Development

The New Math of Green Buildings

Sustainable development grows affordable

It used to be that if you wanted wholesome organic food, you had to go to the health food store or a special restaurant and pay a premium. Now, Wal-Mart stocks organic produce and fast-food restaurants are adding salads and fruit cups to their menus that are much healthier, but not much more expensive than the burgers and fries.

The same thing is happening in commercial real estate: Demand for environmentally-friendly, healthier buildings is growing, making green building commonplace and much more affordable, says Murray Newton, an executive vice president with Koll Development Co. (KDC) which has built a series of “Intellicenter” green office buildings on spec in three markets.



A decade ago, Newton says, the premium for green building was as much as 20%; today, it’s between 1% and 9%. Factor in soaring energy prices, and the enhanced operating efficiency of green buildings produces some compelling deal math, even with slightly higher upfront costs, says Tom Perry, director of engineering services for Shawmut Design & Construction.

The narrowing gap between the costs of green and traditional building is a sign that green construction is coming of age. "With more green products and a larger, more educated pool of designers, developers and contractors who specialize in green building, the cost of green building has been reduced," Newton notes. And, as green construction becomes more mainstream, more clients are coming to firms like Koll, which built 150,000 sq.ft. of green buildings in 2004 and 1 million sq. ft. in 2005.
Green market growth

The market for green building products and services reached $7 billion in 2005, a 37% increase from the previous year, according to the U.S. Green Building Council. Today, projects that qualify for the group’s Leadership in Energy and Environmental Design (LEED) designation exist in all 50 states, and more than 3000 buildings totaling 390 million sq.ft have registered with USGBC to become LEED certified.

Along with the growth of the business has come a depth of expertise that makes building green less costly. "For the first green building, the single most expensive part of the project was the cost of financing our ignorance," says Colin Coyne, chief operating officer of Melaver Inc., a Savannah, Ga.-based developer which got into green construction 2003. Now, the company is in the process of forming what could be the first all-sustainable REIT in the U.S. It owns 13 sustainable properties throughout the Southeast and has 12 LEED projects in the pipeline totaling 1.2 million sq.ft.

Do the Math

Now, the green premium is disappearing quickly. In 2003, when the Tower Companies built its first LEED certified project, the 78-unit apartment complex Blair Towns in Silver Spring, Md., the green premium was 3%. Today, the company is developing 2000 Tower Oaks Boulevard, for which it is seeking LEED Gold certification (the second highest level of greenness based on the USGBC checklist). The premium will be 1%, says CEO Jeffrey Abramson.

Hitting these prices still requires a sharp pencil, however. "You just need to understand how to make trade-offs in design elements in order to reach a cost neutral basis,” says Abramson. With Blair Towns, for example, Tower paid more to install Energy Star-rated HVAC systems in each unit, but saved on irrigation systems by landscaping with native plants and using captured rainwater for watering.

Then there are the operating savings. DMR Architects, a Hasbrouck Heights, N.J.-based design firm, for example, uses extra insulation and premium glazing for its buildings, which raise construction costs. But because they keep heat in during the winter and repel the summer sun, the buildings can get by with smaller HVAC systems. "This kind of trade-off results in a wash for first costs and will save energy and operating costs for the life of the building," says Patrick LaCorte, a principal at DMR.

The Human Factor

There are also benefits for tenants, says Nicholas Moore Eisenberger, managing principal of GreenOrder, which worked with Silverstein Properties on 7 World Trade Center, the first LEED Gold certified, multi-tenanted office building in New York. Eisenberger says companies are beginning to demand green buildings to obtain health and productivity benefits. since they incorporate green materials that reduce or eliminate fumes from chemical contaminants associated with “sick building” ailments such as headaches and respiratory problems. The Environmental Protection Agency estimates that between sick days and decreased productivity business loses $180 billion a year because of sick buildings.

For example, the building that housed the University of Texas School of Nursing was labeled a sick building just five years after it was built in the late 1970s. In 2004, the University replaced it with a $42 million green building. The eight-story, 190,000-sq.ft facility, one of the largest green buildings in the nation, cost about 4% more than a traditional project, says John Porretto, president of Houston-based Sustainable Building Solutions Inc. But it costs 65% less to operate and maintain, and it's won 10 awards including one the American Institute of Architects Top Ten Green Project for 2006.

"With people costs outweighing building costs by ten-to-one, building a great, green place where great people want to work is just smart business sense," says Jim Smith, corporate facilities director for Mortgage Lenders Network USA (MLN), a national sub-prime mortgage lender. MLN, which employs 1,300 people across the U.S., is building a sustainable headquarters in Wallingford, Conn. The 305,000 sq.ft. building has a price tag of $75 million. "The facility will serve as an example to MLN customers to educate and encourage them on the benefits of green construction," Smith says.

Whatever their motivations, corporate and government tenants are factoring sustainability into their leasing decisions, says Jean Savitsky, a senior vice president in Jones Lang LaSalle's New York office. She represented Bank of America at One Bryant Park in Manhattan, a 2.1-million sq.ft. building, developed by The Durst Organization that will meet the criteria for a LEED Platinum building. "If this trend continues to grow, sustainable buildings will be lease up more quickly and possibly at higher rents than traditional buildings," Savitsky predicts.

It’s almost a no-brainers, says Murray of Koll Development. "When a corporate user is given the choice of going into a 20-year-old building for $15 per sq.ft. and another $5 per sq. ft. for electricity or going into this green building and paying $16 per sq.ft. and $1 per sq.ft. in electrical, the green building makes a lot of sense to the bottom line," he says. “And tenants will feel good about putting their employees in a healthy building."

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