The business case for green buildings 2008

As we start 2008 I want to recap how the business case for green buildings has unfolded in 2007 and to forecast how it is likely to develop this year. To sum up 2007 in a nutshell: the business community has totally bought into green buildings. That’s it, end of discussion.

The only question now is: How fast will “building green” become the norm for all corporate and developer decisions? In 2007, we saw more than 70% growth in cumulative LEED registered and certified projects, on top of more than 50% cumulative growth in 2006. Essentially, the cumulative number of registered and certified projects has increased 250% since the end of 2005!

Why? Three seminal events in the past two years: An outpouring of global concern over carbon dioxide emissions from energy use of all kinds; Al Gore’s Academy Award and Nobel Peace Price for An Inconvenient Truth; and Hurricane Katrina’s exposure of the vulnerability of a major American city to natural forces. As a result, the American public is finally demanding action on climate change, in ways large and small. Since American business does know how to listen to the consumer, it realises that a good part of its future success will come from reducing its “carbon footprint,” through energy conservation retrofits and greening new buildings.

So what does this do to the business case for green buildings? Here’s what I’m hearing from speaking to more than two dozen business and industry groups in the past year.

1. Saving energy. This has gone from being a “good idea” to a business necessity. It’s not just that energy conservation has a positive life-cycle cost impact, but also that it offers a direct reduction in an organization’s “carbon footprint.” A number of studies have shown that energy conservation not only also offers a positive “life-cycle-cost” investment (you make money), but that it’s the most cost-effective way to lower society’s carbon dioxide output, one that doesn’t require new technology, just an ability to finance the investment.

2. It’s about the people, stupid! Corporate America is desperate for good people. The “Gen X” group, now roughly 30 to 43 years old, is particularly in short supply. By 2014, in the 35 to 44 year old age group, there will be 7 percent fewer people than in 2005, in absolute numbers; in terms of the size of the economy in 2014, it will be a shortfall of more than 20 percent. This age cohort represents senior managers, young CEOs, top salespeople, top technical people, i.e., those who help the most in growing revenues and profits. If a company cannot attract and keep these people, by conforming business practices to their values, it will not prosper. Green building, which represents a visible and positive affirmation of values of sustainability and environmental responsibility, makes the statement that companies need to make to get and keep good people.

3. It increases property values. Look no further than a study released in October by Professor Norman Miller of the University of San Diego. Reviewing more than 2,000 large office buildings in the CoStar® database of commercial properties, Miller’s study revealed that Energy Star-rated office buildings (those in the top 25 per cent of energy performance) since 2004 have had 2 per cent greater occupancy and a $2 per square foot greater rents. To top that, in 2006 Energy Star buildings sold at a 30 per cent premium (in dollars per square foot) to non-Energy Star-rated buildings. Case closed! Green buildings are more valuable, and destined to become more so each year.

4. The demand is there. Commercial office tenants are waking up to the business case for productivity and health in LEED-certified buildings, especially those that offer superior daylighting and indoor air quality. A 2006 review by Lawrence Berkeley National Laboratory of 33,000 surveys of employee satisfaction with their working conditions showed that certified buildings had statistically-significant greater satisfaction than non-certified buildings. In the public sector, the demand is also growing, as one jurisdiction after another makes a commitment to LEED-certify all future public buildings.

5. Green buildings mitigate risk. Leading insurance companies stepped up in 2007 to offer reduced-cost commercial insurance products, recognizing that green buildings are at lower risk for indoor air quality problems and are likely to have smoother operations, since they’re all commissioned at the time of occupancy. With faster lease-up of commercial buildings, higher rents and greater occupancy, green buildings also mitigate the “market risk” for developers. With lower operating costs and greater tenant satisfaction, green building also mitigate the “economic risk” of return on investment for building owners.

6. The media is all over green buildings. Just sign up for Google Alerts, put in “green buildings” as a search term and you will get five to ten (or more) news articles every day, plus an equal number of blog posts. In other words, a company with a green building commitment and certification of all future projects receives enormous positive media coverage, with significant benefits for marketing and public relations purposes.

7. Follow the money. Investors of all stripes made 2007 the year that “responsible property investing” became the norm for Real Estate Investment Trusts (REITs), public and union pension funds, other investment groups, and many individual investors. People want to invest in buildings that will increase in value and that have a lower carbon footprint; green buildings fill the bill. Even with the global crisis in subprime mortgages, many leading banks have stepped forward with aggressive green lending programs. When it’s easier than ever to finance green buildings with both equity and debt, developers get on board in a hurry.

8. Green buildings no longer carry cost premium. All of the above business case items have certainly stimulated demand for green buildings, but many business people think that the major barrier is still a significantly higher initial cost. A 2007 study by the World Business Council for Sustainable Development showed that business people still believe green building practices carry a 10% or greater cost premium. However, this year Harvard’s Green Campus Initiative delivered the first LEED Platinum building with no capital cost premium. With more than 1,100 LEED-certified projects already finished, there’s no shortage of design and construction teams with the experience, skill and knowledge to deliver high-performance buildings on conventional budgets. Savvy building owners and developers are beginning to demand this level of performance.

9. We have trained an entire industry in green building design and construction practices since 2000. With more than 42,000 LEED-Accredited Professionals on record and more than 60,000 people having taken LEED workshops, there is plenty of capacity to deliver another 1,000 LEED-certified commercial and institutional projects in 2008, and that’s my prediction. With each project averaging 100,000 sq.ft., we’re looking at 100 million square feet of such projects, well over 25 per cent of the total commercial building market.

10. The green building revolution is spreading to all commercial market sectors. In 2007, the retail, hotel and healthcare sectors all began to move toward LEED certification and energy efficiency in new projects. For example, in August, Best Buy announced that all future stores would be LEED certified. In November, Regency Centers, a major public shopping-center developer, announced that 60 per cent of all new centres in 2010 would be LEED-certified (and there’s not even a LEED rating system yet for shopping centres!)

If you want to know more about the business case for green developments, pick up a copy of my new books, The Green Building Revolution (Island Press, 2007) and Marketing Green Building Services: Strategies for Success (Elsevier/Architectural Press, 2007). If you want a good read or need a last-minute “stocking stuffer” for the green building enthusiast in your life, pick up my Green Building: A to Z (New Society Publishers, 2007).

I’m wishing all of you a very Happy and Prosperous (Green Building) New Year!