Environmental and Economic “Green” Go Hand-in-Hand

In the not-so-distant past, the idea of “green” real estate was sometimes met with trepidation by investors, who envisioned cost increases, decreased functionality and wasted time. These common misconceptions still linger, though they continue to fade with each passing year. The reason? A simple truth is sinking in: Eco-friendly real estate is neither a business nightmare nor a tree-hugger’s dream—and it will soon be everyone’s reality.

Both the idea and importance of corporate responsibility (CR) have ballooned in recent years.

Worldwide, 51 percent of reporting companies now include CR information in their annual financial reports, a suggestion that “most companies now see CR information as core to the business,” Yvo de Boer, former global chairman on climate change and sustainability services at KPMG International, explains in the 2014 RobecoSAM Sustainability Yearbook. The report surveyed 59 industries—real estate among them—around the world.

Only 20 percent of companies included material on CR in their reports in 2012; in 2008, the number was just 4 percent. In fact, de Boer describes responsibility reporting as having become mainstream—and sustainability is a key component.

KPMG reports that some of the largest companies worldwide “are beginning to use the process of CR reporting to bring CR and sustainability right to the heart of business strategy, where it belongs.”

So how long will it take for this to permeate throughout the real estate industry? Opinions vary on when the transformation will be complete, but there’s little doubt it will.

Awareness of the environmental impact of commercial real estate has been growing over the past decade, further fueled by public debate about energy dependence and the many industry reports and studies showing that energy efficiency in buildings is simply “good business,” according to the 2015 National Green Building Adoption Index, an academic study conducted by researchers from Maastricht University and real estate services firm CBRE on green building certifications in the largest U.S. office markets.

Certifications through the Environmental Protection Agency’s Energy Star program and the U.S. Green Building Council’s LEED rating systems signal exemplary performance in energy efficiency and sustainability in the commercial real estate market. There are now more than 26,000 Energy Star-rated buildings, some 3.8 billion square feet, and nearly 23,000 LEED certifications totaling approximately 2.9 billion square feet in the U.S. market, according to the report.

“I think that there’s every reason to believe we’ll eventually get to a point where green buildings are just buildings,” says Brendan Owens, vice president of LEED technical development for the U.S. Green Building Council. Owens adds that the data and information collected by the council points to green real estate becoming the standard.

Owens references a decade-long evolution of what “going green” has meant across the U.S., pointing to outdated misconceptions about cost, functionality and duration that have been proven wrong time and again.

“Ten years ago, green buildings were different, there was a learning curve, the availability of products was challenging,” he says. “The last ten years of rapid transformation of the buildings industry—around environmental issues, around social issues, around material issues—has taken away a lot of the excuses that some people were relying on to not engage in green buildings.”

However, as old excuses die, new reluctance can arise. Getting certified through measurement systems like Energy Star, LEED and Green Globes, for example, requires prolonged commitment, attention and action.

While these rating systems have gained significant traction, the certifications have shown some decline in recent years, according to the National Green Building Adoption Index.

For instance, many of the buildings that were previously Energy Star-certified did not renew their certification in 2014. This does not necessarily mean that the energy use of the buildings changed, but that some owners and managers choose not to spend the time or expense to reapply for certification every year.

The LEED program, however, continued to expand in 2014, with 5.3 percent of all commercial office buildings in the largest markets now certified, up from 5.1 percent. This represents 20.3 percent of total commercial office space, up from 19.4 percent in 2013.

“In order to achieve certification, you’ve got to do what you set out to do and prove that you’ve done it,” Owens says. “I think there’s a significant value both from a marketing perspective and also from an outcomes perspective. Economics is absolutely part of the equation relative to green buildings.”

THE FINANCIAL BENEFIT OF CORPORATE RESPONSIBILITY
Sustainability is being established as one of the newer foundational pillars upon which businesses increasingly are willing to stand, not just for the sake of environmental benefits or reputation, but because of associated financial benefits.

“A variety of sustainability factors are relevant to companies across a wide range of industries,” says Christopher Greenwald, co-head of sustainability investing research at RobecoSAM. “These include innovation management, human capital management, supply chain management, environmental management and corporate governance.”

While there is no “one-size-fits-all” correlation across all industries, there are clear-cut universal factors that impact any company’s value. Adjustments to make businesses more sustainable have proven that the practices are, in many cases, entirely justifiable economically.

A number of other elements have contributed to businesses taking a serious look at real estate in particular through a greener lens. Among them are corporate reputation and the social expectation-response loop, which go beyond the purely financial consideration that tenants will pay higher rents for better-quality buildings and the ability to remain competitive.

“Businesses today are operating in a world undergoing unprecedented environmental and social changes,” de Boer says. “Rampant population growth is fueling ever-increasing demands for limited resources. Unpredictable extreme weather is affecting supplies of key commodities. Changing social conditions and expectations are driving both aberrant spending power and social unrest.”

According to de Boer, that’s where the importance of corporate responsibility reporting comes into play. “CR reporting is essential to convince investors that your business has a future beyond the next quarter or the next year.”

IS IT WORTH THE INVESTMENT?​
David Pogue, CBRE’s global director of corporate responsibility, and Norm Miller, Hahn chair of real estate finance in the Burnham-Moores Center for Real Estate, say in the Strategies and Management Working Paper Series that it is.

Green buildings are worth the investment because they yield longer economic life, lower energy costs, lower water costs, less waste, lower turnover of tenants, higher rents, improved leasing velocity, higher occupancy rates and more, according to Pogue and Miller.

“This is an evolving discussion, and we have a long way to go,” says Owens. “LEED provides a framework that’s going to enable us to get there in the most effective way we can, but it’s going to take continued participation from the market and focus on behalf of project teams in order to make sure that we’re delivering across all the different opportunities we have to make buildings better—and then stay focused on their performance.”