Taking The Temperature of Green Building, Economics – Part I

With the current state of the economy (very tired of saying those words, by the way), and the “green” building movement having passed the tipping point, it’s interesting to look at a recent poll of industry representatives that highlights some stark differences between corporate executives and real estate developers.

At last year’s (November 2010) Greenbuild International Conference and Expo in Chicago, a survey was conducted by National Real Estate Investor (in partnership with the U.S. Green Building Council (USGBC)) on green building and development.  Its findings are not surprising, and are probably equally accurate 6 months later.

When surveying corporate executives, it is apparent that companies are committed to investing in energy efficiency in their buildings.

  • 95% of corporate real estate executive respondents emphasized that green design is important in their site selection process
  • 82% of corporate executives state that energy efficiency is important in selecting green buildings to buy or lease — up from 2009’s 63%

However, when surveying developers, it is obvious that they are not as enthusiastic as corporate executives. Only 19% view green design as extremely important in future projects, down from 37% in 2009.

For more information about the survey conducted by National Real Estate Investor, check their Web site.

It is my belief that developers and corporate executives have similar motivations, and that the current state of the economy and simple business practices account for the executive and developer responses above, which are more similar than you might think.  For instance, when considering green design within the context of site selection, choosing to redevelop an existing site (the “greenest” of “green” options) over a greenfield (undeveloped) site can just as easily be credited to the old adage of “Location, Location, Location.”  Most existing sites were previously located in desirable areas, and simply redeveloping them is not only green, but good real estate development.

Also, energy efficiency is not only “green” but economically imperative.  Energy efficiency is the one “green” concept that just about everyone can get behind due to simple economics.  Additionally, energy rebates and tax incentives can entice companies to become energy-efficient.  Some Developers may not be completely on board since for them, energy expenses can be a pass-thru expense to their Tenants.

In my opinion, while corporate executives constantly consider the bottom line, they have also found valuable marketing opportunities by “going green.”  Selling “green” to consumers has been profitable.

Real estate developers, on the other hand, have not found those marketing opportunities as fruitful.  In my own informal poll of corporate individuals, real estate agents and developers, it seems that green properties are desirable, but only when it makes economic sense.  When everything else (lease terms, rate, tenant improvement allowance, etc.) about two competing properties are equal, “green” can then become the deciding factor between properties.  However, at this time, not many prospective tenants are willing to pay extra for it.

In order for developers and real estate professionals to fully embrace the green movement, one of two things must happen:

  • Make it mandatory
  • Make it economically justifiable

We’ll explore both in Part II.

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