Siemens and US Chamber of Commerce Award Sustainable Communities.

Some days, just a little video will do. The US Chamber of Commerce and Siemens have put on a sustainable communities award. A short news piece -- so you don't really get the scoop on how these communities were judged to be award-winning sustainable. Based on the report, I wonder how high or low they set the bar. You be the judge and let us know. Better yet,got your own picks for a sustainable community? Send it in!

Movin' On Up! Our Green Journey has a new home...

Our Green Journey has a new home and I will not be posting here in the future. If you landed here, please go to www.galleyecocapital.com and (re-) subscribe to either the email or the RSS feed.

See you there!

Photocredit: Flickr/

Green Homebuyer Intel Plus Dan Green Interview On Subprime

So this week I've spent time at the annual summit of Build It Green, one of the pacesetting west coast organizations dedicated to greening the residential sector. BIG's market impact is significant -- it is expected that forthcoming state legislation establishing minimum green standards for single family housing will be based in part upon BIG's GreenPoint Rated guidelines. Marketing Reality Check: Do you know who and where your green homeowners are and why they buy? I follow BIG's work because their standards also cover greening multifamily properties, a key area of my business. One highlight of the summit was a great presentation of key findings from a McGraw Hill Construction's Green Homeowner SmartMarket Report, putting out current intel on how homeowner attitudes about green housing are changing. Last week, I posted about pursuing demographic plays when possible in 2008. Green Journey readers are getting a couple of the more provocative nuggets here, since a) green residential is predicted to be a $60 billion market by 2010 -- possibly a good opportunistic play by some of my fund friends -- and b) this type of info should give some early insights to us commercial property professionals who need to understand LOHAS/green demographic lifestyle trends for retail, hotel and multifamily properties.

Intel #1: 71% of all green homeowners are women. Most are married and highly educated.

The study doesn't elaborate on why women green homeowners outnumber men two to one, although I thought I heard some snickering in the audience when that particular slide came up. Note also that word of mouth is the preferred method of how people get their information to buy green homes -- from direct personal recommendations by other green homeowners. Not from TV and official advertising overtures of homebuilders. Though it wasn't directly stated in the study, you can also infer pretty clearly who is missing the green wave so far: the poor, ethnic minorities and lesser educated. They do not exist in this report.

Intel #2: Texas and Florida lead in green home production.

You should have heard the San Francisco crowd gasp when they heard that one! And here's where the cynic in me can't be restrained: largely oversupplied (and now soft) markets always tend to display the highest levels of production. In another section of the report, it states that housing starts in the south in 2008 and 2009 will be their lowest ever. I think you can safely tie those two statements together when interpreting the regional data. By the way, other leading regions are: Washington, Colorado, Nevada (Ouch! California didn't even make the top five).

Intel #3: Reduced energy costs are a key motivator for buying a green home.

Green home features can cut energy bills by half. Rising energy and interest costs are starting to become apparent to homeowners and energy cost savings are the unique selling proposition of green homes, equal in importance to the green consumer's ethical concerns. Want more intel? Click the McGraw Hill link above to get the whole study (note: get out your credit card; $$$). State of Residential Real Estate Markets: Interview with Dan Green If you care about interest rates and think that the housing market performance could have some effect on commercial real estate (like I do), then you should get to know Dan Green. He's a residential mortgage planner and a pretty astute reader of the capital markets. He blogs regularly about these topics at TheMortgageReports.com. Since the whole subprime debacle has been unfolding, he's been debunking what he calls misleading information about mortgage rates and subprime being bandied about in the media. Take a look at his recent interview at the National Association of Realtors convention, where he talks about subprime lending and where he thinks the residential market is going in 2008. If you have an opinion about whether its good for subprime borrowers to get assistance from the government or think that the housing market could make life tough for commercial real estate, listen to Dan's perspective as you think it through.

Real Estate Video by - Real Estate Blogger

ULI 2008 Fortune Telling: A Shortlist of Cool Moves Including Going Green

"Two years from now, a Class A non-green building will not be considered Class A."

- George Denise, General Manager for Cushman Wakefield /Adobe Systems San Jose Campus. Overheard during a panel session on green building.

Like a lot of finance professionals, I was hopeful about attending the ULI Emerging Trends 2008 conference here in San Francisco -- welcoming any port in the credit market storm. Added to that was the promise of a big discussion on green real estate for the first time by one of the mainstream real estate economists. So let's cut to the chase: now the message is that there will be an overall slowing of the economy (sigh...duh), investors are crossing their fingers in hope that consumer demand will remain at acceptable levels, and that interest rates do not become too much of a wild card. In short, Joe or Jane Q. Investor will have to surf choppy waters for awhile but in the end, should come out in good shape. And they stress that current conditions seem right for making a few cool moves. Here is the ULI shortlist:

• Have Dry Powder (Or Go Get Some): Investors with strong relationships and liquidity are going to score now that there may be more motivated, overleveraged sellers in the market needing a lifeline.

• Buy Distressed Loans: Investors are looking at B and mezz loans, figuring that they can get their hands on a quality asset for a 10%-20% discount from its original value if the borrower is unable to repay the obligation.

• Focus on Global Pathway Markets: Traditional 24-hour megacities enjoy more buyer demand and upside potential, especially when capital gets nervous.

• Buy Public REITS: A panelist from BRE Properties, Inc., a top multifamily player, gave a great analysis of the value. Their high quality multifamily portfolio is valued at an implied cap rate of 6.8%, yet multifamily is expected to outperform other asset classes. Cap rates for Class A multifamily shouldn't get too far above 6%! In the case of multifamily, many stock analysts lump them together with other residential stocks, like homebuilders, so they've been taking a harder beating than is really justified by their asset quality and performance.

