The US Green Building Movement - Green Means Go
As energy costs continue to soar to unprecedented levels, it appears that a critical threshold has finally been crossed in the US green building movement. Over the past several years, the “greening” of commercial real estate has started transitioning from a socially responsible peripheral issue into a business necessity for many commercial real estate players. Since 2000 (the year that LEED-NC (new construction) was adopted), the number of new green building projects has been growing at a compounded annual growth rate of 50 percent to 100 percent. In 2006, the number of projects achieving LEED-NC certification was almost 20 times the number that were certified during 2000 and 2001 combined. Approximately 50 percent of the aggregate building area of all LEED certified buildings in the US was certified during 2006 and the first half of 2007.
What has caused the acceleration of the green building momentum in the US? Primarily three factors:
(i) user demand,
(ii) government requirements and incentives, and
(iii) increased savings/reduced costs.
The initial wave of green building initiatives was and continues to be driven primarily by the end users of such buildings. As more and more news regarding sustainability and the threat to our environment has surfaced, the government and corporations have felt compelled to take action.
The US Government is the largest real estate owner and tenant in the country. In recent years, both federal and state governments have started requiring green building in connection with the new construction of government buildings. More recently, the government has started prohibiting certain governmental entities from leasing office space that does not meet certain minimum green standards. The result has been more than just an increase in the aggregate number of green buildings. Perhaps more importantly, it has resulted in an increased public awareness of the green building movement since in many markets such governmental buildings are the first green buildings constructed in the area.
Additionally, as Fortune 500 companies have started jumping on the green bandwagon, they not only have started implementing sustainable initiatives within their organizations, they also have started demanding green buildings from their landlords and have started requiring their suppliers and service providers to have green plans in place.
A second key factor that has accelerated the growth of green building activity in the US has been an increase in the number of governmental initiatives for green buildings in recent years. Numerous municipalities have recently enacted policies either mandating or encouraging green buildings (the most common of which have been imposing requirements for green certifications for new construction or renovation (a) of private facilities above a certain size threshold and (b) of public/municipal facilities).
In the last three years alone, the number of government sponsored green building initiatives has nearly tripled. Such green/sustainable legislation will only continue to grow exponentially over the coming years. Additionally, government incentives provided to developers (and the threat of future penalties for not going green) have helped spur additional movement. Several jurisdictions provide for expedited permitting for green buildings and certain states have started providing tax incentives for green buildings.
The last factor, and the factor that has recently received heightened attention, is that energy costs have reached record levels at a time when developers and building owners are finally starting to obtain a comfort level with the cost control mechanisms and historical figures associated with building green. The primary argument (or excuse) that developers of commercial real estate projects have relied upon over the years is that the cost and expense of building green does not justify the benefits to the bottom line. However, with oil prices reaching new highs on a daily basis and with the variety of governmental incentives that are being implemented, developers, architects and contractors are becoming more attuned to incorporating green features into the building process as a means of cutting costs for the end users of such buildings.
Developers, contractors, architects and engineers have also become more educated and experienced in building green projects thereby minimizing the uncertainties and delays of implementing “new” technologies and materials. The general consensus among those experienced in green development is that with proper upfront planning and integrated design of green concepts, the cost premium associated with sustainable building can be minimal to non-existent.
Of course, the costs associated with new construction of green buildings can be controlled much more easily due to the incorporation of green building features at the onset of the design phase of the project, however, historical comparisons now exist that suggest substantial cost savings generated over a period of time for retrofitting existing buildings as well. Although long-term historical data is currently lacking, recent studies have suggested that in addition to the savings associated with lower energy costs as a result of such green building efforts, the owners of green buildings have been able to command higher rents as a result of the increased demand for their buildings and the lower operating costs of such buildings that are passed along to the tenants.
What will push the green building movement to the next level? Absent across the board government regulation requiring green building construction and renovation, perhaps the greatest opportunity to “persuade” developers to further buy into the green building movement is for the lenders that provide the majority of the capital to fund projects to start requiring a “green plan” to be in place in order for a developer to obtain financing. This is similar to the approach that lenders followed in connection with the impending Y2K “meltdown” and the post 9/11 terrorist attacks. In each instance, lenders changed their underwriting requirements and started requiring that their borrowers have a Y2K plan or terrorism insurance, respectively, in place as a condition to closing and funding a loan. The rationale for the lenders to utilize this type of private regulation of green building initiatives would consist of a combination of:
(i) social responsibility,
(ii) a realization by lenders that the collateral for their loans would become more valuable and marketable with green features in place, and
(iii) a strategic decision by lenders to attempt to stay one step ahead of the impending wave of federal and local legislation that will potentially be impacting their collateral over the life of the loan.
However, even without any such lender intervention, it appears that the interests of the various constituents that impact development decisions within the commercial real estate industry are now aligned in a manner that will ensure that the green building movement will continue to grow at unprecedented levels over the coming years.
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