

January 2007

Would You Pay a Premium to Lease Green Space?

By Greg Zimmerman, Executive Editor

Two 15-story buildings stand right next to each other in a prime downtown location of a major city. Both buildings are brand new and have received plenty of inquiries from potential tenants.

Building #1 is a traditionally built, modern facility — it meets code to the letter. Building #2 is similar to Building #1 in terms of amenities. It offers the same types of leased space, but designers have taken a few extra steps to make it a green building — it has a LEED Core and Shell certification, and its developer has offered to assist tenants with their own LEED for Commercial Interiors certification goals. A lease for 40,000 square feet of space at Building #1 costs approximately $35 per square foot, Building #2 costs $36.50 per square foot. Is the cost premium worth it?

An increasing number of tenants interested in green space are being forced to ask themselves that question. It’s a matter of adding the building’s greenness to the numerous other criteria for leasing space, and determining where on the priority scale green features land. Is a LEED rating worth as much as, say, elevator reliability or restrooms? It’s a difficult issue, to be sure, but asking those kinds of questions will determine how much (if any) more a tenant is willing to pay and whether they’re willing to extend the length of their lease.

For some tenants, the answer is easy. “We’d definitely be more likely to get into a long-term lease with a totally sustainable building,” says Cristine Kanasek, manager of facility services for Duke University Clinical Research.

For most tenants, however, it’s a bit more tricky. Overall, willingness to pay a premium to lease green space is simply a function of how much an organization values sustainability. “Organizations are creating business models reflecting sustainability,” says Chris Moss, president of Moss Green Realty, a New York City real estate brokerage. “Those organizations are more likely to look for green space.”

Looking High and Low

The problem is that those organizations that value green are having difficulty finding existing green space to lease. Even though green buildings are being built at an unprecedented rate, the large majority are occupied by a sole occupant. The green development market is slowly gaining momentum, but most developers still view green speculative properties as too risky. The dearth of tenable green space, then, is one reason landlords can charge more.

“There are just no green buildings in our area,” says Brad Humrighouse, a Cincinnati-based broker for Coldwell Banker. “I think it’s coming, but right now, requests for green space are falling on deaf ears.”

“It’s a market with huge growth potential,” says Kanasek. “But developers don’t feel like they have to do it. It’s difficult for them to give up their typical construction principles and change their mindsets and materials.”

Even in New York, a city with several green high-rise office buildings either just opened or under construction (see cover story, page 30), Moss says tenants have trouble finding space that meets their green needs.

“The inventory of green buildings is low,” he says. “In New York City, landlords with attractive green features are definitely able to charge a premium — if they’re in a good location. Tenants need to work with landlords to get them to build green.”

Green Teamwork

Tenant/landlord cooperation to build or renovate green seems to be the trend. Tenants interested in green features are either petitioning landlords to make green improvements to space they already lease or are doing their own green renovations.

“The market is very much tenant-driven right now,” says Moss.

The good news for organizations interested in green space is that landlords seem more willing to listen to arguments for green improvements. And many of the green features that make tenants happy are relatively inexpensive.

Humrighouse says good lighting and indoor air quality seem to be the most important. He says he uses a “letter of intent” to make sure that tenant improvements include low-VOC paints, carpets, sealants and other finishes, as well as full-spectrum lighting.

“In terms of things that are very obvious to tenants, natural light and fresh air seem to rate very high,” says Moss. “Green areas, like parks or green roofs, do too. If the energy savings from the building are passed on to the tenants, that can be a huge incentive as well.”

Find the Hot Buttons

Other priorities depend on the level of green sophistication of the tenant. For tenants looking to persuade a landlord to make green improvements, the goal should be to find a particular green strategy that hits a landlord’s hot buttons — something that the landlord would be willing to do over the whole building, not just for a single tenant.

In leasing space for his own company, Moss, for example, convinced his landlord to switch to green power. “After some thinking with the landlord, we figured out a way to make it happen,” he says. “I was really impressed with the landlord — he went out of his way to make it happen. Now the landlord is negotiating with the bulk supplier to use green energy for the whole building.”

