Real Estate Investors benefit from Green Building Momentum

by JEFF SIEGEL

Every year around this time, I get the itch to move far away from the cold, gray streets of Baltimore. It's not that I dislike Charm City, but when the mercury falls below 40 degrees Fahrenheit, the lure of warmer climates becomes overwhelming. So to ease the pain of last week's cold snap, I decided to browse the real estate listings in California. What I found blew me away.

I ran a search for a few select zip codes in and around the Los Angeles area. About 90 percent of the listings were foreclosures! Here in Baltimore, where folks still believe their $80,000 rowhomes built in the 1920s are worth $250,000, it's easy to forget what's going on in the real world. Though look back at the charts of what were at one time some very profitable REITs, and it'll quickly come rushing back to you.

The fact is, 2008 was an absolute blood bath for real estate investors. Though the green building sector did manage to gain ground last year.

According to McGraw Hill Construction, green building has actually grown in spite of the market meltdown. In its 2009 Green Building Outlook, the company noted that the value of green construction increased from $10 billion in 2005 to almost $50 billion in 2008. The study also suggested that by 2013, green construction could be valued at nearly $150 billion.
Of course, even with that bit of positive news, there are still those who argue that green buildings carry a heftier price tag. And in most cases, they're right.

In 2003, California's Sustainable Building Task Force reported on the costs associated with its green buildings. That report found the cost premium averaged less than 1 percent for basic LEED certification, 2.1 percent for Silver certification, 1.8 percent for Gold, and 6.5 percent for Platinum. And in a separate 2008 report, which included contributors from Boston College, The Brookings Institution, and PNC Financial Services group, researchers found that green buildings cost less than 4 percent more than conventional buildings, with the highest premium concentrations being no more than 1 percent.

Still, when you realize the cost advantages over the life of the building, it's really a no-brainer. The green California EPA Headquarters Building is a perfect example.

With systems calibration, monitoring, and maintenance for energy performance, the building delivers annual savings of nearly $200,000. After-hours heating and lighting controls as well as the building's exterior lighting systems add another $110,000 of yearly savings.

Just these few efficiency upgrades resulted in savings of more than a quarter of a million dollars per year for that building. And those don't even include the annual savings from grounds management, water-efficient landscaping, elimination of garbage can liners, collection of recyclables, occupant recycling, reduced landfill disposal costs, and entryway cleaning to prevent particle and dirt buildup. Overall, $500,000 was invested in efficiency upgrades, operations, and employee practices, which generated a total of $610,000 in annual savings. That initial investment was recovered in less than a year. And according to the building's USGBC project profile, using an 8 percent capitalization rate, the annual cost savings have increased the asset value of the building by nearly $12 million.

While there isn't enough room in these pages to quote every green building study ever conducted, there is certainly little doubt that the economic benefits of green building are very real. And as we move forward, digging ourselves out of one of the worst economic meltdowns in recorded history, investors would be wise to follow this trend – as it really does represent what will one day be the status quo of building and construction.

This is not some random, green niche. This is the future.

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