Pizza Fusion, a restaurateur based in Deerfield Beach, Fla., is gearing up at 50 new franchises to install features such as bamboo flooring, countertops made from recycled detergent bottles, solar panels, seat cushions made from soybean oil and ceiling panels built mainly from recycled aluminum cans.

With the organic pizza chain's announcement in August that new properties would meet the Leadership in Energy and Environment Design (LEED) certification standards, the company joined the growing ranks of firms making big environmental commitments where their real estate operations are concerned.

A May 2007 survey of real estate executives and institutional investors conducted by the University of Arizona in Tucson shows that 36% of respondents have invested in green buildings, while 31% are considering similar measures.

“There's clearly been a very explosive rate of growth in the interest in green buildings,” says Gary Pivo, professor of urban planning and natural resources at the University of Arizona and author of the study. Companies are taking a variety of approaches to reduce their energy consumption. Among the notable examples:

  • Denver-based ProLogis, an industrial REIT, was the first real estate company to join the Chicago Climate Exchange (CCX), a trading system to reduce greenhouse gas emissions. CCX requires members to annually reduce emissions by a specified amount. If they make reductions beyond that level, they can sell the excess to others. If they fail to meet the target, they must purchase another's surplus.

  • In Seattle, Vulcan Real Estate's 161-unit Alcyone Apartments complex includes low-heat-loss windows, digital thermostats, a central gas-fired boiler for domestic hot water, and high efficiency lighting. The features save $40,000 a year on energy costs, the firm says. Most projects developed by the Seattle-based firm are LEED-certified by the U.S. Green Building Council in Washington, D.C.

  • Los Angeles-based CB Richard Ellis has set a goal for its facilities to become carbon neutral by 2010. That requires balancing carbon dioxide released from burning fossil fuels with renewable energy so that net carbon emissions are zero.

Some companies are reaching beyond the workplace to diminish their impact on the environment. “We don't emit any greenhouses gases, but we do have an effect on emissions through traveling to job sites and going to conferences,” says David Goldberg, a principal at Mithun, a Seattle architectural firm that also joined CCX.

“We wanted to find a way to quantify our impact and offset it.” Despite a 40% increase in the number of employees in recent years, Mithun reduced its carbon footprint by 9% through small steps such as using hybrid cars, says Goldberg.

Several factors, including environmentalism, spur the trend toward sustainability, the broad term used to indicate practices that conserve the Earth's resources. Many global companies are required to follow strict environmental regulations at European and Asian facilities, and that has led to stronger corporate environmental policies. Also, some firms' customers demand pro-environment policies.

“It's important to the Ford Motor Cos. and the Dow Cornings, and these are the very customers leasing from us,” says Walter Rakowich, president and chief operating officer of ProLogis. “If it's important to our customers, it has to be important to us,” he says.

“This isn't a fad,” observes Sally Wilson, director of advisory services for CB Richard Ellis. “It's clearly growing. For example, a big law firm called me last week and said, ‘We see you're going carbon neutral. How do we get there?’”

Beyond green development

Many companies incorporate sustainability in everyday practices so it becomes part of the basic mission. At Vulcan, a development and asset management firm created by Microsoft co-founder Paul Allen, the goal is to get every project LEED-certified, explains Lori Mason Curran, market research manager.

Certification is based on such benchmarks as water savings, energy efficiency, and indoor environmental quality. The sustainable features determine whether a project meets higher LEED environmental levels of silver, gold, or platinum.

If a Vulcan project can't be LEED-certified, the firm doesn't give up on sustainability, Curran says. Case in point: A 53-unit housing and retail project to be completed in Seattle in 2008 called Borealis Apartments won't be LEED-certified. But it is expected to meet local green standards by installing ceiling fans or building systems that reduce heat distribution levels.

“There's a cost associated with LEED certification that can make it more difficult to pursue,” Curran says. Costs mount with the level of certification sought, and include the expense of energy-efficient features and administrative costs of seeking LEED certification and monitoring compliance during construction.

ProLogis examines each project to determine what aspects can be improved, says Rakowich. “In France, where the government subsidizes electricity, it helps to make photovoltaic roofs. Elsewhere, we're experimenting with solar walls, making buildings more air tight, trying to increase natural lighting, and also using energy-efficient lighting fixtures.”

Massive tracking operation

As a member of CCX, the greenhouse gas emissions trading organization often called a “cap-and-trade” system, ProLogis is required to track and reduce annual corporate greenhouse gas emissions. For example, a company could reduce employee travel and facilities' energy use.

CCX members agree to reduce emissions by 6% a year. If they use less than their annual allowance, they can sell the excess to members who exceed their target. If they use more than their allotment, they must write a check to purchase credits from members with a surplus.

