by John Salustri — Originally published in the May/June 2019 issue of BOMA Magazine.
We all want to save the planet, and the commercial real estate industry has made great strides in reducing energy use and creating a “greener” built environment. But, frankly, building managers also have a fiduciary need to pencil out their part in that grand goal. That means making a strong business case for sustainability initiatives. In other words, property managers need to save two birds with one LED light.
Before proceeding, however, let’s clarify terms. The green movement as discussed here has grown far beyond its indoor air quality roots to more holistic issues. Today, it not only encompasses air and light and energy use, but also the entire working environment, from mechanical systems to fitness centers and meditation rooms. Sustainability touches on hard solutions that offer direct payback and softer considerations that lead to engaged and happy tenants, terms much squishier than a business case can allow.
Not surprisingly, how big a bite an owner or investor takes of the green apple varies by corporate mission, budget and local market demands. But, happily, these stakeholders do typically “get” the business case for going green. As a result, sustainability is no longer the hard sell it once was. In fact, standard operating procedure within the industry includes these efforts.
“More corporations realize that we need to ensure the future prosperity of human beings on Earth for business to continue,” says Elizabeth Kertesz, LEED AP BD+C, CDT, executive director of the San Antonio 2030 District and president of Resilient Oak Consulting, LLC. The District is part of a national umbrella organization, the 2030 Districts Network, focused on achieving “carbon neutrality in our new buildings by 2030 and reducing energy and water use and transportation emissions associated with existing buildings by 50 percent,” Kertesz explains.
NET-ZERO AND THE BUSINESS CASE
Even among the savviest of property owners and investors, a net-zero building is still a stretch in the world of sustainability. But, in coming decades, it might be a choice that’s out of their hands. In a sense, net-zero and designing for resilience “work together,” says Rives Taylor of Gensler. “But, it’s still a stretch, especially in downtown environments, where there’s never enough space
to put solar.”
Jason McIntyre, USAA Real Estate, agrees: “While net- is a lofty goal, it’s still determined on a market-driven basis. If a client asked us to build a net-zero building, we would pursue it as a strong development partner of choice. But, those requests are just not coming up, not yet.” A turnkey spec net-zero building, he adds, wouldn’t likely command the necessary rents to make it viable.
But, net-zero is a growing mandate. “The business case for sustainable design has never been clearer, even though the specifics of how to achieve higher levels of sustainability are evolving,” according to Gensler in its 2018 Impact by Design report. “State and city governments are driving many of these changes. Taking cues from progressive design firms and nonprofit organizations, states and municipalities are implementing increasingly stringent building codes. These shifts will be the basis on which performance is judged in the future.”
Right now, in the United States alone, the net-zero charge is being led by state and federal governments, and the Gensler report cites at least two states (Oregon and California) and two cities (New York City and Cambridge, Massachusetts), where carbon-neutral or net-zero mandates are being phased in.
“A lot of cities have climate action and adaptation plans, with goals to reach net-zero within various target dates,” explains Elizabeth Kertesz of Resilient Oak Consulting, LLC. “In San Antonio, the draft CAAP [Climate Action and Adaption Plan] is targeting 2040 to go carbon-neutral. It’s coming, but it will take some getting used to.”
Early successes demonstrate the potential of net-zero. “One of our San Antonio 2030 District members, a credit union, is building a new headquarters that will be net-zero. It’s truly innovative. They’ve drilled geothermal wells and the roof will be covered with solar, with the expectation of saving lots of money,” Kertesz says.
In fact, the early estimates are that, after reclamation, purification and recycling, the new HQ will “drink” no more water than a private residence. “We’re waiting to see how it turns out,” Kertesz concludes. We suspect she’s not alone.
She drops names such as 3M, Google and Walmart as examples of corporate space owners and/or occupiers “that are committed to investing in renewable energy. It’s catching on.” So, if tenant corporations are catching on, can the industry afford to be far behind?
Jason McIntyre, FMP, LEED AP, O+M, provides further evidence of that trend with a report from the Governance & Accountability Institute, Inc., stating that “in 2011, 20 percent of S&P 500 companies published a sustainability report. By 2017, it was 85 percent.” For McIntyre, who is director of Real Estate Operations & Sustainability for USAA Real Estate, this means that A-credit tenants—which typically sign longer leases at competitive rates—are being held accountable by their stakeholders for their sustainability efforts. “If we can support their goals, that makes us a more attractive partner and enables us to meet our own internal sustainability goals,” he notes.
At its core, the business case for sustainability is a question of outflow and income. “It’s about saving more than you spend,” says McIntyre, “and evaluating that spend through a simple return-on-investment strategy. However, there are more contextual and qualitative impacts, such as tenant engagement, satisfaction, retention and renewal—all of which are also part of the sustainability business case and what the best owners do. Tenants may not lead with sustainability as a priority in negotiations, but, increasingly, they care, and they choose USAA Real Estate because of our sustainability leadership, all of which ties directly to satisfaction, retention and occupancy.
“This,” he continues, “is the core of the ultimate value proposition. Satisfied tenants are more likely to renew their leases, driving better net operating income, financial performance and value.” As a result, he adds, “There’s an institutional investment appetite for products that can show better performance and lease duration.”
Kertesz agrees. “The direct paybacks are important, but property owners usually take other factors into account, things that might seem more indirect, such as saving operations and maintenance staff time.” The time wasted grabbing ladders and fluorescent tubes whenever a light burned out was eliminated for one local owner when he switched to LEDs. “That made the business case work for him,” she states.
