If the movement to benchmark commercial buildings—that is, to track buildings’ energy consumption and energy-efficiency performance—has a leader, it is arguably economist Nils Kok. The Dutch economist currently holds positions as a visiting scholar at the Goldman School of Public Policy at the University of, Berkeley, and as associate professor in Finance and Real Estate at Maastricht University, the Netherlands. He is also the founder of Green Real Estate Sustainability Benchmarking (GRESB), an international, Netherlands-headquartered organization committed to “bringing benchmarking to the C-Suite,” in Kok’s words.
But Kok’s mission to spread the message of benchmarking goes beyond the commercial real estate industry. His cutting-edge research on benchmarking is making waves in environmental economics and policy as well. Kok’s current academic projects include research that is being conducted with Matthew E. Kahn, professor at the University of California, Los Angeles’ Institute of the Environment, Department of Economics and Department of Public Policy, on commercial building energy consumption. Kok and Kahn’s most recently co-authored paper, "Energy Consumption and the Durable Building Stock: The Capital Vintage Paradox," can be found at nilskok.com.
NREI talked with Kok about benchmarking’s impact on the commercial real estate industry and investment. An edited transcript of that interview follows.
NREI: Many people have resisted green building and retrofitting in the past due to its high cost. It has even been seen as elitist. How are the economics of sustainable building evolving? And how is the attitude of the public and the commercial real estate industry changing?
Nils Kok: Green building is now a large fraction of new, but also of the existing building stock. In 2010, about 10 percent of the commercial office stock in the United States had been labeled by the U.S. Green Building Council under its LEED program. Other sectors are catching up to this trend as well. On the cost side, there is limited evidence on the additional expenses to construct green, but a recent report by the World Green Building Council rightly highlights a perception gap: developers think that constructing green is very expensive (in the 20 percent range), whereas the real marginal cost is more in the 0 percent to 5 percent range.
NREI: What is green building's driving force?
Nils Kok: I would say there are multiple forces (in random order):
- Tenant demand for better space.This is related to: locations closer to public transport, access to facilities such as restaurants and shops (i.e., walkability) and better managed indoor environmental quality, such as temperature, humidity and lighting.
- Legislative pressure.This related to both requirements for new construction—LEED has become the de facto building code in many cities—as well as mandatory disclosure of the energy performance of existing buildings, which is now mandated in seven large U.S. cities.
- Incentives.Many utilities and local governments offer incentives for building retrofits and green construction. This ranges from rebates to tax-exemption.
- Investor scrutiny.More and more investors and investment managers include energy efficiency and sustainability in due diligence for property acquisitions. This is part driven by asset owners, who scrutinize the environmental, social and governance performance of investment managers and listed property companies.
NREI: What are the biggest obstacles in the way of green building becoming the universal standard?
Nils Kok: The difference in energy prices between Europe and the United States shows in consumer behavior and efficiency of durable goods. Low energy prices will slow down the uptake of more efficient building practices, as returns are lower and payback periods are longer. At the same time, there is a lack of information on the energy efficiency and sustainability of properties, unlike information available for cars (MPG), dishwashers, washing machines, etc. Last, the economic benefits of green building have only recently started to become more apparent, with large-scale studies investigating the financial implications of sustainability for real estate investors.
NREI: What countries and cities are most advanced and promising regarding understanding and implementing sustainable measures? How does the United States compare to Europe?
Nils Kok: Australia and Europe have traditionally been leading the movement towards more efficient buildings, driven both by legislation and consumer awareness. But the United States is catching up rapidly, driven by the market rather than purely being dependent on legislation. That is a much stronger force, which may lead to fundamental changes over the years to come. Plus, I made my point earlier about energy prices.
NREI: Are REITs, life companies and pension funds investing in green buildings more now than in the past?
Nils Kok: Absolutely. We studied the adoption of green buildings by U.S. REITs in a recent paper, and you can see the uptake of LEED and Energy Star by these REITs. These property companies have been fast to adopt new standards, and many REITs benchmark their full portfolio in the Environmental Protection Agency’s Energy Star program. One impediment to even faster uptake is the limitation of LEED and Energy Star designations for some property types, such as retail and multifamily. Once this barrier has been removed, large property companies such as Kimco and Simon Property Group will surely start to certify their portfolio.
NREI: Why does benchmarking matter? And is it an art?
Nils Kok: It provides transparency to employees, customers, households, visitors and other people that live, work and play in buildings. It also helps investors to price in environmental risks when evaluating the acquisition and disposition of properties. It brings sustainability to the C-Suite, by enabling the CEO to evaluate an otherwise vague concept in a tangible manner. It's not necessarily an art, but it requires carefuland collaboration with the industry and its stakeholders—consultants, developers, etc. There is the risk of too many benchmarking schemes, competing for a piece of the pie. That's what Europe currently experiences, with every country developing its own green label, confusing tenants and investors.
NREI: How did you come to this career and why have you devoted your career to the economics of sustainability? How have you seen the industry change in your own experience?
Nils Kok: My interest is in real estate investments from an institutional perspective. For pension funds and other large investors, real estate investments involve choices between direct and indirect allocations, countries or states, property types, level of risk. Corporate governance has become paramount with many investors now investing through third-party asset managers. And corporate governance is part of the wider environment, social and governance. A few years ago, the focus on environmental and social factors was in its infancy, but the recent crisis, which was really a real estate crisis, has taught developers and investors that these factors have started to matter to its stakeholders. The crisis, of course, also taught us the lesson of high leverage and irrational risk taking. The industry is becoming smarter, more sophisticated, and with that naturally comes a focus on good-quality asset management. That includes tenant engagement, building optimization, etc.
NREI: How and why was the organization Global Real Estate Sustainability Benchmark, or GRESB, founded? What are its greatest accomplishments so far? What is in GRESB's future regarding growth and projects?
Nils Kok: GRESB was developed to fill a knowledge gap: investors wanted to know more about the ESG performance of their investments in real estate funds and companies, including REITs. Ratings such as the Dow Jones Sustainability Index or FTSE4Good focused just on large cap, listed property companies, ignoring the specifics of the real estate industry and the fact that real estate has the largest carbon footprint and lowest hanging fruit for increasing energy efficiency.
GRESB developed a tool for investors to assess the sustainability performance of their investments at the portfolio level. LEED is great, but it does only part of the job if you're invested in a REIT. For an investor, it's the performance of the portfolio that matters, not just the performance of an individual asset. GRESB has grown from being used by three investors, covering some 200 companies and funds, to a global standard that is used by more than 50 major pension funds and investment managers, including, for example, the Norwegian oil fund (€600 billion total assets under management [AUM]), the Townsend Group ($110 billion AUM in real estate and infrastructure) and CBRE Global Investors (the world's largest real estate investment manager). We're currently in thecollection phase, and the results will be released on September 1st.
NREI: What are some of the research projects you are working on now? Are there any areas of sustainability you have not yet explored but plan to?
Nils Kok: I'm excited about the role that IT and technology can play in creating more efficient buildings and more efficient cities. We're long on human capital, but short on IT in the real estate sector. This is surprising, given the developments of technology of the past decades. The real estate sector is not known for its rapid pace of adaptation, but the sector will eventually become smarter, more connected. I'm using data on some new technologies, like smart thermostats and building optimization software, to investigate the real impact of IT on building performance. We're also in the process of developing the third sequel in our study of the economics of green building, which will be launched during the fall of this year. New data allows us to better understand the income dynamics of green buildings—are tenants in green buildings more “sticky,” especially during the downturn?