Sensible sustainability for industrial buildings

September 06, 2011  |  Staff Writer  |  Print Article  |  Email this Article

By Susan Bergdoll

Duke Realty

When ground was broken in late 2007 for a speculative warehouse and distribution center in suburban Chicago, plans called for the roughly 650,000-square foot facility to be packed with green building features. Those included hundreds of skylights to reduce the need for electric lighting, motion detectors and photo sensors to automatically shut off unused lights, water-saving plumbing fixtures, and other energy-conserving features. In fact, the developers were so successful in including sustainable features that the building earned Leadership in Energy and Environmental Design (LEED) Gold certification from the U.S. Green Building Council.

Yet, despite all its sustainable features, a tenant for this green building has not been found.

Admittedly, this facility had the unfortunate timing to come online during one of the most challenging commercial real estate periods we have seen in recent times. However, this building remains vacant even as other similar-sized industrial buildings in Chicago have been leased. That begs the question: Is LEED certification a good investment, especially for an industrial facility?

The case for LEED

During the past several years, most developers and many end-users have been aggressive proponents of green buildings. More and more, however, developers and users – even some prominent architects like Frank Gehry – are questioning the value of LEED certification.

This has sparked a healthy debate regarding the need for LEED, but that has also created uncertainty for many developers, owners and tenants. So let’s take an objective look at the costs and benefits associated with LEED certification for industrial buildings.

First, here are some of the good reasons to consider LEED for new or existing industrial properties:

  • Social benefits. Incorporating LEED features results in higher-efficiency buildings that are more likely to conserve resources and reduce pollution, and better protect occupant health.
  • Financial benefits. For the owners of LEED-certified buildings, increased energy efficiency reduces operating costs, and those savings fall straight to the bottom line in the form of increased net operating income (NOI). LEED certification can also boost real estate asset values for owner-investors. For users, LEED features can enhance worker productivity, lowering overhead costs and increasing employers’ NOIs.
  • Tighter management. LEED certification requires careful measurement and documentation of building performance. Closely tracking electric and water consumption, indoor air quality, and other factors creates focus and might help to motivate property managers to continue to maximize efficiency. The data generated also contributes to more informed decision making regarding building systems.
  • Credibility. LEED certification represents third-party verification of a building’s sustainability. While the owners of other buildings might claim they are green, independent LEED certification provides proof.
  • Improved marketability. In theory, the prestigious LEED designation gives buildings a marketing advantage relative to non-LEED buildings – with at least some prospective tenants – possibly allowing owners to command higher rental rates.

Another perspective

As sustainability and green building have gone mainstream in recent years, seeking LEED certification has become almost routine for some developers and end users. However, there can often be valid reasons to forego the LEED process:

  • Higher construction costs. There is no escaping the fact that LEED certification usually increases up-front construction costs. Every project is different, and the extra costs will vary depending on which level of LEED certification is being sought. But various studies have estimated that the LEED “premium” can be up to 5 percent for the minimum LEED standard to up to 30 percent for the highest-level Platinum certification.
  • Added cost of the LEED process. In addition to higher construction costs, the added costs of extra research, design, commissioning and modeling required for LEED compliance, the costs of documenting the LEED process, and LEED registration and certification fees must be considered. Those additional costs can run tens of thousands of dollars – even hundreds of thousands of dollars, depending on the project. Some have argued that pumping those dollars into additional sustainable features makes more sense then spending that money on LEED documentation. More and more, we are hearing about buildings that could have qualified for LEED, but their developers made a conscious decision not to invest the additional time and expense required. Some have called that strategy “going green without the plaque.
  • Minor improvements in sustainability. Although the lower levels of LEED certification are undeniably a positive step toward sustainability, the actual improvements in energy efficiency can be relatively modest, often less than 20 percent. Granted, those savings can add up during the life cycle of the building. But they might not be dramatic enough for a developer or owner to be willing – or able – to absorb the additional up-front costs.

