Wednesday, April 13 th, 2011 Sustainable Real Estate Economic Overview and Update By Norm Miller,...

Wednesday, April 13th, 2011Sustainable Real Estate Economic

Overview and Update

By Norm Miller, PhD, Research Professor at the University of San Diego, NAIOP Distinguished Fellow

and Editor of the Journal of Sustainable Real Estate, see www.josre.org

• My contact: [email protected]• PS. Most of my talks are economic and

strategic outlooks but I have been type cast within NAIOP.

Preface on Regulation Vs. the Market

• 1. The market can efficient absorb the burden of regulation if it is clear and known a priori.– For example: design regulations on colors and

materials, heights and density, etc.– The rationale may be defendable in some cases.

• Endangered species, clean water, clean air…

• 2. Disclosure and market transparency help the market work better while penalties and incentives and fees distort the market.– i.e. affordable housing and bonus density

Sustainability is enhanced by enlightened planning (something that rarely exists)

• Mixed use and more density can do more good than LEED silver or gold requirements and since when do we rely on a 3rd party non-profit for regulatory minimums? (But planners for years encouraged separation of uses or more recently used green nooses to force up land costs and density)

• Rigid transport planning can work in dense markets but not most markets, i.e. Atlanta. (We’d be better off encouraging private market alternatives and using gas

taxes to discourage use of oil consumption.)

Key Economics of Green Topics and Conclusions

• Green does not cost significantly more except for the novice.

• We are still early in the main streaming of more efficient buildings.

• Rent premiums vary by market and tenant mix presence.• Modest absorption advantages seem clear.• Vacancy is a function of vintage.• Operating expenses are not always less but energy costs

and water costs are less.• Green leases: enforcement, risks and sharing the benefits

is important and there are some great lessons from NAIOP cases here.

• Green Feature investments often have high hurdle rates. • Residual values: Cap rates are lower but appraisers are naïve.

LEED while dominant is still evolving, weights, hurdles and components will change:

LEED while dominant is still evolving, weights, hurdles and components will change:

• Energy Conservation (windows, lights, solar power technology evolving, air drying disks prior to cooling)

• Rain Water recycling and indigenous plant landscaping (importance varies by local market)

• Toilet designs are evolving as are showers and sinks.• Non-toxic materials used in construction.• Indoor air quality, waste management.• Personalized under floor air controls.• Modular components that can be easily removed and

possibly re-used.• Electric plugs that no one uses….YET!

Source: CoStar Group

Top Ten Greenest States/Dist Based on LEED LQ

1 DC 10.744012 OR 3.0464863 VT 2.6778394 WA 2.389765 CO 2.3482956 MA 2.0859857 ME 2.0317328 NH 1.366299 IL 1.233565

10 CA 1.226033Source: CoStar Group

New Opportunities and Demand Drivers

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Energy Star® Requirement addresses Section 435 of the Energy Independence and Security Act (EISA).

Effective December 19, 2010, no Federal agency shall enter into a contract to lease space in a building that has not earned the Energy Star® label in the most recent year except for the following:

o Size of lease is 10,000 rentable square feet or lesso No space is available in the delineated area that meets the

functional requirements of an agency, including location needs

o Agency will remain in a building they currently occupy o Lease will be in a building of historical, architectural, or

cultural significance verified by listing or eligibility for listing on the National Register of Historic Places

Cost Effective Energy Efficiency Upgrades are required in NON-Energy Star® Buildings

Energy Star® Requirement for Lease Acquisition

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•Buildings can earn an Energy Star® label - similar to appliances

•The Energy Star® rating relates to the level of a building’s energy performance (relative to other similar buildings; there are 23 categories for benchmarking purposes, including offices, warehouses, courthouses and data centers)

•Labeling is based on EPA’s established National Energy Performance Rating System which analyzes a building’s past 12 months of utility consumption history and existing systems

•Points are earned on a scale of 1 – 100

•Buildings achieving a score of 75 or higher are eligible for Energy Star® label

•Energy Star® labels expire 12 months after being granted, but can be renewed

•The CoStar real estate database identifies Energy Star® and LEED® buildings - - including their space availability and pricing. EPA’s www.energystar.gov site, updated regularly, lists all Energy Star® buildings by address or building category.

Energy Star® Rating

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What should drive LEED development?

• Absolute rent levels or• Rent differentials?• Mandates by local or state government?• The GSA?• Fear of Obsolescence?

A classic combo of all of the above: Potomac Yard 1&2 Leed

Gold Building654,000 GLA at 60% leased Nov of 2005 and 90% leased Sept of 2010


99% occupiedBuyer: USAA


The Ill-Conceived Green Notion

• Some developers in the past five years have taken a marginal B- location, perhaps just outside the prime submarkets and skimped dollars on location and then spent a little extra to go for a superior level LEED building, even GOLD.

• This does not always work. • An inferior location is not offset by going green,

except in rare cases, where substantial excess demand exists and/or there is a mandate by the government to lease green.


Paybacks and Risks of Green Feature Investment

• What do you investors want in terms of payback in years?


Why such a high rate of return required?


The risk of jumping in too fast on green ‘features” or products

LED 1/1/09 CFL IncandescentLight bulb projected lifespan 50,000 hours 10,000 hours 1,200 hours

Watts per bulb (equiv. 100 watts) 13 23 100

Cost per bulb $89.99 $5.95 $1.95 KWh of electricity used over 600 1200 500050,000 hours

Cost of electricity (@ 0.20per KWh) $120 $240 $1,000

Bulbs needed for 50k hours of use 1 5 42

Equivalent 50k hours bulb expense $49.99 $29.75 $81.90

Labor to replace at $3 per bulb $12.00 $123.00 Total cost for 50k hours $209.99 $281.75 $1,204.90

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It’s not irrational to wait on buying the

• I phone 5• An LED Bulb when prices are dropping fast• Solar cells, etc.

• Until such time as the items start to become commoditized or

• When tax credits seem to be temporary and the economics are compelling


Are occupants more productive?

• Human costs dominate business costs and if buildings with better light and air can be more productive then we should be able to justify higher rents.

• A recent American Journal of Public Health July 15, 2010 study by Michigan State (Singh, Syal, Grady, Korkmaz) suggests health benefits do correlate with LEED feature affecting ventilation, temperature, lighting, acoustics, and environment. They found reduced absenteeism and other benefits.

• Another study last year by Miller and Pogue in JOSRE.org also found some positive results last year and concluded that management matters a great deal on this question.


Thank You

• Norm Miller at [email protected]

Wednesday, April 13 th, 2011 Sustainable Real Estate Economic Overview and Update By Norm Miller,...

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