• Use Demographic Strategies: Old school dirt investors like myself love this category, because it plays to our strength of intimately knowing communities and their potential. Seniors housing, second homes, medical office buildings, and even student housing play on baby boomer wealth accumulation and long lifespans. Also think about urban plays that penetrate markets with high immigrant inflows.

The Green Competition Factor Green real estate was woven into the conference as a prominent economic factor affecting the direction of investment real estate in many ways. The economists explicitly cautioned that owners of non-green buildings in high development markets should start understanding the impact of new green developments being built around their properties. In short, the presence of green developments around brown real estate may decrease the competitiveness of brown real estate. The lead in quote to this post, from George Denise, of Cushman Wakefield, is his point of view. I would add that two years ago no one would have even understood what he was saying and now people might start to realize that his point is highly plausible. Green Real Estate Plays for 2008 ULI's take on busting a move with green real estate was still restricted to thinking about new development plays -- so they still have a ways to go in my book. Also note that ULI didn't delve into any discussion of defining green, which is appropriate for an economics-oriented conference. And here's a couple of their recommended green plays for 2008:

• Green equals competitive advantage: Okay, for the Green Journey crowd, this is preaching to the choir. But believe it or not, just thinking about building green at all is still pretty edgy for alot of market investors.

• Focus on Mixed Use and Infill: 24-hour residential environments with pedestrian-friendly layouts and varied living options are in. Particularly among empty nesters and career starters. Fringe subdivisions without amenities are losing appeal.

• Build Transit-Oriented Development: Condominiums, apartments and retail near lightrail or subway/train stops are becoming "increasingly attractive".

Green Journey Takeaways

ULI did do a good job of evangelizing green from an economic point of view and started the process of translating green into an investment strategy -- critical for market transformation of our industry. I'm still waiting for one of the big firms to be a leader in discussing how we green existing buildings.

Photocredit: Flickr/Jai-to-Z

TBLI, Paris: Sustainability Heavy Hitters & Green Building Transparency

Introduction

As you think about your green real estate strategy, have you defined how transparent your property’s energy performance and environmental impact will be to tenants, other investors and lenders? Do you measure and report environmental outcomes based upon internally derived or neutral third party standards? As you think about it, read on for examples of how the same questions are being approached in the European Union.

Last week I was in Paris speaking about financing green real estate at the Triple Bottom Line Investing conference hosted by Brooklyn Bridge, a powerful organization run by Robert Rubinstein out of Amsterdam. TBLI is at the cutting edge of global sustainability, allowing corporate social responsibility representatives from traditional organizations such as TIAA-CREF and Allianz Global Investors to share perspectives with socially responsible and/or mission-based groups like Calvert Investments and Environmental Defense.

The green building session was packed with a savvy, enthusiastic international audience of developers, venture capitalists, NGO’s and financial institutions. Turns out that they were all busy chiseling out their green real estate strategies or updating their intelligence on how green building’s emergence may be affecting some other key area of their business.

My main TBLI takeaway can be summed up in one quote from an SRI professional, overheard during another session on carbon offsets:

“Transparency makes a market”

This reminded me of the recent Costar Green Report, which listed the latest green building initiatives by heavy hitters such as CBRE, Simon Property Group (SPG), Glimcher (GRT) and Jones Lang LaSalle. It’s great that US real estate is going green in a big way, but I still see lots of subjective picking and choosing of green initiatives with only vague mentions of concrete, meaningful energy performance improvement and environmental impact. This essentially relegates the green real estate investment proposition to being a cat in a sack – so long as a property owner does not have to disclose the true energy and environmental impacts of their green initiatives, buyers can not objectively value (i.e. pay for) the green benefits they expect to receive. So, in the spirit of Carnegie Mellon professor Randy Pausch, I’d like to introduce you to The Elephant in the Room:

“Which, if any of these companies are executing initiatives that deliver the real value and impact expected by their investors and communities? And if they are, how can we compare and judge their initiatives relevance and success for ourselves against what objective standards?”

Examples of Transparency from the European Union

The European Union has already passed the 'Energy Performance of Buildings Directive', requiring member countries to implement laws regulating building energy efficiency.

Generally, the regulations:

• define what areas of a building’s energy performance and environmental impact will be measured,
• compel building owners to obtain the evaluation at certain junctures in the building’s lifespan and
• require the property owner to make the official certification of the most recent evaluation to occupants and prospective buyers.

I talked with green building professionals from Germany and Britain about how these regulations have already caused investors within their countries to tie a portion of a property's value to its objectively certified energy performance and environmental impact.

In Britain, the Energy Performance Certificate, is the official document verifying a buildings energy performance and environmental impact. The evaluation results are plotted on an A-G scale, where A is very efficient and G is highly inefficient. The EPC is required any time a property is built, bought or sold. It is required to be displayed near the building entrance at all times, to inform all occupants of the building’s actual performance (!). I talked to a London-based property professional who reported of the quick action by investors to begin retrofitting buildings once they learned that their tenants and buyers would know of their building’s potential lower grade – and possible devaluation. Predictably, the retrofitting of buildings has become a very lucrative market by itself. Representatives from British engineering firms also reported that they were already scouting out the North American markets for potential expansion.

Germany implements the EU directive through an Energieausweis (‘energy certificate’) -- see a sample certificate above -- similarly certifying to occupants and potential buyers a building’s performance level on the same dimensions. The Energieausweis must be created/updated at the time of construction, rental, leasing or sale. Public buildings have to display their certificates as in Britain, but private building owners simply have to make their certificates available upon request by tenants and property purchasers. Interestingly, the energy evaluation for commercial buildings can be made based upon either the property's actual energy consumption or its calculated requirement, based upon its construction and use. Again, the energy audit and building retrofit business in Germany has been big business for years and now will probably grow in relevance for the industry.

