green building: what we have learned about costs, savings and value. part one of a three-part series.
green building benefits and perceived risk
What is being said about green building benefits? Occupants report improved comfort, convenience and worker performance. Owners reduce operating expenses for utilities, repairs and maintenance while increasing their lease rates and occupancy. Developers dispose of their commercial space faster than their competitors – at higher lease rates or higher sale prices. Real estate investors net greater returns. Corporations show their good corporate citizenship by associating their brand with environmentally friendly workplaces that standout, attract employees and build their loyalty. People involved with green building feel they are helping with environmental challenges, and that “it is the right thing to do.” Owners, developers and occupants are realizing all of these benefits from green buildings, however, the facts about why, and to what degree, these benefits accrue are not well understood. The old adage “perception counts, reality doesn’t” is somewhat true in the case of green buildings. Despite hundreds of successful projects and years of experience, green buildings may still be perceived as unproven and more costly and, therefore, financially more risky.
Owners and developers constantly endeavor to reduce financial risk in building investments. The rapid run-up in commercial energy prices
1 has made conserving energy and mitigating the risk of future price increases attractive for many years. While owners and developers generally believe green building operating costs savings are achievable, surveys also show they are not convinced first costs are competitive. When asked, they acknowledge a lack of understanding of the benefits of green building, and they believe construction costs are much higher than experience shows. In addition, appraisers and lenders are only now beginning to understand and value green buildings in appraisals and lending practices. These uncertainties elevate perceived risk among decision-makers.
market acceptance
Progressive-thinking owners, developers, and design and construction service companies are seizing the business opportunity to lead the market transformation to green building practices. They believe in its benefits and recognize the competitive advantage green expertise affords their businesses, and are enjoying successes by being first to market and creating brand recognition. It’s much easier to stand out before the field becomes crowded, and the market trend is moving more quickly than many people may realize.
Market share of commercial and institutional space is growing steadily and rapidly. The U.S. Green Building Council’s (USGBC / www.usgbc.org) LEED rating system is the best barometer of this growth because it is the consensus standard for measuring green building performance. Since its inception in 2000, interest in LEED has blossomed; the USGBC has trained over 36,500 design and construction industry professionals, and accredited over 25,000 as LEED Accredited Professionals. Growth also shows itself in surveys conducted by publishing companies: A recent ED+C survey showed that 94 percent of service firms involved in design and in construction of buildings have experienced an increase in requests for green buildings during the past two years
2!
A recent survey predicts green building will grow to 5 to 10 percent of the non-residential market represents $10.2 to $20.5 billion by 2010
3. Given the rate of LEED registrations, it is certain the green building market is growing faster. Figure 1 shows the growth rate of LEED-registered buildings with actual data through August 2006 and projections through 2010. This projection assumes 50 to 75 percent of LEED registrations will be constructed and certified within three years of registration. After 2006, it also assumes a 10 percent lower growth rate year-to-year for both number of registrations and square footage. The 12 to 20 percent LEED share of the commercial market by 2010 indicates very strong momentum in green building and the success of USGBC’s LEED program. Since LEED is a subset of total green buildings, the green market as a whole is growing even faster. While certifications to date are lagging behind registrations, this fact does not mean LEED is not having an impact. It seems safe to assume a building registered for LEED will be designed to LEED standards whether it is certified or not.
Data from the USGBC shows their goal of capturing the top 25 percent of the building market is well underway. Through August of 2006, over 4,200 projects have been formally registered for LEED certification, and registrations have averaged over 40 percent annual growth rate. This rapid growth is an indication of the acceptance of green buildings. Market demand, growth and desirability should make green buildings attractive to commercial brokers, appraisers and lenders as a means of growing their business by providing unique, marketable expertise. If this opportunity unfolds, it will be an important development that will help broaden knowledge about the advantages of building green.
belief in investment value but uncertain about costs and benefits
Green buildings have become well known even though the industry is still relatively young. Two industry surveys by McGraw-Hill Construction3 and Turner Construction
4 confirm that a majority of owners, developers and design and construction professionals believe there is investment value, occupant appeal and business benefits that favor building green. Both surveys reveal that executives believe green buildings improve the health, well-being and productivity of occupants. These beliefs imply that the occupants’ businesses benefit financially because of green building performance. Very importantly, respondents also believe green buildings lower operating costs and provide a better return on investment than conventional buildings. The McGraw-Hill Construction survey also showed that executives “feel it is important to be a part of an industry that values the environment.” Both surveys confirm executives’ uncertainty about the cost-benefit equation. They want to better understand costs, operating savings and occupant benefits to help in their decision-making about building features, as these issues are holding back even more rapid market acceptance of green buildings.
The next article in this three part series will examine construction costs and operating savings for green buildings.
