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Sustainability Trends in Commercial Real Estate

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Jonathan Burgess

on 15 September 2015

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Transcript of Sustainability Trends in Commercial Real Estate

The Real Estate Value of Green Building
Cushman & Wakefield Survey
Top 8 Findings
The Value of Green Building

-Owner advocacy and engagement is a must.

-Appraisal expanded to account for complexity of high-performance buildings.

-Developers and owners should choose banks wisely and utilize services of financial institutions with expertise in this area.

-Appraiser needs experience working with high-performance assets / knows the local market.

-MAI, SRA or SRPA appraiser designations w/ specialized education on the valuation of sustainable buildings.

Sustainable Development Trends
FEMA Flood Maps
Implications & Projections
-Redevelopment of infill properties & towards those parcels that are less vulnerable.

-FL building code & local zoning code response to inundation, adaptation action areas, efficiencies.

-Energy prices escalate: investments in efficiency, energy management and even alternative energy sources.

-Water prices escalate: investments in:
Extending purple pipes for reclaimed water for irrigation,
Rainwater harvesting to flush toilets
Increased awareness around potable water use and retrofits of flow and flush fixtures to be more Waterwise.

-People to step up & become engaged in Sustaining this County in which we live, work and play.
Elected officials, business leaders, developers, it’s going to take all of us joined into this conversation.

Jonathan Burgess, PLA

Top 5 Current Trends
Audience Poll (Raise Your Hands)
Does Sustainability Influence your investment decisions?
Is environmental responsibility essential to business operations?
Can taking steps to reduce energy usage not only reduce costs, but enhance a corporation’s brand and customer appeal?
Aegon Principal Financial Group
AIG Prudential Financial, Inc.
Bentall Kennedy SL Green Realty Corp.
BlackRock State Teachers Retirement System of Ohio
Cornerstone Realty TIAA-CREF
IndCor Properties, Inc. Tishman Speyer
JPMorgan Chase & Co. USAA Real Estate Company
Lasalle Investment Management Vornado Realty Trust
Morgan Stanley
Survey Participants
Finding #1: Investors Demand Sustainable Buildings
Finding #2: Sound Management and GRESB Are the Biggest Drivers
Finding #3: Large Occupiers Continue to Push Sustainability With Owners
Finding #4: Sustainability Performance Is a Significant Consideration for Investors
Finding #5: Sustainability Is a Factor in Evaluating New Investments
Finding #6: Sustainability Performance Is Less of a Factor For Already Owned Assets
Finding #7: Sustainability Has a Positive Correlation to Value
Finding #8: Energy Efficiency Contributes the Most to Value
Value Proposition
of Green Building
Increased Occupancy
Lease-up rates up to 20% above average

Increased Retention Rates
-Increased Employee Comfort
-Lower Operating Costs
-Improved Employee Heath & Productivity
Operating Expenses
Lower operating costs when paying for own utilities w/ triple net lease increases Net Operating Income

-Passing savings onto tenants may attract more tenants
or entice them to pay more for office space

-High-performing HVAC & Lighting equipment w/ long-lasting components, calibration and energy management through Commissioning increase shelf-life and reduce replacement costs
Mitigating Risk
High-performance buildings hedge against changing consumer preferences, new laws, & increasing energy $$.
2008 Study: "Commercial Real Estate and the Environment"
Commissioning, Auditing, Appraisals
Investments in green features establish position in crowded marketplace and keep rents up.
Skilled valuation professional can determine green 'premiums' vs necessary retrofits to keep up w/ market.
More Productive Workforce
-Less Absenteeism
-Improved Air Quality
-Increased Employee Comfort

Best-in-class market position can future-proof assets,
protecting the going-out cap rate.

2 dozen insurers offer premium credits & discounts
Institutional investors embracing ESG practices & demanding ESG considerations are factored into investment decisions.
Real estate funds ranking / rating funds' ESG performance through research analysts and ratings groups.
State and Municipal Regulations:
-Disclose or benchmark building energy performance
-Obtain a green building certification like LEED.
Federal, State & local tax credits and incentives:
-IRS Section 179D provides tax deduction of up to $1.80 per sq. ft.
-Income tax credits, property tax abatements, bond financing, grants and rebates.
-FAR density bonuses, fast-track or expedited permitting. fee Waivers/Refunds/Reductions.
-Boynton Beach has a Green Building Program with CRA Tax Increment Financing Funding
-Green Energy Works- PBC commercial financing vehicle for energy efficiency improvements.
-Corporate and Government tenants have policies for LEED etc. to qualify for leasing.

