Green Building Industry Marching Forward, but Facing Some Uncertainty

Even as the CRE industry continues to embrace higher levels of green certification as the norm, diminished government commitment to sustainable building practices and achieving conformity between a myriad of local codes and international voluntary requirements continue to present challenges that green building teams will have to face going forward, noted experts at CoStar’s most recent Current Trends In Green Real Estate webinar.

A major issue for the green building industry is expectations for continued pull-backs by the government, both in the volume of construction undertaken and the public sector’s commitment to sustainable measures, with more lean years ahead in both areas, said Peter Morris, director with Davis Langdon, consulting company on cost modeling and other economic issues in sustainable building.

Morris made his presentation during CoStar’s recent summer update in its green construction webinar series hosted by CoStar Research Director Anthony Guma. The event also included a presentation by Nils Kok, a respected economist and visiting scholar at the University of California/Berkeley, on the relative costs and benefits of green construction and retrofitting for investors.

The cautious approach toward proceeding on green building guidelines isn’t limited to government. The U.S. Green Building Council (USGBC) earlier this month postponed balloting on the new version of LEED due to concerns from both public and private stakeholders that the changes were too much, too fast in the face of a relatively moribund economic recovery.

The drastic reduction in space used by federal government tenants is a reflection of the roughly one-third of employees working at an outside location, with another third in the building but not at their desks. In fact, only 30-40% of end users with assigned desks are actually using them, according to recent studies by the General Services Administration, and GSA expects to cut space demand by 30% to 50%.

There’s a potential for releasing a huge amount of leased government space back onto the market, which will have an impact on private sector construction, Morris said.

GSA has dramatically cut back on new construction and reduced the level of building alterations. While federal spending on new construction, repair and renovation reached a peak of nearly $2 billion in 2006, the current GSA budget for new construction is $50 million, and about $300 million in repairs and alternations.

Congress has responded to the issue with legislation of its own. Buried deep in the National Defense Authorization Act for fiscal year 2012 is a prohibition for any federal spending additional money to achieve LEED Gold or Platinum certification, Morris noted.

There’s a general trend since 2004 toward higher levels of LEED certification according to Guma, CoStar’s resident expert on green building issues. This may be attributed to the expectation of a green "standard" being raised, but according to Morris, "advanced" green designations may be less in play. While LEED Gold certifications peaked in 2010 at just over 50% of square footage certified, the small declines in 2011 and 2012 year to date were replaced by LEED Silver and LEED Platinum certifications, respectively. General reversion back to lower certification levels is very unlikely, but time will tell the manner in which the industry continues to push the green envelope.

While LEED New Construction certifications have declined steadily since 2006, while LEED for Existing Buildings has increased fairly dramatically since 2009, peaking at nearly 70% of LEED certified square footage this year. LEED Core and Shell, which rose steadily from 2007 through 2010, has declined in 2011 and 2012.

"There is a direct shift of the resources and energy in the green building world toward existing building stock," Guma said.

Another major issue will be how to best navigate through the varying and sometimes conflicting mandatory and voluntary green building guidelines.

"You’re finding a lot of variation in adoption between jurisdictions, and untested language meeting inexperienced officials," Morris said. "The voluntary nature of some of the guidelines makes adoption and enforcement highly variable. The code issue will have to be addressed much more substantially by green building officials, with potential conflicts between voluntary requirements and mandatory codes."

Morris noted that the International Green Construction Code (IGCC), a voluntary code, is focused less on energy consumption and more on non-energy issues such as storm water management and gray water reclamation. At the same time, mandatory codes such as the Cal Green initiative in California and the Massachusetts Green Building Code are going momentum in certain areas.

In addition, the webinar presenters addressed the relative costs and benefits of green construction and retrofitting for investors.

“What we’re finding is, with the rapid diffusion of green labels, the rental discount premium for non-LEED certified buildings is 3%, and 7% for effective cash flow and 13% for transaction prices,” said Kok. “That’s a reflection of lower cash flow and higher capitalization rates.”

However, those premiums may be difficult to quantify.

"If you ask a typical broker whether they see [rent] premiums, it’s very hard for them to answer. They may see that it’s a little easier to lease the green space, or a little harder to lease non-green space."

“In a metro like San Francisco, where a large percentage of existing buildings have been certified, it may be harder for the few landlords who don’t have the certification, and those landlords are motivated to get it.”