“Discriminating tenants and, therefore, owners and investors, see the difference a well-performing building makes,” says Rives Taylor, FAIA, LEED AP B+D, principal, co-director of design resilience and regional sustainability leader for Gensler. Taylor’s perspective is particularly interesting because he operated a facility for 12 years before joining the architecture firm. “It’s not about more upfront expense. It’s about better choices. That’s the fundamental point of sustainability.”
He cites Trammell Crow Company’s Hess Tower in Houston, developed in the depths of the Great Recession. It had a LEED Platinum certification, giving it an all-important third-party imprimatur—and a long-term credit tenant. “Two years later, Trammell sold the building for twice what it cost to build,” explains Taylor.
PERCEPTION SUPPORTS REALITY
No, not every green measure carries a dollar-for-dollar payback. But, tenant retention is more than figures. It’s also about perception, the perception of a well-run building. It’s that combination of soft and hard results that makes for that perception and, therefore, a bulletproof business case.
“There isn’t a major company that isn’t creating a healthy environment,” Taylor says. “Like productivity, it can be too nebulous to measure. Companies like Hines or Trammell Crow embrace it because it reduces turnover or time between tenants, who typically say their people work better in such environments. There’s no measure for that or a definitive answer to the business case question other than differentiation in the marketplace.”
An argument can be made that the perception of wellbeing is heightened in central business districts, where there’s more access to mass transit, public parks and even such amenities as fitness centers on virtually every block. Still, “assigning a cost/value ratio is difficult,” according to Taylor. “Executives might buy the concept,” but “many corporate decision-makers dismiss the numbers associated with it as inflated.”
Somewhat surprisingly, sustainability’s impact on rental rates also is elusive. “The best answer to the rentincrease question is that the sustainability features of the building, including LEED or ENERGY STAR® certifications, do have a correlation with rents and renewals,” says McIntyre. “But, I don’t think anyone will say it equals this or that. Our buildings are responsive to the market, and third-party validations assure these properties are being run well. We may not see a green premium, but we avoid a ‘brown discount.’ In other words, we may not command higher rents because of sustainability, but we’re competitive and we avoid concessions or not making the short list for prospective tenants.”
FROM SUSTAINABLE TO RESILIENT
As mentioned earlier, over the years, we’ve watched the concept of sustainability mature from the narrower focus on indoor air quality (remember sick building syndrome?). Now, it seems that sustainability has grown to encompass the broader concept of resilience.
It’s a logical step, especially given what seems to be increasingly severe global weather conditions, from Japanese tsunamis to Gulf Coast hurricanes. But, trying to make a business case for resilience makes the case for building sustainability look like child’s play (see “NetZero and the Business Case,” page 17), simply because it deals in what-ifs.
Resilience revolves around the idea of creating building and city environments “to be durable and less brittle,” says Taylor. “How quickly can we bounce back from a Hurricane Harvey or the wildfires of California? Resilience involves creating long-term power and computer redundancy. Business continuity has become the mantra of resilience.”
In a sense, building the case for resilience is like betting against yourself. How do you fold into your plan your city’s exposure to unknowns, such as natural disasters or even human-made catastrophes, such as active shooters?
MAKING THE CASE, CASE BY CASE
These are highly locational questions that defy generalization. Building the business case for sustainability, however one defines it, has to be made building-bybuilding, market-by-market.
“I don’t anticipate any time in the future a blanket statement from us saying all buildings must be this or achieve that,” cautions McIntyre. “We evaluate each property from a business plan perspective. Some of our investment partners might be more aggressive than others in their risk/return strategies, and what’s competitive in the San Francisco office market isn’t the same as in the Memphis industrial market.”
Kertesz agrees: “Every operation has their own budget, and we can’t implement new projects unless the budget supports it. We have to look at it on an asset-by-asset basis to make the business case work out for each organization and situation.”
However one defines their goal, there are funding mechanisms that can push the sustainability plan over the top, such as the property assessed clean energy (PACE) programs sponsored by the repetitively titled U.S. Department of Energy’s Office of Energy Efficiency & Renewable Energy. “Such programs can help break down some of the barriers that building owners face,” says Kertesz. Details of the relatively new program vary by state, but essentially “a property owner can take out a loan to finance certain energy-efficiency improvements,” she explains. These improvements and savings, however, all have to be independently verified.
“The idea is that those savings should more than cover the cost of the loan, which can be up to
100 percent of the capital outlay,” she continues, “so the property owner could have a zero-dollar initial cost and always be cash-flow positive.” In the case of triple-net leases, “since the loan is treated as a property assessment on the tax record, the tenant gets billed and the owner is still cashflow positive.”
Making the business case for sustainability is a much more complex and nuanced process than simply tacking projected savings onto the cost of products and programs, although that is clearly a part of the picture as well. The successful case for sustainability also incorporates the
entire tenant experience, set against market specifics, and the overall perception of a well-run building.
Sustainability as a differentiator is what will win the hearts of today’s savvy owners and operators. Besides, they already get it.
ABOUT THE AUTHOR: John Salustri is editor-in-chief of Salustri Content Solutions, a national editorial advisory firm based in East Northport, New York. He is best known as the founding editor of GlobeSt.com Prior to launching GlobeSt.com, Salustri was editor of Real Estate Forum.