Since the implementation of the EU directive is still in its early stages, there is not any data on the actual environmental impact of this directive nor on exactly how property values have changed as a result. Both the colleagues that I spoke with however, said that the energy certificate results are utilized by investors to assess a property's operating efficiency and sales price by transparently comparing a certain result with national standards and those outcomes achieved at similar properties in the market trade area. So the laws have brought some amount of transparency to these aspects of the investment property market.

And what about the USA?

It is a good time for us to begin an industry level conversation about objective standards of measurement and disclosure as the basis of investor perceptions and action on energy preformance and environmental impact – in order to better promote green building, protect its integrity and allow the real stewards of best practice to be properly rewarded for their efforts.

At the present time, many of our cities and states have begun to enact laws and regulations, which implement green building and LEED ratings criteria into code. This is great for new construction, however it still does not address the greening of existing buildings nor do investors have a relevant, comparative benchmark for environmental performance when they are evaluating a potential acquisition. Also bear in mind that, while LEED-certified buildings generally have a lower energy usage and environmental impact, no particular LEED rating assures that a property has actually achieved a certain level of energy performance or environmental impact. Here in the US, we are keen fans of transparency. This time, American green real estate can benefit from learning how our colleagues across the Atlantic have been approaching the same issues.

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Green Journey Reading Recommendation: Check out Germany's GreenBuilding program. This is not a green building program like the USGBC LEED rating system, rather a special program , administered by the German Energy Agency ('dena'), designed to inform and help German property owners to green their buildings. The program's overall setup, content and implementation is 'high protein' information for industry professionals who are participating in similar programs here in the US. Both sites contain English translations of all information.

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GE Real Estate Announces Green Initiative

Go big or go home!

That has got to be GE Real Estate's motto concerning their green real estate initiative, announced at Greenbuild in Chicago earlier this week and covered in this week's CoStar Green Report. Under the new program, GE intends to imbed sustainability into its entire investment and asset management process. They are doing this through a partnership with the Clinton Climate Initiative. That alliance allows GE to "tap into CCI's resources to improve the environmental performance of properties". Initiative Highlights

• Energy audits and retrofits of properties "where profitable".
• Tracking of environmental and energy metrics alongside financial performance.
• Incorporation of LEED rating system and international equivalents into their ongoing property assessments.
• Sharing best practices with customers.

GE's $30 billion a year operation is large enough to influence the actions of of their owners and partners throughout the property financial system. Pay attention to the fact that they limit their commitment to retrofit to situations where it would be profitable. That is one of the biggest questions investors wrestle with these days. As I've written before, greening existing investment properties seems to be harder for investors to achieve than building brand new green buildings. It also raises questions about how they will judge the post-retrofit profitability of the property and what environmentally beneficial retrofit work might be avoided on a property because the benefits are not profitable enough in their view. GE's integrating energy and environmental metrics alongside financial indicators is a needed best practice. They have the financial strength and platform to cause these types of metrics to proliferate throughout the real estate industry. Of course, we will have to see what exactly those metrics are and hope that they result in transparent, verifiable reductions in their portfolio's carbon footprint.

The Green Journey Synopsis: The content of GE's key real estate initiatives is excellent intel on where investors should focus their efforts as they build environmentally responsible investment platforms.

We will not know any of these answers until we see GE's performance over the coming years, but one thing's for sure -- they have got everyone's attention.

Industry Pacesetter: Digital Realty's LEED-Gold Datacenter

Hurray! Digital Realty Trust (NYSE: DLR) recently announced that its datacenter at 350 East Cermak Road in Chicago has earned the first LEED-Gold certification in the US for a datacenter from the USGBC.

Click here to see more details on the property.

Note that none of the information available reports on the targeted performance improvements that are expected because the building has undergone a green renovation.

Digital Realty also reports that they are currently greening several other buildings in Chicago, Northern Virginia and Santa Clara with the goal of either LEED Silver or Gold for all of them.

Green Datacenters are a Great Leap Forward for Green Building

While all green real estate is good, a green datacenter gets special attention due to its deep impact on energy savings over conventional buildings and the great expansion of green building best practices for existing buildings.

Dave Ohara, who writes for Microsoft’s TechNet magazine, reported that “datacenters consume nearly forty times more energy than conventional office buildings”. He went on to say:

A typical US datacenter can account for up to 15%-20% of that company’s operating costs. Several studies report that datacenters in the US are responsible for between 1.2%-2.0% of the nation’s entire energy consumption. That means, if you analyze datacenters together as a single industry, their aggregate level of energy consumption would put them in the top five US industries with the greatest energy consumption.

350 East Cermak's LEED-Gold certification was earned for greening an existing property – currently a tougher challenge in the industry. I know several investors who have become adept at developing green buildings from scratch, but still struggle with retraining their organizations, collaborating with tenants and raising the capital to green their existing portfolios in a way that generates decent returns. Digital Realty’s announcement of getting this done can provide a positive example of how market driven investors are using the green challenge to their, their shareholders and the planet's advantage.

Get the Green Datacenter Video

Interested in best practices for greening a datacenter? Digital Realty's Vice President of Engineering talked with InfoWorld about his company's initiatives in greening datacenters a few months back and provided lots of specifics that help to better understand the decision process involved with greening this asset type. For practitioners serious about greening their assets, this video is definitely worth the time spent.

Now I can't help but look ahead to the next question:

How will greening an existing investment portfolio affect a publicly-traded REIT's stock price?

It will be interesting to see how that develops.