Until the development industry finds a “magic key” for complete market transformation to sustainability, the market will continue to be driven by tenants. Many think that magic key could be a study that proves green buildings are appraised at higher value than a similar, traditional building — something green building advocates already believe. The problem is that many of those same advocates don’t see an apples-to-apples comparison.

“Green buildings are inherently different,” says Moss. “It’s tough to compare green buildings with non-green buildings and say ‘all things being equal.’ They don’t feel, look or operate the way non-green buildings do. With LEED-certified buildings, different features are intrinsic.”

But it’s because organizations are valuing those green features more and more that green leased space is in such high demand.

K-12 Schools:
Grade “A” Savings for Going Green

Financial Benefits of Green Schools ($/ft²)
Energy	$9
Emissions	$1
Water and Wastewater	$1
Increased Student Earnings	$49
Asthma Reduction	$3
Cold and Flu Reduction	$5
Teacher Retention	$4
Employment Impact	$2

Total	$74
Cost of Greening	$3
Net Financial Benefits	$71

A recent study shows that the net financial benefit of building a green K-12 school can be as much as $71 per square foot (see chart to the right) when compared with a school designed just to meet code.

“Greening America’s Schools: Costs and Benefits,” produced by Gregory Kats, managing principal of Capital E and former director of financing for energy efficiency and renewable energy in the U.S. Department of Energy, is the result of an examination of 30 green K-12 schools located all over the country. According to the report, “conservative and prudent financial assumptions” were used to analyze the cost benefits of building sustainably.

The report states that the national average school construction is $150 per square foot. Building green adds an average of 1.7 percent to first costs, or about $3 per square foot.

Other significant findings of the study detailed in the report include:

Green schools in this study used an average of 33 percent less energy than conventional schools.
Greening America’s schools could lead to a reduction of 585,000 pounds of carbon dioxide, and significant reductions of other greenhouse gases.
The 30 green schools in the study used 32 percent less water than conventional schools.
Seventy-five percent of senior executives believe that a green school improves the ability to attract and retain teachers.

In addition to illustrating the costs and benefits of the schools particular to this study, the report draws on several other green school-related studies and incorporates that information as well. The report concludes that building green schools is “more fiscally prudent and lower risk than continuing to build unhealthy, inefficient schools.”

U.S. GREEN
BUILDING
COUNCIL

Website

E-mail

CHAIR
Kevin Hydes
Stantec

VICE CHAIR
Sandy Wiggins
Consilience LLC

SECRETARY
Gail Vittori
Center for Maximum Potential Building Systems

TREASURER
Joe Van Belleghem
Buildgreen Developments Inc.

IMMEDIATE PAST CHAIR
James E. Hartzfeld
Interface Americas

FOUNDER
David A. Gottfried
WorldBuild Technology Inc.

FOUNDER
Michael L. Italiano
Sustainable Products Corp.

PRESIDENT, CEO and FOUNDING CHAIRMAN
S. Richard Fedrizzi
U.S. Green Building Council
1015 18th St., NW Ste. 805
Washington, DC 20036
202/828-7422

briefings

Studying LEED in Public Buildings

A study by PinnacleOne, a construction consulting firm, shows that 48 percent of public building owners have implemented energy efficient measures into projects within the last year. Of those owners, 70 percent received LEED certification (71 percent received silver certification and 29 percent received gold).

The study also found that, of the owners who implemented energy efficient measures, 43 percent chose to outsource design and construction work but maintain ownership and management, 45 don’t outsource at all, and about 10 percent outsource all aspects of the facility’s funding, construction and management.

Owners in the Northeast and West were more likely to use energy efficient designs and owners of educational buildings were more than twice as likely to use sustainable designs as other market sectors.

The study was conducted by telephone in August 2006.

Read and Be Green

ASHRAE’s updated GreenGuide: The Design, Construction and Operation of Sustainable Buildings contains a new chapter that provides guidance on how to use LEED. The book also contains a new chapter on how HVAC&R systems interact with the local environment and methods for mitigating their impact.

