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RREEF Report: Recession Fails to Diminish Demand for Green Real Estate

In Downturn, Owners Eye Existing Buildings for Sustainability, Energy Efficiency Measures
March 18, 2009
The fundamental shift in real estate markets toward sustainable buildings will experience only a mild disruption from the global recession and credit crunch, according to research published last month by RREEF, the investment management business of Deutsche Bank’s Asset Management division.

The report, like other studies and surveys that have been published recently, found little evidence to suggest firms are backing off long-term commitments to sustainability. It said that economic conditions have not diminished the appetite of tenants and property investors for green real estate.

“Stretched budgets and market uncertainties will undoubtedly force some firms to postpone or curb sustainability initiatives in the near term,” the report said, but added that green buildings "will continue to outperform conventional buildings due to their scarcity relative to demand."

"Owners of green properties should generally outperform -- or at least minimize their losses -- relative to less sustainable properties, while achieving other social or company goals,” it said.

What's more, the report warned that the recession will not provide cover for property owners who have hedged on sustainability or energy efficiency, particularly in major U.S. real estate markets where green buildings continue to gain market share at a swift pace.

“Budgets are tighter, but the downturn has not hurt green building any more than the whole economy is hurt,” said Richard Donnally, senior principal of the Maryland-based design firm DVA Architects and founder of Sustainability By Design, an affiliated green building consulting group.

In fact, going by the numbers, green building could have one of its best years ever. The large backlog of projects that are registered for LEED certification -- about 18,500 at the start of this month -- makes it extremely unlikely that the growth of certified green buildings will tail off, the study stated.

Roughly 2,000 projects have registered for certification since December, according to numbers from the U.S. Green Building Council, the nonprofit that runs LEED. The number of certified projects doubled last year. And in the eight years since LEED was created, the amount of LEED-certified floor space has grown 25 times faster than the overall rate of U.S. commercial real estate (about 2 percent annually), the study said.

Green building is benefitting from other conditions too, RREEF noted, such as sustainable real estate development mandates in cities and states, and cost premiums that are much less than were once thought.

Still, the downturn is affecting segments of green building in vastly different ways.

Some green retrofit projects are being shuttered, sustainability advocates acknowledge, as financing has become more difficult to find and tenant rosters are impacted by job cuts.

Those that are investing in sustainability may favor energy efficiency upgrades, which tend to cost less and have better defined paybacks than more general sustainability measures, said Dan Probst, chairman of the Energy and Sustainability Services group at Jones Lang LaSalle.

“Owners are clearly motivated to pursue the energy efficiency opportunities. They’re being more thoughtful about investing in things that improve the property environmentally, but may not have a direct economic payout,” Probst said.

Measures like indoor air quality and green cleaning programs, he said, seem to “be falling a little father down on the list. The low-cost/no-cost measures are being pursued much more aggressively.”

But by far, the biggest impact is coming from the construction sector, where a recovery seems distant. Newly constructed buildings account for two out of every three LEED-certified projects, and the ratio for registered projects is almost the same.

Recent news has not been good. Boston Properties last month suspended development of a 1 million-square-foot office tower in Manhattan that was planned for LEED Gold certification, and the green-friendly rebuilding of World Trade Center is likely to fall further behind schedule in the recession.

Microsoft has postponed its massive headquarters expansion in Washington that would have added millions of square feet of LEED-certified space. Also delayed is Related Cos.’ Hudson Rail Yards project in west Manhattan (all 12 million square feet is supposedly slated for LEED) and as much as $650 million in new construction by ProLogis that would have been built for LEED certification under a company-wide policy.

“Capital is very dear right now. There’s no lack of interest in sustainable building, there’s just a lack of building,” said Skip Schick, the manager of Better Bricks, the commercial green building initiative of the Northwest Energy Efficiency Alliance.

But if those events paint a bleak picture, they don’t tell the whole story, said Andrew J. Nelson, the vice president of RREEF Research who authored the study. “Those kinds of events make big news, but there is still an awful lot of construction going on,” he said. “You don’t read about the ones still going forward.”

For example, Donnally’s Sustainability By Design group is working right now on a geothermal component to a new office building being planned by Akridge in Loudoun County, VA. That project is projected to earn LEED Gold or even Platinum, and is proceeding according to schedule, Donnally said.

Yet, the downturn appears to be having a much different effect on existing buildings, a sector that has been slower to embrace sustainability.

The recession, and particularly the drop-off in construction, seems to be drawing more attention to sustainability opportunities in older buildings, a shift that advocates say is long overdue. With tighter belts, owners are using energy efficiency measures to cut utility costs and pursuing LEED certification or the government’s Energy Star label to gain competitive advantages in a difficult market.

Energy and environmental assessment work at Jones Lang LaSalle is booming, Probst said, while the RREEF study said LEED’s Existing Buildings (LEED EB O&M) platform “seems poised for the same exponential growth” as its New Construction platform has experienced.

With the exception of a few projects, Donnally said most of his work today is in repositioning existing assets. “I’m lucky we’re in the existing building market,” he said. “It’s helping take some of the pain away.”

“As important as new construction is, it’s the existing stock that consumes the vast amount of energy in this country,” Schick said. And he added, “If the recession means that people are going to focus a lot more of improving the performance of the existing building stock, that’s a good thing.”

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