COSTAR GREEN REPORT: Greening the Supply Chain

Wind turbines generate power at distribution center in Osaka, Japan.

Companies building environmental responsibility into their corporate mission statements can grow the bottom line even as they shrink their "carbon footprints." The problem is, most firms aren’t taking advantage of easy, low-cost energy efficiency steps that can yield big cost savings and provide much-needed cachet at a time when corporate America’s image could use a good burnishing.

That's the conclusion of CoreNet Global, which unveiled the results of a 10-month study and a checklist of recommendations at its Global Summit in Denver last week. The CoreNet study found a growing recognition of the importance of energy efficiency among corporate real estate execs. A large majority (83 percent) ranked sustainability as important or most important and 94 percent ranked energy efficiency as important or most important relative to other issues affecting real estate over the next 10 years. More than two-thirds of executives expect budgets devoted to sustainability and energy efficiency to increase over the next five years.

However, the report also found that less than half of corporations have energy policies or consumption targets in place. Only 40 percent of those surveyed say corporations are making use of quantitative targets, and only 42 percent say a company-wide energy policy is in place. Less than a third say that a senior-level executive is in charge of energy management. Only five percent are linking employee compensation incentives to energy efficiency.

ProLogis (NYSE:PLD), the world’s largest distribution and warehouse developer and one of largest builders of commercial structures in any asset class on Earth, is one of the exceptions. The REIT controls 422 million square feet in worldwide assets totaling $26.7 billion -- a big carbon footprint that's ripe for shrinkage and cost savings.

ProLogis issued its first sustainability report at the CoreNet conference April 30, committing to achieve carbon-neutral operations at its U.S. business facilities by 2010 in accordance with the U.S. Green Building Council's LEED program.

The new annual report sets performance targets over the next three to four years that include using 20% recycled construction materials at all new distribution centers, diverting 75% of construction debris from landfills or incinerators, cutting the use of potable water in landscape irrigation by 50% at all new developments, and installing renewable energy sources such as solar panels with a combined capacity of more than 25 million kilowatt hours per year by 2010 -- equivalent to the power required for more than 2,300 U.S. homes.

ProLogis officials said the timetable is aggressive but doable. CEO Jeffrey Schwartz, speaking to investors on a conference call May 1, said the measures "are not only the right thing to do for the planet" but will fast become a strong competitive advantage as ProLogis corporate clients move toward their own sustainability.

"Increasingly, our customers are asking us how we can help them with their own initiatives in this area," Schwartz said.

In the United Kingdom and Japan, key ProLogis growth markets, clients have long expected new projects to be sustainable. In the U.K., project approvals and entitlements are very difficult to secure, Schwartz said.

"It’s an island, and there’s a very strong green movement. It’s been green a lot longer than most parts of the world, with the exception of Japan."

CoStar Advisor caught up last week with Jack Rizzo, managing director of construction for ProLogis.

CoStar Advisor: Is it possible for a distribution center to truly be green?

Rizzo: There are really two answers to that. First, when we build our buildings with certain environmental design elements and technologies, that building operates more effectively from an operating cost prospective. For example, the lighting systems we’re now putting in save anywhere from 35% to 70% of energy costs for lighting. We’re using low-water irrigation systems and storm-water technology where we’re replenishing the underground aquifers.

Those buildings will operate more efficiently and as a result save energy -- but more importantly, the features improve the building lifecycle. For example, the life of a roof is probably 18 years. We have improved our systems so that we’re getting 25 to 30 years out of our roofs. Second, the largest operating cost for our customers is transportation. A lot of logistics companies have been looking at their distribution networks to cut cost. We’re building bigger buildings now, locating them in key transportation nodes that have easy access to ports, highways and intermodal facilities. Logistics companies are actually reducing the number of facilities they have, consolidating them closer to these key transportation nodes.

Advisor: Are you finding that demand is greater overseas than in the U.S. for green distribution facilities?

Rizzo: That’s definitely the case in Europe. Again, whether we want to admit it or not, Europe is probably 6 to 8 years ahead of us on sustainability initiatives. That was primarily attributable to Europe signing off on the Kyoto treaty, where there are specific requirements for companies to reduce their carbon footprint.

Our European colleagues have been stressing that to us, and 2004 is when we really started taking a look at how we can make our buildings more sustainable there. But what we’re seeing now is a lot of U.S. companies, when they go out for an RFP on a facility, asking what design elements we have to make our buildings even more efficient. Over the last 12 months, we’ve been giving (customers) a breakdown of those design elements and the costs associated with them.

Advisor: CoreNet Global’s study shows many companies aren’t taking advantage of simple ways to save energy. Do you agree?

Rizzo: I would say there’s a heightened level of awareness for customers to want to incorporate more environmentally sensitive design elements into their buildings. There is a cost associated with that -- a small cost, we think, but there is a cost. A lot of our customers are Fortune 500 and Fortune 1000 companies. We’ve found that our key customers also have sustainability objectives, goals and mission statements that really sync up with what we’re trying to accomplish. And we want to be a conduit that allows them to achieve their corporate goals.

Advisor: How difficult is it going to be for an organization with the size and geographic spread of ProLogis to hit these goals? What's the most challenging?

Rizzo: Getting all the locations we operate worldwide up to speed in attaining the levels we want to achieve. That’s going to be a two, three, four-year process. Also, the hard cost of distribution facilities is pretty low compared with other types of building products -- a hotel, office building or even a mall. The per-square-foot cost of those facilities is three to five times what we spend. So adding 50 cents, a dollar per square foot in costs to us is a big number.

The challenge is to get creative and be cost-effective. The biggest challenge, and we haven’t set specific goals for it yet, is renewable energy. It’s an area that will change dramatically over the next three to five years. There’s going to be a sea change politically. I think we’ll start to see some requirements for carbon reduction for manufacturers and utility companies. We think there are going to be a lot more tax incentives and rebates associated with renewable energy.

Right now, California is the only state with a good rebate program. That’s one of the only ways for renewable energy, particularly solar energy, to make financial sense. Improvement in solar technology and reduction in the cost of solar installation will be a tremendous opportunity for us. Think about 400 million square foot of flat roof worldwide where we could mount solar panels. We could generate an awful lot of power.


Do you have a comment on this article or the CoStar Advisor newsletter? Reach Randyl Drummer at rdrummer@CoStar.com