When it comes to doing the right thing, altruism can only go so far. Most people are conscious of climate-related challenges and want a more sustainable world — but few want to take on the financial burden of getting there. The built world is no different, as demands by tenants are a top reason buildings strive to be more green. However, even though 61 percent of respondents said they’d pay more to live in a sustainable community, these upgrades cost money and that’s money many building owners and operators are very conscious of their expenditures. The want to create more sustainable buildings must be balanced with a reward for doing so in the form of a property with more value.
Measuring the value of a large commercial property isn’t a simple equation. Understanding the effects of sustainable investments on the building’s value is even more complicated. “In short, the answer is yes; buildings are more valuable when they’re sustainable,” answered Matt Ellis, CEO and Founder of Measurabl. He mentioned the overall premium that office buildings get for rent because they have green certification; LEED-certified buildings reach capacity 20 percent faster and those in Los Angeles receive a premium of $2.91 per square foot while non-certified buildings average about $2.16 per square foot. But, he said, “the long answer is more complex because the definition of a green building is subjective. For example, real world buildings are on a spectrum and having a certification doesn’t necessarily mean it’s ‘green.’”
In short, the answer is yes; buildings are more valuable when they’re sustainable. The long answer is more complex because the definition of a green building is subjective. For example, real world buildings are on a spectrum and having a certification doesn’t necessarily mean it’s ‘green.’
Matt Ellis, CEO and Founder of Measurabl. Matt will be speaking at Blueprint 2021, a gathering of the leaders changing real estate this October in Las Vegas. Tickets are available with a special $200 Propmodo discount.
So, how can building owners think about the return on their investment as it pertains to sustainability? The answer has to be broken down into the different ways that we think about value.
Buildings are businesses and their performance is measured by their Net Operating Income (NOI). Upgrading, integrating, and automating building management systems is often touted as the number one way to reduce costs and, thus, increase NOI. Retrofitting and improving energy conservation, water usage, and the carbon footprint of buildings is important and directly makes buildings worth more.
How much more was the question posed by Lawrence Berkeley National Laboratory for the Department of Energy’s Smart Energy Analytics Campaign that looked at the payback from energy management information systems (EMIS). The study looked at 6,500 buildings in 104 organizations’ portfolios for a total of 567 million square feet of space. Savings was quantified at reductions of $95 million a year which started to be realized in the second year of operations; the first was spent getting the tech set up and integrated.
The stakeholders in the boardroom consider the true value of sustainability to be at the enterprise level. Sustainability is more than just energy efficiency in operations but expands into a company’s mission, culture, and brand. Unlike the boiler room where operational efficiency is at the top of mind, the boardroom sees sustainability as the whole approach to the enterprise.
Outside of operations, there is money and savings for green buildings and portfolios through a financial lens. Green bonds, a type of sustainable bond, are the fastest growing segment of the $128.3 trillion global bond market. Sustainable bonds are issued for environmentally friendly projects like energy efficient buildings and these bonds are on track for a 32 percent jump from last year’s bond issuance numbers.
“I could change every light bulb in every building that I own and create some savings and maybe my buildings are worth more,” stated Ellis. “If I can change the basis point for the cost of borrowing for the next billion-dollar bond issuance, that will overwhelm all the lightbulbs you could ever change.”
The NYC Accelerator PACE Financing Program recently closed an $89 million loan to retrofit 900,000 square feet of office space which is estimated to save $2.5 million in annual energy costs and, with Local Law 97 fines starting in 2030, avoid $750,000 in fines. The loan allows building owners to finance up to 100% of project costs. “The NYC Accelerator PACE Financing Program is a creative way to assist New York City’s property owners to reduce carbon emissions through energy system upgrades and the Department of Finance is glad to play a part in the financing mechanisms by facilitating loan payments through property tax bills,” said Sherif Soliman, Commissioner of the NYC Department of Finance.
The complex equation includes credibility with a bank, tenants, or any other stakeholder, and energy saved through operational practices still matters. It’s all part of the game of ESG. “Everything needs to be analyzed on performance and what’s right for the future,” explained Rosanna Lawn, Global Brand & Strategic Partnerships Director at Etopia. “Before we do something in the name of progress, we need to ask where are we going, how do we get there, and what’s the best thing for the unique property?”