Photo credit: 350 Cermak - Digital Realty Trust

Extinct Debt Terms & Agency Muscle in Multifamily

Here's a quick update on the pulse of the debt market:

Earlier this week, I had the great pleasure of spending time with colleagues at the Counselors of Real Estate at their annual convention here in San Francisco. During a Capital Markets forum, the panel was asked their views about the types of deals lenders are willing to do these days, in light of the currently constrained credit markets. That discussion humorously morphed into "what kinds of debt terms are extinct these days". So here are a couple of the debt market's newest extinct species:

• Full Term I/O: Lots of nods on this one -- wide agreement that lenders are back to old school underwriting, requiring at least 25 to 30 year amortization for most loan terms over three years. On a 5+ year loan, the borrower may be able to get up to two years I/O.

• Cashout Refi: In light of rates, spreads and cap rates having moved up, creating the risk of lowered valuations, lenders are particularly hard-pressed to finance profit-taking anymore.

Plus a Snippet on Apartment Financing

There was a strong consensus that the agencies (Fannie Mae, Freddie Mac) are emerging as true winners in financing apartments during the debt market's latest gyrations. They are putting out large levels of debt for apartments, using their own underwriting criteria and benefitting from less competition. The audience felt that the strong presence of the agencies makes the multifamily market the strongest asset class out there for now.

While this blog is heavily focused on green real estate, I like to bring in capital markets commentary since green real estate, after all, is still real estate.

Market Risk Analysis: Peak Oil and Investment Real Estate

Synopsis & Recommendation

Energy company officials have estimated that global oil production will start to decline in the near to mid term (“peak oil”), if it has not started already. Experts warn that there is a strict correlation between economic growth and oil supply. Properties currently in design and construction will probably be put in service at or near the time when peak oil is expected to occur. Real estate practitioners must incorporate a more thorough assessment of energy availability and pricing within their transaction underwriting as well as think about shifting their development focus to more resilient properties and investment scenarios.

The (Latest) Download on Peak Oil

Check out Biopact's very instructive report on the connection between peak oil and economic decline. Not only have energy company executives largely agreed upon peak oil occurring around 2010-2012, experts stress that the prolonged, permanent decline in global oil production can trigger an economic crisis. Moreover, they believe that we will directly suffer from the energy crisis more quickly and a lot worse than from climate change in the same time frame.

...a new study by Dr Robert L. Hirsh, senior Energy Program Adviser at the Science Applications International Corporation (SAIC) demonstrates the economy-destroying effects of peak oil. His conclusion is that economic growth will decline at a similar rate as oil output, that is, by 2 to 5 percent per year. There is a strict correlation between economic growth and oil supply.

Remember:

A recession is defined as two quarters of negative growth in GDP.

Landlords & Energy Costs Today: "Just Passin' Through" Every real estate practitioner spends a considerable amount of time engrossed in market and economic analysis, to bullet proof their underwriting and make sure that their investments actually perform according to shareholder expectations, if not better. You constantly ask yourself, "what could go wrong?" over the life of your deals. Energy costs have been gradually rising over the past few years and those costs are a key factor in real estate construction, operation and maintenance, not to mention at every point of the business supply chain. So far, the timing and velocity of energy price increases have allowed them to be absorbed by tenants, so investments continue to perform within expectations and we practitioners have not had to radically adjust the structures of our deals or property design and construction. Time for a New Scenario Analysis Because we have been able to pass through any increased energy costs to tenants, investment professionals have not had to grapple with the ways in which a permanent change to energy availability and cost would affect the way they do business. The common underwriting practice is the correlate energy price increases with projected inflation, but I have never seen a deal package that analyzed the potential effects of

• energy prices increasing significantly above the rate of inflation,
• tenants broadly resisting further energy cost increases, meaning that the landlord now "eats" further cost increases,
• widespread reduced petroleum availability, and worse still --
• all of the above occurring at the same time.

If the two to four year timing of peak oil happens as predicted, then most of the properties under construction right now could be put into service in markets facing energy-related economic shocks a short time later. That means that we all could be working on transactions right now that are doomed to go sideways. Building New Green Buildings Does Not Help Currently, green building is just beginning to be taken seriously within the investment real estate community. However, even though the gross value of green building activities should nearly double to nearly $12 billion in 2007, most of it represents new construction, albeit with greater energy efficiency over that of non-green buildings. Unfortunately, in the context of an energy crisis, the current green buildings in production today still largely rely on petroleum-based energy -- meaning they are "less bad", but are still unfortunately not "good". Very few green buildings being put in service actually run 100% on renewable energy. So even though investment professionals are doing the great work of going green, the property construction and performance standard required to adapt to a peak oil economy is still much more sophisticated than the green buildings we will most likely be living and working in when energy conditions deteriorate. (Re-)Positioning Real Estate Investments for a Peak Oil Economy While no one can foresee how to navigate the market uncertainty coming from the energy crisis predictions, real estate practitioners can start positioning their businesses and portfolios in such a way that they will have better options to improve their outcome when such events occur by:

• factoring in a larger volatility in energy costs during deal underwriting to account for the growing risk of potentially increased operating expenses.
• investigating switching as much of your properties' energy sources to renewable energy.
• focusing on adaptive reuse investment plays and renovating existing properties for higher energy efficiency,
• obtaining the maximum rating possible, when going for certification on green buildings, and achieving the maximum amount of energy efficiency points possible for that given rating, no matter what,
• joining forces with those pushing government officials and public utilities for greater overall availability of renewable energy,
• refocusing their investment dollars on urban properties with a smaller, more compact footprint that reduces the need for vehicle travel by occupants and suppliers
• starting to think about sustainable markets: when preparing annual investment plans, redefine your target markets to include regions that have a combination of economic base, mass transit infrastructure and progressive policies to facilitate the above.

