Would You Pay a Premium to Lease Green Space?
By Greg Zimmerman, Executive Editor - January 2007 - Green
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.”
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.
Grade “A” Savings for Going Green
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.”
To download the report for free and click on “Greening America’s Schools.”
Center for Maximum Potential Building Systems
Joe Van Belleghem
Buildgreen Developments Inc.
IMMEDIATE PAST CHAIR
James E. Hartzfeld
David A. Gottfried
WorldBuild Technology Inc.
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
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).
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.
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
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.
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
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:
For more information on these eight Climate Actions, download the complete document.
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.
— 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.
— Lacey Muszynski, assistant editor