABERS (Australia’s EnergyStar) rated buildings are from 2% to 9% more valuable, depending on the NABERS level. The Green Star (Australia’s LEED system) value premiums were up to 12% over non-Green Star accredited buildings.
A closer look at the latest data on retrofits and conversions, as it relates to costs/pay-back, is encouraging. The presentation, The Retrofit Triangle – Monetizing Green Building Efficiency Gains By Linking Technology, Operations and Finance, which was delivered at the 2011 Greenbuild conference, provided affirming evidence that tangible value exists.
The numbers quoted were sourced from the McGraw-Hill Construction report, Green Outlook 2011: Green Trend Driving Growth, and were stated as follows: 8.5% reductions in operating costs; 6.8% increase in building values; 9.2% increase in ROI; 6.4% increase in occupancy; 6.2% in rent; and 8.5% in reduction in operating costs.
In summary, the literature would suggest marginal cost premiums for new green buildings along with costs/paybacks on green retrofits and conversions. The emerging data seems to validate the potential for rent premiums for certified green buildings, higher occupancy levels and substantially higher values.
Michael Brooks is the CEO of the Real Property Association of Canada (REALpac). Robert Campanelli is REALpac’s, Vice President, Industry Sustainability. For more information, see the web site at www.realpac.ca.
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