The book contains more than 40 tips — sidebars that provide information on techniques, processes, measures or systems. The tips also include other sources for reference. Visit www.engineeringforsustainability.org to check on the tips.

The book can be purchased on ASHRAE’s Web site for $79.95 ($62.95 for ASHRAE members).

Washington, D.C., Mandates LEED

Washington, D.C., is the first major city in the country to pass legislation mandating that all new buildings must meet LEED guidelines. Starting in 2012, the bill requires that all new construction or major renovation projects 50,000 square feet or more would have to meet LEED requirements

Several cities have laws in place that require new public buildings to meet LEED standards, but this is the first bill in major city to require even private developers to meet LEED. (Pasadena, Calif., and Montgomery County, Md., have also passed similar bills.)

Support for Renewable Energy

The IRS has allocated $800 million in tax-credit bonds for 610 renewable energy projects to be located throughout the U.S.

The bonds range from $23,000 to $31 million and are intended to help finance 434 solar energy facilities, 112 wind power installations, 36 landfill gas facilities, 14 hydropower plants, 13 biomass power plants and one refined coal product facility. Each project may also require other forms of financing, as well. The IRS selected the projects from 709 applications for 786 projects.

The tax-credit bonds, called “Clean Renewable Energy Bonds,” will be issued by the state or local governments or electrical cooperatives. The bonds pay the bondholder by providing a credit against their federal income tax, instead of paying interest. That means that the bonds will provide interest-free financing for renewable energy projects.

An Update on LEED

	NC	CI	EB	CS
LEED Registered Projects*	3,738	431	234	293
Certified Projects	504	92	34	23

NC = New Construction
CI = Commercial Interiors
EB = Existing Buildings
CS = Core and Shell
LEED = Leadership in Energy and Environmental Design

*A “registered project” is one that has applied for certification, but has not yet been conferred a rating by USGBC

About LEED

LEED-NC was released in 2000, and is currently on its third full version: LEED-NC v2.2. LEED-EB and LEED-CI were released in 2004. LEED-CS was released in 2003, but is still in its pilot phase.
There are LEED projects in all 50 states and 12 countries.
Total square feet of space registered or certified: 774 million.
For more information about LEED, visit www.usgbc.org/leed

Data are current as of November 2006.

USGBC TAKES CLIMATE CHANGE ACTION

At Greenbuild in November 2006, USGBC unveiled a series of eight Climate Action proposals and recommendations that will spotlight green buildings’ impact on climate change. They are:

A 50 percent reduction in carbon dioxide emissions. Pending USGBC member approval, all new commercial LEED projects will have to meet this requirement in 2007.
Increased energy reduction prerequisites in LEED. Pending USGBC member approval, all new projects in 2007 will have to achieve at least two energy and optimization credits.
Implementation of a carbon dioxide offset program. USGBC will develop a program that relies on performance data from LEED projects.
Continuous process improvement incentives. All buildings that achieve LEED for New Construction (LEED-NC) and LEED for Core and Shell (LEED-CS) certification will automatically and at no cost be registered for LEED for Existing Buildings (LEED-EB).
Pushing the envelope on performance — certification fee rebates for platinum buildings. A building that achieves a platinum certification will have its registration fee fully refunded.
A carbon neutral USGBC. By the end of 2007, the organization will be 100 percent carbon neutral.
Portfolio Performance Program. This program will help companies achieve LEED certification quickly on a large number of buildings.
Carbon reduction education and a challenge to the industry. USGBC will launch an educational program in the first quarter of 2007.

For more information on these eight Climate Actions, download the complete document.

projects

The Providence Newberg Medical Center is the first LEED Gold certified hospital.

Hospital Earns Gold by Going Green

Hospitals and healthcare facilities have stringent requirements when it comes to power and indoor environmental quality. The very direct connection between these systems and the preservation and protection of human life means that their reliability is paramount.

The Providence Newberg Medical Center in Newberg, Ore., has combined these healthcare concerns with environmental responsibility to become the first LEED Gold certified hospital in the country.