Photocredit: Flickr/AZRainman

Warning: Common Sense Lurks Behind Integrated Design

Have you ever been on a project team with or for a commercial real estate owner who had high expectations of their new green building project? Or maybe the better question is, who hasn’t?

Timothy Corbett, President of SmartRisk, recently cautioned an audience at the AIA’s conference on public space and design to carefully manage an owner’s heightened expectations of green buildings. If the finished product doesn’t meet their expectations, ‘then lawsuits and claims could follow’.

No duh.

When I read through Corbett’s examples of green building lawsuits and claims, I began to think that someone on those project teams also drove their car around with hot coffee between their knees.

Corbett is quoted as saying that the best way to manage the exposure to such claims is “direct contact with the client”.

Another duh.

All of the green building professionals that I know continually stress that an integrated design process from the very beginning helps to reduce the risk of misunderstandings about what the green building can and cannot deliver. They contrast that with the tendency of some owners to think of green as an added feature than can be plugged into the project at some later point, creating more costs and the potential for miscommunication.

The article’s title, indicating that ‘risks lurk’ in green building, as well as its appearing on GlobeSt.com, a website targeting real estate investors, unfortunately makes me think that GlobeSt was more interested in getting a few more clicks on their website by playing on investors fears about green building, instead of helping to educate them.

Click here to read the article and decide for yourself.

Photo credit: Flickr/Everydaylifemodern

Transforming Building Markets, or Transforming Marketing?

Bill Walsh's reprinted article in GreenBiz.com with the same title as above passionately highlights the insidiousness of greenwashing within the building materials sectors, but his thoughts address a similar concern across the entire spectrum of real estate development.

When Home Depot invited suppliers to submit products for consideration in its Eco-Options program, manufacturers claimed that more than 60,000 of the items currently on the shelves were already "green." According to the New York Times, "Plastic-handled paint brushes were touted as nature-friendly because they were not made of wood. Wood-handled paint brushes were promoted as better for the planet because they were not made of plastic."

In these heady days of sustainability's emergence within the commercial real estate industry, how will we hold each other accountable for true market transformation and not cleverly marketing the status quo? Click here to read the article in its entirety and share your comments with us.

San Jose's 50 Million Square Foot Vision

Co-Star and others featured San Jose Mayor Chuck Reed's big ten point vision that will green San Jose in fifteen years by 2022. Called the Green Vision, this plan artfully concentrates the vision's outcomes around "10 far-reaching goals that address energy consumption, water use, greenhouse gas emissions, and other environmental impacts". Sounds nice, but the real estate market underwriter in me still makes me roll my eyes a little because it is intuitively doubtful that such big numbers can be achieved. Plus success will be measured several city administrations into the future leaving me wondering whether realistic accountability can be implemented. Nevertheless, it was still interesting to do a little fact checking to better assess San Jose's current real estate and sustainability context. Keeping this type of info in mind helps with future assessment of the Green Vision as it evolves. What Kind of Impact Will Retrofitting 50 Million Square Feet Have? The vision calls for retrofitting 50 million square feet in 15 years, or 3.33 million square feet of commercial real estate per year through 2022. Rosen Consulting puts the total size of the metro San Jose commercial real estate market at just under 552 million square feet . So mathematically, the mayor's retrofit proposal addresses roughly 10% of the current day San Jose commercial real estate market. 90% of the commercial square footage remains untouched for the same fifteen year period, making this objective not as exciting as it appears on the surface. But it may still be tough to meet. Rosen Consulting reports metro new construction amounts to less than 2 million square feet for 2007 with lower levels projected in the immediate years ahead. So somehow, this vision requires existing owners of commercial real estate to immediately begin retrofitting properties at the rate of more than 3 million square feet per year. Hmmm.... How and for how much paid by whom? Is San Jose a 'Sustainable City' in the First Place? San Jose ranks #23 -- between Phoenix and Dallas -- in Warren Karlenzig's How Green is Your City, where SustainLane ranks US Cities according to their sustainability criteria. San Jose gets lots of credit here for adopting far reaching sustainability measures way ahead of many US cities. 62% of all waste is already diverted away from landfills and the mayor's vision increases that to 100% in 2022. Air quality already ranks #7 in the nation and water is pretty clean at #12. The city's leadership has proven repeatedly that they get the tight connection between offering a top quality of life for residents and preserving the region's status as the hub of high tech. That said, room for improvement lies with a severe affordable housing shortage and a widespread allergy to public transportation. Nevertheless, city actions to enforce living wages, incorporating LEED standards into public buildings, and install five new renewable energy systems in 2008 are what make SustainLane praise San Jose as being a city "best situated to promote - and reap the benefits of - a transition to a greener economy." So while I'm not a big fan of grand statements, it helps to see a city with a positive track record try to push itself harder to stay competitive.

LEED: Avoid Underwriting Misconceptions

Do you prepare your non-green project budget and then add your “green costs” on top of it? At which LEED-rating do you think you own a distinctive higher value green asset? Think that ‘integrated design’ is only interesting for the architects and engineers? Read on. I’ve blogged before about Davis Langdon’s update study on LEED-rated project costs and recently saw a talk by one of their architects, Lisa Fay Matthiessen, that went substantially beyond just concluding that LEED projects do not necessarily cost more than non-green buildings. She spoke in depth about the source of misconceptions about LEED project costs and shared a surprise that challenges our current knowledge of LEED-ratings and the associated project costs. Recap of Davis Langdon’s Findings In case the study is still sitting on your “weekend reading” stack, here are the Cliff Notes takeaways:

• Many projects are achieving certification within their budgets and in the same cost range as non-LEED projects.

