Do green buildings make dollars and sense?

by David Pogue - 3.1.10

After several years of developing, introducing and implementing sustainability practices in a wide range of office building projects around the country, CB Richard Ellis (NYSE: CBG) arrived at the logical question: To what extent are we impacting the industry, and is the effort we’re making to improve our clients’ operating efficiencies producing positive outcomes?

In 2009, CBRE, in conjunction with the University of San Diego (USD), launched the largest study of sustainable commercial buildings of its kind, focusing on 154 buildings in 10 widely dispersed geographic markets. All the buildings had earned an Energy Star label and ranked in the top 25th percentile of comparable Energy Star buildings in either 2008 or 2009. The buildings, which totaled more than 51 million square feet and had an average Energy Star score of 83, ranged from fewer than three years old to more than 40, and in size from 80,000 to more than one million square feet. The study used comparison market data collected by the CBRE Information Management teams in the 10 markets and also relied on quarterly building data updates from various CBRE real estate managers.

Key to the study’s success was the collaborative work of Norm Miller, who has a doctorate in real estate and finance, and his USD research team at the Burnham-Moores Center for Real Estate. With a CBRE managed population of nearly 3,000 occupants, the team had access to a deep pool of respondents which, through a systematic process and the accurate collection of data, could render critical insights into the motivation of tenants and the choices they make based on a building’s environmental components.

Expectations, experiences and attitudes toward sustainability play an important role in tenants winning corporate support for an occupied space, with improved recruitment, retention and, especially, increased productivity being key factors.

These results produced a number of interesting findings:

For starters, the economic findings reinforced prior studies that demonstrated the positive impact of sustainability on both achievement of rental rate and occupancy rates of the buildings. Most pronounced was the finding that buildings achieved rental rates 13.1 percent higher than buildings in previous studies. The influence on vacancy levels was less dramatic, with a smaller than expected 3.5 percent reduction. One conclusion is that the surveyed tenants are weighted toward real estate and financial services firms, so were more directly impacted by the downturn and their sector’s larger retrenchment.

Of particular interest were operating expenses: Virtually no difference was found in overall expenses, although energy-related costs were lower and there were few if any outlier buildings (anomalies outside the curve) with extreme expense costs. A shortcoming of the study may be the small number of comparison properties reviewed, which is being addressed in 2010.

There were several noteworthy results in relation to operating expenses. Foremost was the impact that Energy Star had on a building’s performance. Consistently the data proved that even a single point improvement in the Energy Star score equates to a 80 percent to 100 percent improvement in energy usage. In other words, an improvement from 50 to 80 in Energy Star score would result in about 25 percent reduction in energy usage and costs.

Another key finding related to separate utility metering, which was analyzed in 23 buildings that employed it. Separately metered tenants on average had an eye-opening 21 percent lower utility costs compared with those occupying buildings with a consolidated meter. Clearly, making tenants accountable for their own utility usage has a significant impact on consumption behaviors.

The opportunity to analyze a large, engaged occupant population was the true innovation of the CBRE-USD study. While there have been other studies focused on the economic aspects of sustainable buildings, the CBRE-USD study represented the largest-ever study to hear directly from occupants, with more than 750 responding.

The study found that most tenants had been in business for a reasonably long period of time and represented a mix of public and privately held firms. It also showed that a significant number were implementing assorted sustainability practices. The tenants indicated that such practices enhanced their business and aided in recruitment and retention efforts, although fewer than expected shared their vision of sustainability, or its outcomes, with clients or employees.

The most interesting results were seen in the area of employee productivity. More than 55 percent of respondents experienced reduced employee sick days in “green” spaces over their previous locations, with an average reduction of 2.88 days. When extrapolated to employee compensation levels, the economic benefit translates to slightly more than $5 per square foot, a significant number.

When the broader question of general productivity was posed, the answer was even more surprising: For those responding “Yes,” and providing a metric of change, the improvement was 4.88 percent. Again, applying the self-reported compensation levels to this percentage, we can predict an additional economic benefit of nearly $20 per square foot for the typical occupant. Overall, our study indicates that occupants gain on average nearly $25 per square foot in economic benefit from a “green” space, or more than 85 percent of the average rental rate.

We also asked a number of questions regarding the leasing process, the likelihood of seeking similar sustainable spaces in future leases and the wiliness to actually pay a higher rent for more sustainable space. Respondents indicated little actual “green” language written into their current lease, although they intended to seek this type of space in future occupancies. Not surprisingly, there was a general resistance in willingness to pay more in future rent for a sustainable space; however, most buildings were already commanding a rental premium.

The CBRE-USD longitudinal study continues, and is expanding in 2010 to include specific questions for occupants of CBRE’s growing Leadership in Energy and Environmental Design-Existing Buildings portfolio. While noteworthy, first-year findings require validation over multiple years. For now, it’s safe to conclude that sustainable buildings command a significant rental premium and have marginally better occupancies than the general market. Residual benefits include fewer employee sick days and higher productivity, factors that may influence a tenant’s choice of occupied space. We look forward to future studies that could reinforce developing trends and to gaining insight into the value of sustainable space and its benefits to the commercial real estate market.