“It felt like the right thing to do,” says Larry Bowe, chief executive of the hospital. “We were taking care of the land, creating a better healing environment for patients, and reducing the cost of operations.”

Part of creating a better healing environment included installing a ventilation system that circulates 100 percent outside air throughout the hospital at all times. This system is intended to decrease the risk of infection from airborne contaminants that may be present in recirculated air, Bowe says.

Bowe also cites the increased amount of natural daylight in patient rooms and open spaces as contributing to a better healing environment. The abundant daylight creates a more calming space for patients, and the views to the outside gardens and landscape create an atmosphere more conducive to healing.

The facility was also designed with energy conservation in mind. The 56-acre campus includes a 175,000-square-foot medical center, a 138,000-square-foot hospital, and a 37,500-square-foot office building, all of which are powered completely by green energy. The center gets 50 percent of its electrical power from wind energy, 25 percent from geothermal energy, and 25 percent from low impact hydro power. The facility’s two 750-kilowatt generators also enable it to sell energy back to Portland General Electric in times of peak demand.

Earning the LEED certification meant steps had to be taken during the construction process. Tony Church, senior project manager for Skanska who oversaw the Newberg Providence project, says that there were many aspects of the project that differed from a typical construction project. Waste created during the construction process was diverted to a recycling plant, and an effort was made to utilize regionally manufactured construction materials, says Church.

Church says that green hospital construction presents special challenges, so the Newberg project was an exceptional feat. Hospitals have unique HVAC and electrical needs because of the function of the facility, he says, and this means extra work to ensure health codes are met. Integrating a green building plan into the construction process adds an extra facet that must be managed, so it’s important for goals to be mapped out early in order to achieve success, says Church.

Although the cost for the green building initiative was more than typical construction costs, tax incentives were available, says Bowe. And although the upfront costs may have been high, the hospital predicts the initial investment will pay off in 14 months, and the projected annual energy savings are 26 percent.

Bowe says that the payoff has also occurred with the hospital staff and patients. “The response we have gotten is that the green building effort make employees feel valued, and it helps employees feel better and do their job better,” he says. Bowe says that in a Press Ganey patient survey, a national benchmarking system used by hospitals, Providence Newberg ranked in the 94th percentile of patients satisfied with care. “The question we track is the likelihood to recommend the hospital to family and friends,” he says.

— Rachael Zimmermann, associate editor

Rebuilt Railyard Garners Gold Certification for EPA

Formerly a massive rail yard and Superfund site, Potomac Yard just outside of Arlington, Va., has been rebuilt into a sprawling mixed-use development including retail, office and residential space. One and Two Potomac Yard, the site’s flagship office buildings, achieved LEED-NC Gold certification in July 2006. They are the first new construction projects in the Washington, D.C., metro area to receive LEED Gold certification.

Headquarters of EPA’s Office of Solid Waste and Emergency Response and Office of Prevention, Pesticides and Toxic Substances, the buildings reflect EPA’s mission to protect human and environmental health. Originally designed as a conventional building, it underwent an extensive redesign to meet LEED Gold criteria, including 20 percent energy savings and 40 percent water use reduction.

During construction, 71 percent of waste was recycled, diverting 2,000 tons from landfills. Of the building materials used, 27 percent contained recycled content. In addition, 63 percent of building materials were manufactured within a 500-mile radius of the site, and of those, 61 percent were also extracted regionally.

Exterior green elements include a highly reflective Energy Star compliant roof. Part of the roof is a vegetative roof that serves as an occupant-accessible patio. In the rear of the facility, sand filters treat stormwater runoff heading for the Potomac River, reducing particulates in the water by more than 80 percent.

Inside the buildings, employees are provided with bike storage, lockers and shower facilities to encourage alternative means of getting to work. Indoor air quality was also taken into account, and low-VOC adhesives, paints, sealants and caulks were used.

The EPA has also purchased grid-source green power for both buildings for one full year.

— Lacey Muszynski, assistant editor