• Construction costs have risen dramatically but projects are still achieving LEED certification.

• The idea of green as an added feature continues to be a problem.

The study conclusions were essentially preaching to the choir. Nothing new for the audience of mainly architects, designers and engineers – many of whom were LEED accredited. But when they drilled down into the ‘why?’ behind these findings, things got pretty interesting. Why Add Green Components When You Can Integrate Them? Matthiessen says that the false notion of being able to design and build a green project by adding the desired green components to an already planned non-green project is a deep-seated misconception. Moreover, this sets up the project team for another incorrect evalation approach: comparing the building to itself. When this happens, the project team compares the budgeted construction costs of the building without any green elements to the same budget with estimated costs to achieve the determined level of LEED certification. Naturally, the latter budget is often greater then the former, and individual green components get put on the fiscal "chopping block" instead of the team focusing more on better design and engineering solutions to optimize budget constraints. Matthiessen stressed the need for an evaluation based upon benchmarking costs from a pool of comparable projects, as was done in the study, meaning that the project costs of green buildings were compared with normalized costs for a larger array of similar projects with similar elements and criteria. Also, a heightened awareness about the potential economic benefits, or savings from an integrated design approach will help project teams to achieve their intended goal of the best LEED-rating for their budget. LEED-Gold Sometimes Costs Less Than LEED-Silver This was a surprise that was not discussed within the study text and that not many people know about. Davis Langdon’s data included several instances of LEED-Gold projects costing less than LEED-Silver projects, which the audience focused on quite intensely. While Davis Langdon did not study this observation individually, Matthiessen said that the study team concluded that the project teams for those less expensive Gold properties had met the challenge of attaining the required higher level of LEED points by having green elements perform several more functions for the project than normally expected. For example, the roof and building skin might provide more ventilation, heating and cooling assistance than would typically be required of such components. These multi-functional integrated elements not only help the project to qualify for the greater number of points needed for the higher LEED rating, Davis Langdon thinks that the bundling of so many functions within certain components actually saved money. This is good evidence that extending integrated design principles into the project budgeting process can deliver a financially competitive advantage: a project owner could come out with higher performing assets with higher LEED-ratings for less than assumed. And achieving that level of financial optimization has implications for financiers and capital markets investors. A standard investment underwriting process involves the preparation of linear spreadsheets, so that investors can evaluate project costs and revenue generation potential against their desired payback and return hurdles. Standard operating procedure involves judging specific line items against specific intended paybacks. But this type of process assumes that every single line item in can be tied to one measurable benefit. And that assumption is at odds with the premise and approach of integrative design. Optimizing your project to the point where you deliver LEED-Gold assets for less than the cost of LEED-Silver will take your financial underwriting to a whole new level. The capital markets are not that familiar with multi-tasking line items that simultaneously deliver multiple and overlapping quantitative benefits. In order to make the best assessment of such a project's potential investment value , investors – and their lenders – need to implement a holistic financial analysis based upon utilizing these cutting-edge green building best practices. When is a Green Building Really Better? This was an interesting side discussion, with Matthiessen relating her opinion that a LEED-certified or LEED-Silver project essentially represented a few good upgrades to a non-green building. However, the elements and engineering required to make a LEED-Gold or Platinum building greatly distinguish the building from its peers, to the point where she considers these properties to truly be several steps ahead in terms of quality and performance. A basic question for the new green investment funds and their partners is “At what point are we building or buying higher value real estate?” This opinion also points to the potential for more differentiation in asset pricing for those higher-rated properties. For example, if that opinion prevail with the current ratings system remaining in effect, speculative development of LEED Core and Shell projects would not be considered as more valuable simply because they are green. Taken together, Matthiessen's talk pointed to a needed paradigm shift for investment real estate analysis in order to fully assess and realize the value of green development. Project owners cannot stick with a ‘business as usual’ approach of appending green to the back end of their existing decision making process and expect to successfully compete in the market with green real estate investment strategy. Successful, high value LEED-projects will challenge professionals to employ a deeper, holistic financial evaluation much earlier in the project’s lifespan that goes beyond individual line item measurement. I tell my friends that, in today’s green age, the deal is done in the architect’s and engineer's offices, because environmental impact differentiation is the point of value and that’s where it occurs. That shift will continue to challenge our basic assumptions about the way we commercial real estate professionals do business.

Help! Need to Lose Two Tons Fast

So I just learned that I have a carbon score of 415 and must lose two tons of carbon output, just to put a mere 10% dent in my estimated individual carbon emissions. Ouch! And that's after taking into account that we don't even drive our car more than once a week. When I heard that Earthlab was providing Al Gore's Alliance for Climate Protection website with a carbon calculator, I decided to give it a test drive. There are quite a few out there, and I am still on the lookout for the ultimate user friendly model that my clients and colleagues can work with without much difficulty. Earthlab's Live Impact Calculator provided an interesting experience, since it satisfied the need for instant gratification on a key level: you get immediate info on how specific lifestyle changes reduce your carbon output plus you are encouraged to make a personal pledge to improve your carbon footprint. Most calculators just move you over to the 'buy offsets here' screen and send you on your way. Learning that, as a frequent flying business traveler, my carbon score is much higher than the average 325 score for Americans or 305 for Canadians and that I alone generate approximately 20 tons in emissions was depressing, to be honest. But I am now armed with info on how to behave my way out of the problem. And unlike any fad diets out there, at least I can 'offset' the weight that I can't lose entirely. Do you know your carbon score? Have any experience with reducing and offsetting your emissions that you would like to share?