-General Service Administration: policy of min. LEED Silver for all federal leases of 10,000+ sf new construction projects.

-17,000 LEED-certified commercial projects in the United States.

-Total SF of LEED-certified commercial real estate exceeds 20% in several major cities.

-REIT market: 120 companies w/ $430 billion in stock market capitalization; 220 million sq. ft. of LEED-certified buildings.

-Leading public and private real estate companies use LEED to deliver higher value to their tenants and greater transparency to investors.
Commercial Tenant Demands:

Small interventions by the owner in the conventional appraisal process can make a difference in getting value.
1) Market Profile- Do the best tenants in market prefer green or efficient buildings? Are tenants looking for certifications? Is the asset in a market that does not value green buildings?

2) Tenancy from Lease-Up to Turnover- Does market show a premium for Lease-Up/Absorption; Vacancy and Retention, Downtime; Collection Losses?

3) Lease Structure- Does lease structure benefit tenants or owner? Recoveries, Tenant Improvement, Maintenance, Expense Sharing

4) Utility Costs- Has the building been Commissioned? Are energy audits / historical use data credible? Do low energy costs convey competitive advantage? Does the third party Commissioning or auditing firm have a track record/ What is their realization rate on projected savings?

5) Income and Expenses Analysis: Potential Rent and Vacancy premiums? Do green practices (daytime cleaning) or materials (durability, lower reserves) reduce expenses? Are insurance rates lower? Is the building an early adopter of any unproven green technologies? Is there an additional demand on property managers, engineers to understand green systems? Do managers make tenants partners in optimizing building performance?

6) Investment Trends and Risk- Do likely buyers display a preference from green assets and will this lower reversion risk? Potential for smaller, less experiences owners of green buildings to have a higher risk profile vs institutional players
-Income Capitalization Approach: The best option for high-performance buildings due to the relatively low number of comparable properties.
-Cost Approach: Weighs the value of the green features against any premium.
1) When construction cost estimates are available from architects or estimators, do offsetting incentives, reductions to cost of other components, and long-run benefits offset premiums? Can these be supported by life-cycle or cost-benefit analysis?

2) Is the green premium for a project too high to offset benefits? Is there a risk of over-improvement or superadequacy?

-Sales Comparison Approach: Provides an opportunity to weigh the asset against green and conventional peers
Physical Characteristics- Is the property of higher quality? Does it need the green features just to stay competitive or to avoid obsolence? If the property goesn’t have green features does it lose a class ranking for instance from Class A to Class B?

Economic Characteristics- Is the property more marketable than its peers? Would the market consider the asset less risky?

-Design/ Construction Professionals, Property Managers, Operations/Maintenance Vendors, Building Engineer, Sustainability Manager, Commissioning Agents or Building Auditors.
"Adaptation action area": optional comprehensive plan designation for areas that experience coastal flooding and that are vulnerable to the related impacts of rising sea levels for the purpose of prioritizing funding for infrastructure needs and adaptation planning.

-Local governments that adopt an adaptation action area may consider policies within the coastal management element to improve resilience to coastal flooding. Criteria for the adaptation action area may include:

• Areas below, at, or near mean higher high water
• Areas which have a hydrological connection to coastal waters
• Areas designated as evacuation zones for storm surge

Adaptation Planning Strategies- Adaptation to sea level rise is the steps a community takes to become more resilient to the impacts of rising seas over a period of time. The three main strategies a community may use to adapt to sea level rise are:

Mission: To transform the way buildings and communities are designed, built and operated, enabling a sustainable and socially responsible, healthy and prosperous environment for people to live, work, learn and play.
Jonathan Burgess, LEED AP BD & BD+C
I. PROTECTION - Protection strategies involve "hard" and "soft" structurally defensive measures to mitigate the impacts of rising seas, such as shoreline armoring or beach renourishment, in order to decrease vulnerability yet allow structures and infrastructure in the area to remain unaltered.

II. ACCOMMODATION - Accommodation strategies do not act as a barrier, but rather alter the design through measures such as elevation or stormwater improvements, to allow the structure or infrastructure system to stay in place. Adaptation measures do not prevent flooding or inundation of the property but do protect the structure.

III. RETREAT - Retreat strategies involve the actual removal of existing development and possible relocation to other areas and the prevention of future development in these high risk areas.

John Hardman, Ph.D.
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