“It was an immense operational effort to quantify our carbon footprint before we joined,” says Rakowich of ProLogis. “We have operations in 13 countries including the United States, Europe, Mexico, and China. It took six to 12 months and bits and pieces of about 50 to 60 people's time. I have no idea what it cost.”

One advantage: ProLogis executives now know the company's carbon output for 2006 and can compare those totals to output for 2007.

An imperfect system?

One CCX critic, the Natural Resources Defense Council in New York, which declined to be interviewed, issued a statement to National Real Estate Investor complaining that CCX members produce increased amounts of carbon without penalty. The environmental group says exchange members also are permitted to increase emissions as operations grow.

That's not the case, says Richard Sandor, chairman and CEO of CCX. “Members are subject to the only existing, legally binding cap in North America,” Sandor says. “Members that in any given year exceed the cap have to purchase Carbon Financial Instruments (CFIs)” to reduce net emissions.

The claim that members are permitted to increase emissions as their operations grow is also false, Sandor says. “If emissions associated with growth in operations increase above what a member could emit in a given year, that member has to buy CFIs,” to reduce emissions to the annual reduction requirement.

But Sandor acknowledges that another criticism is true. Members can get credit for energy reductions that others may also claim. Though theoretically possible, he says it is unlikely to occur. Members who improve electricity efficiency beyond their goals can earn credits, he says.

Mithun's Goldberg isn't deterred by the trading system detractors. “I respect those opinions,” he says. “I don't think anybody has it all figured out yet. At a conceptual level, a cap-and-trade system works. Those issues need to be resolved, and we want to support CCX because we know it's working hard to resolve them,” Goldberg concludes.

Strict measures

CB Richard Ellis is seeking LEED certification for three facilities to house staff, using energy-efficient appliances and even setting printer defaults on double-sided to use less paper. After all the energy-reducing measures, if its internal operations still produce greenhouse gases, it'll offset those emissions.

“The easy and quick fix is to buy carbon credits,” says Wilson. “But we might buy wind power or invest in alternate fuels instead.” CBRE formed a practice group to help clients improve sustainability.

In Chicago, Jones Lang LaSalle has done the same. John Schinter, global president of energy and sustainability services for JLL, says that the first step is to set up a way to track greenhouse gas emissions, and the second is to create a company plan to compare industry output.

Commuting by bicycle

Small steps make a difference, says Goldberg of Mithun. “We added three office bikes that people can use to get to meetings in the city,” he says, and the firm upgraded its three cars to hybrids.

Will more real estate firms follow suit? Rakowich thinks so. “The more we've invested our time and the more I learn, the more engaged I'm getting, and the more I believe we have to do our part.”

G.M. Filisko is a Chicago-based writer.

Wanted: Green real estate investment trust

While many companies are making progress in becoming more energy-efficient, challenges still loom, including the absence of a real estate investment trust (REIT) devoted solely to green projects.

“There's been interest in the idea of a green REIT for several years,” says Gary Pivo, professor of urban planning and natural resources at the University of Arizona in Tucson. “There aren't any. A few REITs, like Liberty Property Trust and ProLogis, have said they're seeking to be global leaders in that regard. But they're not doing green buildings exclusively.”

Another challenge for the green movement is the question of what to do about existing buildings that don't meet the newest environmental standards. “Where do programs that certify green buildings leave owners interested in improving the performance of their portfolio from average to above average?” asks Pivo.

“Those owners don't have the opportunities for support as do the very best built buildings,” adds Pivo. If the industry is really committed to real estate sustainability, he says, it must create systems to motivate owners to continuously improve existing buildings because the least environmentally friendly buildings are older properties.

Many investors want to put their money where their environmental loyalties lie, says Rona Fried, editor of The Progressive Investor. The newsletter, which helps investors identify green corporations, recently analyzed sustainability in real estate. Fried is heartened by the progress she sees.

“The industry is currently taking baby steps, but I'm very encouraged that it's taking the issue seriously,” she says, citing the increasing number of LEED-certified projects and conversion of brownfields. LEED-certified projects have grown from 669 in 2006 to 1,004 in 2007. And the number of projects registered to gain LEED certification upon completion has grown from 4,628 in 2006 to 7,714 in 2007.

Interest in the environment is unlikely to wane, Fried says. “Real estate executives are getting nervous that they're going to be left behind. The best analogy I can use is that when central air conditioning came along, a lot of owners said they wouldn't bother with it. When it became standard, those owners found themselves with antiquated buildings that tenants didn't want to be in,” Fried says. “Green buildings are becoming the standard, and people who don't follow those standards will be behind the times.”
G.M. Filisko