Talking Points on the New Green Bonds

credit: photosfromonhigh/flickr

Are you on the lookout for how green commercial real estate will be financed in the future? Did you know that Congress has already made $2 billion in private tax exempt bonds available for green commercial real estate projects? What about how they are structured – possibly shaping the future green commercial real estate debt market?

Green Bonds are a first-of-its-kind pilot financing created by Section 701 of the American Jobs Creation Act of 2004. The Council of Development Finance Agencies summarized the basics of this newest trial debt initiative in an online ‘explainer’ memo, which outlined some of the qualifying criteria:

• Size: Projects must include cleanup of a brownfield site and contain 1 million square feet of building space or at least 20 acres.

• Mandatory LEED certification: 75 percent of the square footage of commercial buildings, which are part of the project must be registered for LEED certification.

• Energy Use Reduction: Project applicants must demonstrate how the project contributes to the reduction of electric consumption compared to conventional construction as well as other energy measures.

• Federal, State & Local Co-financing: State and local governments that nominate projects must contribute $5 million to a project. Tax abatements and in-kind contributions count toward the $5 million.

The limited scope of the financing is underscored by Section 701 specifically naming four projects, which should submit for financing within 120 days of the IRS publication of formal guidelines for the tax exemptions: Destiny USA in Syracuse, NY; the Atlantic Station in Atlanta, GA; the Belmar in Lakewood, CO; and the Louisiana Riverwalk in Shreveport.

Interesting for investment real estate is the conditioning of incentives based upon achieving mandatory LEED certification, requiring energy use reduction at the asset level as well as the focus on existing, large mixed-use projects in urban metro areas.

You should also take note of energy reduction goals being formulated as specified carbon footprint reductions. For example, super regional shopping center Destiny USA announced that they are closer to complying with the terms of their $229 million in green bonds by running one of their developments, the Carousel Center, on green power, stating that:

Destiny USA committed to reduce So2 [sulfur] output on the project by 1780 tons per year. This initiative alone satisfies 10% of that requirement, avoiding 185 tons of So2 per year, reducing visible pollution like haze.

In the green age, those commercial lenders who may be asked to co-finance the greening of of existing real estate will have to learn to do a much more complex credit assessment, incorporating direct LEED review as well as the borrower carbon reduction strategy into credit due diligence. The existence of tax exemption compliance issues plus possible additional environmental cleanup would leave too much potential liability on the shoulders of the lender if these issues were not properly examined when making the loan.

So are you up to speed now? We will keep bringing out stories about how these green bonds are shaping up in future posts.

The Lender Case for Going Green

I had a good time this afternoon with the USGBC Chapter BayLUG (Bay Area LEED User Group), along with Chris Bartle of Green Key Real Estate. I gave a banker's perspective on green commercial real estate and Chris shared his expertise on the situation for green residential. My synopsis on financing green commercial real estate:

• Many real estate deals are sidelined now due to current capital market conditions.
• The positive business case for going green is being heard by financial institutions. I receive a strong, constant flow of positive anecdotal evidence that green buildings deliver superior economic performance.
• Financing green buildings is hampered by poor integration of the players.
• While an investment in a green building creates much additional value overall, there is an uneven allocation of that economic upside among the different players -- lenders are not seeing a tangible (read: cash) value-add for financing green, and so have been sluggish to establish green lending programs.
• More organizational and industry paradigm shifts are on the way as green buildings emerge as a preferred investment asset for institutional real estate.

How to move forward? As they say in Cameroon,

The questioner never loses the way...

Click here to view the slide deck and let me know your thoughts.

Green Mortgages 2.0: Less Carbon & More Money

Is your mortgage rewarding you for being an environmentally conscious homeowner?

Not many can say ‘yes’, so read on. I was at West Coast Green over the weekend and learned that green home mortgages have undergone a radical revamp, and now help you to fight carbon emissions, boost your wallet and enable you to direct your investment to a complete supply chain of green investors. The Prototype: Energy Efficient Mortgages Energy Efficient Mortgages (EEMs) came about in the 1970’s when former President Jimmy Carter challenged government agencies to create home loans that counted energy and water savings as additional income for use in paying debt service. In the past ten years, EEMs from Fannie Mae, Freddie Mac, the Veterans Administration and the Federal Housing Administration have all offered homeowners the opportunity to stretch their debt-to-income ratios by slight amounts, so long as the loan was used to purchase a new energy efficient home or helped to install energy-saving improvements. Unfortunately, the structure of EEM programs ignored the basic realities of homebuying, so they’ve never been a hit. For starters, they do not pay sufficient loan proceeds – for example, the maximum loan amount you can receive under the Fannie Mae EEM is $417,000, rendering the product irrelevant for most of us in high cost markets such as California. Additionally, features such as loan docs and closing costs were not streamlined with today’s market standards, making them seem more cumbersome and less competitive. The Upgrade: Green AND Competitive Now private investment banking firms such as Oakland-based Sustainable Capital, are coming to market with a redesigned green mortgages enhanced with best practices in residential rating systems, realtime energy monitoring, reduced interest rates as well as a true green capital supply chain. Here's how to distinguish the newer green mortgages from their predecessors:

• A smaller carbon footprint. Reducing the home's carbon footprint is now the goal, as opposed to only water conservation and energy use reduction. The outcome of you having additional income from energy and water savings is still a main goal but the new green mortgages go steps further. Using best practice independent rating systems such as Build-It-Green’s Greenpoint system, a more in depth assessment of the home includes indoor air quality, construction materials, paints and carpets as opposed to merely better appliances, light bulbs and plumbing. Additionally, specialist vendors supply cutting edge monitoring technology, which provides you and the lender with continuous verification of the reduced energy usage and water conservation over the life of the loan.
• Higher loan proceeds and lower interest rate. The loan qualification process and proceeds are comparable to what is on the market today from most banks, fixing a basic problem of the EEMs. Your rate of interest is reduced from comparable current market rates, based in part upon post-financing audits verifying the success of the green renovations and the results of ongoing energy monitoring.
• Integration of incentive financing. The new green mortgages manage to integrate the diverse financial incentives offered to you from other sources such as local utility companies, state and federal governments. So you get additional help in the complicated search for the necessary funds to green your home.
• True green supply chain. The new green lenders source loans using certified Eco-brokers, who are trained to sell green homes and can provide additional support and tips on going through the process of greening the house. Finally, the funded loans are packaged and sold off to socially-responsible funds, concluding a supply chain of totally aligned consumers, contractors, intermediaries, lenders and secondary market sources.

