Green Real Estate Rocks!

Take-away from the NAIOP national real estate conference, Development ‘06, in San Francisco: LEED Silver projects are being built by serious developers at a cost premium of 0.5%, essentially in the “noise level.”

I chaired a panel on “The Emerging Business Case for Green Development” at the NAIOP national real estate conference in San Francisco on November 1st. Two major developers, Vulcan in Seattle, and Corporate Office Properties Trust (COPT) in Columbia, Maryland, presented their approach to green development. A private company, Vulcan Real Estate is essentially doing urban infill in the South Lake Union district of Seattle, while Corporate Office Properties Trust, a public company, is doing suburban office buildings in Maryland, Virginia, Colorado Springs and San Antonio. Both are doing LEED Silver on their projects, and both report capital cost increases of 0.5%. This is exciting news, as it indicates that costs for developing green buildings are going down, as developers get more individual experience with green projects.

Posted by on 11/02/2006 at 04:33 PM

What does 0.5% mean?  I assume these developers had hard numbers for their completed LEED-Silver buildings.  To what did they compare those hard costs to derive the 0.5% difference?  I expect it was either an averaged cost of other buildings they have built, or it was an estimated cost of building those LEED-Silver buildings as merely code-compliant buildings.  In either case, 0.5% is pretty silly to even cite.  Even when the number floating around was 2%, I considered that to be way within the margin of error of the comparison.

It may seem to be a quibble, but even a 0.5% number can make an owner contemplating, say, a $10 million project to say, “Ok, show me where to find the extra $50,000.” The number is specious, but the owner feels the need to extract that imaginary $50,000 from somewhere.

Why not, “There is no discernible difference in the price of a LEED-Silver building.”?

Posted by David Sheridan  on  11/10/2006  at  05:34 PM

I think it’s far more wise to cite actual costs from serious, “pro-green” people who have looked very carefully at the costs, than it is to wave your hand and say it doesn’t matter. If it’s an extra $50,000, one can easily compare that to, say, the benefit of a faster lease-up of the property. At a $50,000 cost premium, we’re talking about the rent equivalent of 10,00 sq.ft. at $1.67 per sq.ft., for three months.  If I can get the last 10,000 sq.ft. of a 120,000 sq.ft. building leased three months sooner, because of the green aspects, that’s a real benefit and wipes out the extra cost. If I get better tenants, lower vacancy rates and possibly some extra rent for the energy savings, I’m money ahead, and I have a higher-value property going forward.

Posted by Jerry Yudelson  on  11/10/2006  at  06:47 PM

Thanks for your prompt response, Jerry.  I agree that we should be open about our costs.  My point is that the comparison is not necessarily valid, because we are comparing a hard cost to a soft cost.  So I am not waving away the “difference”.  I contend that there is no difference.

Maybe another way to look at is to compare the hard cost of the green building to the range of costs at which that developer has built previous buildings.  Then we don’t have to look cavalier by saying “It doesn’t matter.” Instead, we let the owner draw the obvious conclusion: green buildings can be built to fit into the range of costs of conventional buildings.

Posted by David Sheridan  on  11/11/2006  at  10:47 AM

Did these panelists talk about the returns on their .5% investment?  As you cite in your comment above: higher rents, sale prices, lower vacancy etc. are all potential benefits.  Did they reap the rewards?

Posted by Greg Reitz  on  11/13/2006  at  08:54 AM

Developers are notoriously secretive about things like return on investment. I think we can assume that the returns were reasonably positive, perhpas not only in economic terms, but also in terms of favorable PR. The biggest indication of favorable returns is that both firms indicated they would continue to do LEED Silver (or better) buildings in future developments. “Watch what they do, not what they say,” is probably the best advice.

Posted by Jerry Yudelson  on  11/23/2006  at  10:45 AM