The U.S. real estate industry has never been a strong proponent of going green unless, of course, green refers to dollars. But there is a growing awareness among developers and architects of the inherent bottom-line benefits of sustainable design and conservation, which is reflected in the design of the next-generation office building.

“The challenge is to produce higher-value buildings at competitive costs in what has been a declining market,” says Ken Hubbard, executive vice president with Houston-based developer Hines. Given the difficult market conditions and competition for tenants, Hubbard believes that developers will be compelled to build high-performance buildings once the market begins to reward such buildings with higher valuations. Such buildings use less energy and cost less to operate, while providing efficient and healthy work environments.

The consensus among architects is that designing green buildings does not curb their creativity. “In no way do we find it restrictive,” says Lee Polisano, president of Kohn Pederson Fox Associates, an international architecture and design firm. “To the contrary, we find it liberating and embrace it.”

Still, green office buildings in the U.S. are small in number and continue to be driven primarily by the government or companies in single-tenant facilities who have bought into the concept, says Kim Heartwell, vice president with RTKL Associates.

That leaves a major hurdle: educating the real estate community on the benefits of high-performance green buildings, which include lower insurance premiums, lower energy costs and healthier and more productive tenants. “We believe that these will translate to higher lease rates, better retention and, ultimately, lower cap rates,” Hubbard explains.

Leading By Example

In Manhattan, the Conde Nast Building at 4 Times Square, a 48-story office building developed by the Durst Organization and designed by Fox & Fowle Architects, is one of the first large speculative U.S. office buildings to embrace green design. Completed in 1999, the 1.6 million sq. ft. tower includes photovoltaic panels, which generate voltage and current when exposed to sunlight, fuel cells, high-performance glass that minimizes energy consumption, numerous recycled materials and efficient gas-fired chillers. These features reduce its energy usage by 40%, when compared with other Manhattan buildings, according to the U.S. Green Building Council.

To incorporate such green technologies, Jody Durst, co-president of the Durst Organization, estimates that the developer incurred marginal costs 4% to 5% higher than if it had built a more conventional office tower. Nevertheless, he says the firm's goal was to illustrate to the real estate community the feasibility of incorporating green design in a functional and attractive high-rise.

Durst believes that the industry is fast approaching the day when the most sought-after tenants will gravitate toward environmentally friendly space, which will translate to increased value for developers and owners who are willing to incur higher first costs, the simple amount incurred to build the project, as opposed to the potential savings achieved over the life cycle of the building for green buildings.

Toyota Motors also is making an environmental statement with its new 624,000 sq. ft. facility in Torrance, Calif., which was built at comparable costs for a traditional steel structure, says the Green Building Council. Its many green features include the largest private-building solar panel network in North America, which, given the state's past power problems, should come in handy.

Valuations Positively Affected

Even simple environmental efforts in older buildings can pay tangible dividends. In late 2001, USAA Realty, a San Antonio-based real estate services provider and a subsidiary of the giant insurer with more than $2.9 billion in assets under management, invested $110,000 to improve energy efficiency at its 170,000 sq. ft. La Paz office plaza in California.

The following year, USAA netted an incremental $1.5 million from the sale of the asset that was attributed directly to the building's improved energy performance, according to Brenna Walraven, executive director of national property management with USAA Realty.

Such returns are common among high-performance green buildings that are designed with indoor air quality and worker health issues in mind, although they pale in terms of the tangential benefits, such as greater productivity and less absenteeism.

Although these benefits are difficult to quantify, the Rocky Mountain Institute, a Colorado-based organization that studies a range of environmental issues, has documented that green building designs can yield productivity gains of up to 16%. Unfortunately, such advantages are not always considered in the traditional cost analysis, especially in the U.S., according to architect Lee Polisano of Kohn Pederson Fox Associates.

Power of Persuasion

Christine Ervin, president and CEO of the Green Building Council, believes the willingness of developers to embrace the green concept is gaining momentum. She points to the rapidly growing list of projects registered for certification under the council's Leadership for Environmental and Energy Design (LEED) standard. The number of projects has ballooned to 841, totaling 113 million sq. ft., up from 600 buildings comprising 86 million sq. ft. in February 2003. The council was established in 1993 to foster development of a new generation of buildings that are environmentally responsible, profitable and healthy places to live and work.

“If you look at ownership, project type and geographic spread, it all points to great diversity and a general mainstreaming of the concept,” says Ervin. Nearly 40% of the square footage in the certification pipeline is privately owned.

The real estate community is beginning to realize that green buildings can add to the top and bottom line, says Ervin. Drawing on natural ventilation techniques, using solar and wind generation technologies, incorporating reflective materials and green roofs, and adopting numerous other strategies can add value to assets.

The European Influence

The model for green buildings can be found across the Atlantic. In Europe, high oil prices forced developers to become much more energy conscious decades ago. In addition, labor laws play a role. For example, laws in the European Union ensure that employee workspaces are near windows. Such legislation mandates the greater use of natural light in building design. Other European laws regulate energy usage and require audits of materials at demolition sites, pushing European buildings to incorporate recycled products, new technologies and green design.