Everything needs to be analyzed on performance and what’s right for the future. Before we do something in the name of progress, we need to ask where are we going, how do we get there, and what’s the best thing for the unique property?
Rosanna Lawn, Global Brand & Strategic Partnerships Director at Etopia. Rosanna will be speaking at Blueprint 2021, a gathering of the leaders changing real estate this October in Las Vegas. Tickets are available with a special $200 Propmodo discount.
The definition of value is different for each stakeholder in a building. Owners want profitable buildings that are representative of their larger portfolios. Tenants want to be in a space that is conducive to business but also provides a healthy environment for employees, visitors, and customers. Occupants want to feel like they’re part of a sustainable solution by living, working, or shopping in certain places.
All stakeholders share a common goal of avoiding cognitive dissonance. “People increasingly want to align themselves from a values point of view with products that represent their world view,” explained Brad Dockser, Founder and CEO of Green Generation. “People spend more on organic meats, fruits and vegetables because they believe they’re better for you. They want to align themselves with healthy living even if they don’t fully know what organic as a label means.” The value of a property increases when it aligns with what is important to stakeholders.
People increasingly want to align themselves from a values point of view with products that represent their worldview. People spend more on organic meats, fruits and vegetables because they believe they’re better for you. They want to align themselves with healthy living even if they don’t fully know what organic as a label means.
Brad Dockser, Founder and CEO of Green Generation. Brad will be speaking at Blueprint 2021, a gathering of the leaders changing real estate this October in Las Vegas. Tickets are available with a special $200 Propmodo discount.
Sometimes characteristics of value are hard to measure. If the sense of safety in a building is high, the occupants’ experience is improved which can lead to longer stays in the space, higher productivity and collaboration with colleagues, or more time perusing shopping aisles. Properties are often evaluated based on location and amenities, which could include how sustainable a building is.
However, investment could make it the most sustainable building in the world and not increase its value based on other characteristics. “There’s a dramatic range in how assets are valued and some of that is due to the perception of the property and the commitment to quality. It’s all integrated,” said Abbey Ehman, Vice President at Lincoln Property Company. “If we consider an asset that’s architecturally unresponsive to the local neighborhood or is isolated due to access issues, a significant investment in sustainability could be made yet the true potential returns will never be realized.” If you build it, they’ll only come if they can get to it and, if the building is considered aesthetically unpleasing or unpleasant to be in, people will find other places to go.
What occupants expect out of their buildings has evolved, as have the desires of owners. And with customers voting with their dollars, companies are paying attention. One such company with aggressive sustainability goals is Microsoft who aims to be carbon negative by 2030; they’ve been carbon neutral since 2012. One of the largest purchasers of renewable energy, the company’s Puget Sound campus has been zero waste certified since 2016. But their corporate responsibility statements aren’t just about building operations, they address products, services, and devices, too. The company, which doubled down on office space during the pandemic, has about 15 million square feet of office space worldwide.
It wasn’t that long ago that questions from investors about an ESG strategy were a simple yes or no, a box to be checked about the plan’s existence. “Now it’s three pages of opening questions about your strategy. People I spoke to years ago are now reaching out in a rush to talk about ESG strategies as they consider it a fundamental disruption to their business,” said Dockser.
What’s going to be the factor that pulls the value of sustainable buildings ahead of others? High-performing buildings can be sold at prices seven percent higher than their counterparts and, as concerns about the climate and desires to be in sustainable buildings continue to increase, the appeal of these buildings to tenants will only continue to grow. Additionally, as tech improves and the gap in operational performance between sustainable buildings and more traditional buildings widens, it makes financial sense to plan for the future. Investor interest in ESG continues to grow and additional green bond availability from companies like Boston Properties and Fannie Mae continues to make the news.
The value of sustainability equation is complicated as no two buildings are the same, but, as Ehman put it, it also creates the opportunity to think about the intangible benefits of upgrades. As buildings have many unique variables, it is difficult to judge the value of sustainability in buildings; not only does one size not fit all, but one size rarely fits multiple. The value of a sustainable building is somewhere along a spectrum and, depending on who you ask and what their priority is, it matters and it’s rising — regardless of the perspective.