So now you do not have to put up with substandard financing alternatives in order to live (and invest) according to your values. Definitely much better than a few bucks off the closing costs and a new toaster! Click below to share any comments or feel free to pass this along to a friend who may find it interesting. - Lisa

Climate Change Legal Risks: Energy Companies Feel the Heat

“Selective disclosure of favorable or omission of unfavorable

information concerning climate change is misleading.”

-- New York Attorney General Andrew M. Cuomo to Energy Companies

Check out OneAtlantic.net’s excellent post on the creative use of existing law to sensitize corporate investment practices to climate change risks. Following predecessor Eliot Spitzer’s example, New York Attorney General Andrew M. Cuomo is using an almost forgotten law to investigate five energy companies, which intend to build coal-fired power plants. The Attorney General’s correspondence advises the energy companies that they should have made their investors aware “of the growing potential that they may be taking on big financial risks by building coal-fired plants.” The Attorney General’s overarching thesis is that publicly-traded companies are legally liable for taking undisclosed risks that could diminish their value to shareholders. The goal appears to be one of forcing polluting companies to proactively reduce their carbon emissions.

My synopsis: this investigation, if successful, will propel commercial real estate's risk management practices and corporate social responsibility into a new millennium -- at warp speed.

In commercial real estate finance and investment, hard money liability, regulatory and reputation risk directly affect bank and investor decision making. Such amounts flow through to net cash flow or funds from operations, meaning the potential for deterioration of net asset values and with it, market capitalization and shareholder value.

Real estate investment trusts (REITS), being publicly-traded, should immediately begin to incorporate climate change risk into their corporate and portfolio risk management processes. Their client investors (pension funds, etc.), are probably following this carefully, too, and will start requiring similar reporting disclosures. It goes even further: other investment real estate developers and operators who want to do business with REITS (practically everyone else in the industry) will have to be similarly compliant. After all, no one will take an asset into their portfolio until they are sure that they can understand and economically manage that building’s carbon footprint in compliance with the law and market expectations.

And here's the competitive advantage angle for Green Real Estate Investors...

In the course of meetings yesterday with a couple of investor clients who already develop green apartments and retail, I asked about their motivations to focus on building green real estate. Besides the fact that they felt it is the right thing to do, they honed in on their perceived risks of not going green. Both developers indicated that they see the potential of the federal or state government passing some form of carbon tax on commercial property as being imminent. They, too, perceived any type of carbon tax as being a direct hit to their bottom lines and, therefore, a valuation risk to their properties. Already being green puts them at a competitive advantage in such an environment.

“Wash me… but don’t get me wet”

Any German will immediately recognize the above saying about people who are less committed to something than they publicly profess. Environmentalists call it ‘greenwashing’. And here’s my devil’s advocate question:

What if we are confusing a company’s incremental progress on a complex long-range strategy with hypocrisy?

The Wall Street Journal has just updated us on General Electric’s (NYSE: GE) progress on its attention-grabbing Ecomagination strategy. It seems that there is resistance to Ecomagination’s promise and products from both customers and the ranks within and more limited C-level support than was widely assumed.

To its credit, GE leads the pack in establishing top-level leadership on going green. And its stated approach, to bring innovative environmentally-friendly products to market without sacrificing profits, raised our expectations of the bottom line benefits of corporate social responsibility. Yet, GE’s current business reality is that it backs proposals to cap industrial carbon-dioxide emissions even as it continues to sell coal-fired steam turbines.

And it is particularly troubling that some GE employees still question whether climate change is even for real. Huh? (Hint: Ron Nielson’s The Little Green Handbook is a number cruncher’s dream). Also, CEO Jeff Immelt’s statement about limiting GE’s sustainability initiatives to only those things that made ‘economic sense’ sounds reasonable on the surface, but also leaves the loud silent question of whether sustainability initiatives are being shouldered with a heavier burden of proof (and performance) than status quo business practices.

With green building now emerging in our industry, this article provides deep insights about the realities of leading organizational and industry transformation and leads to a more concrete question:

What would they write about you?

If a Wall Street Journal reporter googled your company on its green building progress, perhaps even called you and your peers to find out more on what you’re doing, what do you think would be written about you and your firm?

• Can you compartmentalize the business of green building away from your personal beliefs about sustainability?
• Do you embed sustainability into your personal lifestyle?
• Do any of your peers and employees?
• Is favoring green building a moral or business choice, or a political necessity?
• What are the economic and political realities of embedding sustainability in your company?
• What business tradeoffs are you prepared to make?
• What tradeoffs will you absolutely NOT make to go green?
• How are you engaging your employees, customers and other important stakeholders about your efforts to go green?
• Are you retaining any other business practices alongside your green building efforts which may be in conflict?
• How do you explain that?

It is very difficult to make the necessary business decisions about green building without spelling out your level of personal and organizational commitment. I hope these questions help us to engage each other more constructively and authentically.

-- Lisa