Europe's tallest building, the Norman Foster-designed 1.3 million sq. ft. Commerzbank Tower in Frankfurt, Germany, has been widely heralded as a model for sustainable high-rise design by the design community. Not only does this building meet some of the strictest environmental laws, it delivers on aesthetics as well.

At more than 980 feet, the Commerzbank features operable façades — windows that open to enhance ventilation and reduce energy consumption by nearly 50% when compared with similar towers — extensive natural lighting and even winter gardens that provide true green work settings and informal gathering places.

Richard Keating, president and design director with architectural firm DeStefano Keating Partners, points out that there are fundamental economic reasons that green buildings are more prevalent in Europe. “The problem is that rents in Europe can be several times what they are here,” he explains, which compels Europeans to incorporate elaborate but costly ventilation systems into their buildings.

According to Grubb & Ellis and Knight Frank, annual gross serviceable rents for prime buildings in London were $108.50 per sq. ft. at year-end 2002, second only to Tokyo, where rents were $110.91. At $51.57 per sq. ft., New York was the only American city in the top 10.

In the development business, it's widely understood that Europeans spend more to construct their office buildings, says Dan Kaplan, senior principal with Fox & Fowle Architects. He estimates that the cost for the Conde Nast building's core and shell — basically the cost of bricks and mortar less the land acquisition, fees and other costs — was approximately $125 per sq. ft. In comparison, the like-sized Commerzbank Building may have cost two to three times that amount for its core and shell, according to Kaplan.

Adaptation Takes Time

A short-term focus on immediate returns — particularly by publicly traded companies — continues to be a barrier to adding environmental technologies to U.S. buildings, say industry experts. Their primary focus remains on first costs.

“That needs to change,” suggests KPF's Polisano. Compounding matters is that energy prices in the U.S. are lower than Europe, which makes sustainable design features and complex ventilation systems in Europe uneconomical on a first-cost basis here in the U.S.

Convincing clients about the importance of environmental and sustainable design remains a challenge, agrees Heartwell of RTKL. “Everybody believes in it, but it's the level in which you invest,” she explains. “If you want to pursue it in a big way, it's still going to be client driven where that's part of their mission.”

Alexis Petrakis is a Chicago-based writer. Please e-mail comments on this story to mvalley@primediabusiness.com.

A Passion for Productivity

Today's businesses are squeezing efficiency from every inch of office space.

Like energy efficiency, workplace productivity is at the focus of architects' and developers' office building plans. The next-generation office building emulates many features of older loft buildings that dot-coms once populated, says Dan Kaplan, senior principal with Fox & Fowle Architects.

Kaplan believes the ideal workspace will resemble a long, clear shell that allows for maximum flexibility. High ceilings, improved access to exterior walls, more daylight and airy plans are becoming standard. In fact, the ways interior design can boost productivity, enhance communication, improve morale, foster creativity and reduce absenteeism has become a science.

The planned 51-story New York Times headquarters, for example, is a loft environment with very little enclosed office space. A joint design between the Renzo Piano Building Workshop, a firm with offices in Genoa, Italy, and Paris, and Fox & Fowle, the Times building has numerous conference and meeting facilities with prime views by the perimeter, while private offices rely on borrowed light and are located by the core. The open stairs, also around the perimeter, are meant to encourage use and create informal meeting areas that are important to the company's culture and environment.

“We wanted to make a statement that we are a collaborative company that communicates across the organization,” explains David Thurm, vice president of real estate development with the New York Times. The media company will occupy approximately half of the building's 1.3 million sq. ft. Ground breaking is scheduled for October with a projected 2006 move-in.

‘The Small and Beautiful Trend’

A 1% increase in productivity can more than offset an efficient workplace design that costs 30% to 40% more than a traditional office space, according to Volker Hartkopf, professor of architecture and director of Carnegie Mellon University's center for building performance and diagnostics.

Office environments are also responding to general need for flexibility. Jon Pettit, senior principal with Phoenix-based design firm DLR Group, calls it “the small and beautiful trend.” When the economy is stagnant, the pressure is on to do more with less resources. The traditional office allocates 250 sq. ft. per worker, but in this soft economic climate, more clients are exploring if they can utilize 175 to 200 sq. ft. per worker, Pettit explains. “Our clients are reluctant to build offices for people if they are not going to be there, so they're looking at creative ideas with respect to the at-home worker and the part-time worker,” says Pettit.

Take Sun Microsystems, for instance. The company has been widely recognized for its creative plug-and-play approach to office-space requirements. In its 2002 annual report, Sun says it reduced real-estate holdings and lowered spending on operations by $50 million, thanks to its flexible office program, which provides the infrastructure and resources for 13,000 participating employees to work at remote locations anytime. The significant savings result from more efficient use of real estate.

That's a powerful statement. Given the wild swings in employment over the past several years, many corporate tenants are reluctant to pin down their space requirements a decade in advance.

Says Dave Labuskes, vice president with RTKL, “A whole new generation of workers is coming into the workplace, and they're very comfortable with mobile technology and the freedom it provides.”
Alexis Petrakis