Lease rates vs. LEED

When developing new industrial buildings – especially speculative buildings – developers must make a judgment call as to whether the benefits of LEED certification outweigh the costs. And they must make it based on current conditions.

For the developer of the warehouse and distribution center mentioned above, LEED certification was part of its marketing strategy. The developer attempted to differentiate the facility on the basis of its LEED-certified sustainable features. Even though the lease rates were higher than those of less green buildings, it was reasonable during early to mid-2007, when the project was in pre-development, to assume that some tenants would be willing to pay more. It made sense to think that certain environmentally conscious executives would pay above-market rents for a sustainable facility that was a better fit with their corporate mission, strategy and brand image.

Today, however, many industrial users are having second thoughts about the costs associated with LEED certification. During this still-fragile economic recovery, minimizing overhead expenses has become the top priority for many businesses. When it comes to leasing space, many industrial tenants are simply seeking the lowest possible lease rate while still satisfying their requirements. For them, at least in the short term, the prestige and long-term savings associated with doing business in a LEED-certified building has taken a back seat to controlling costs.

Even before the economic slump, it is probably fair to say that most industrial users were less interested in LEED certification than office users. Since clients often visit office buildings, office users understandably feel compelled to present a responsible, professional image, and doing business in a LEED-certified building can help to reinforce and burnish that image.

Industrial users are also concerned with brand image, and undoubtedly would welcome the reduced operating costs of more energy-efficient LEED buildings. Some have made a significant corporate commitment to sustainability. But most industrial tenants’ customers rarely visit warehouses and distribution centers, and those customers often pay little attention to those buildings – if they are aware of them at all. Thus the branding value of LEED certification is a secondary consideration for many “behind-the-scenes” industrial users.

Opportunities for LEED

Speculative industrial development in the Chicago area will remain limited until rental rates and availabilities return to pre-recession levels. Speculative green projects are even less likely. Though the capital markets have improved, obtaining construction financing for most projects remains challenging – let alone for anything that adds to the project’s cost and makes underwriting even more difficult. Even if a developer can get financing for the additional costs of sustainable features that might require charging rents that are too high to be competitive.

“No one pays for LEED on a spec building,” a local broker told me recently. But when sustainability is a fundamental component of a user’s corporate mission, there could still be opportunities to incorporate green features in built-to-suit facilities. A recent example is the regional distribution center that was built for BMW of North America LLC in suburban Chicago. With BMW’s blessing, that 306,240-square foot facility at 100 S. Internationale Parkway in Minooka received LEED Silver certification in early 2010.

Another local example was an existing non-LEED spec building in the northern suburbs that was upgraded to LEED for Commercial Interiors requirements at the request of the tenant, The certification received for the 234,715-square foot facility in Niles is considered the green benchmark for tenant improvements, and is often pursued in existing structures.

Sensible sustainability

Seeking LEED certification is a worthy goal that can often deliver considerable direct and indirect value. A sustainable facility demonstrates a commitment to social responsibility, and can yield long-term cost savings for both building owners and occupants.

But the realities of the market place during the past two to three years have undercut the power of LEED. The supply of industrial space in the Chicago area still outweighs demand and, for many prospective tenants, minimizing costs has taken precedence over LEED certification.

That situation is likely to moderate as the economy strengthens and the commercial real estate market moves closer to equilibrium. At the same time, sustainable design and implementation will probably become more streamlined and less costly. For now, however, developers, owners and users should take an objective look at whether LEED certification is a viable strategy.

Susan Bergdoll is Vice President of Industrial Leasing for Duke Realty’s Chicago office. For more information, please visit the company’s website at www.dukerealty.com.

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3 Responses to “Sensible sustainability for industrial buildings”

  1. Eric Johnson says:

    One project, which may or may not have been feaesible to start with, doesn’t negate LEED’s positive outcomes.

    I’m curious which studies are the ones you refer to? Usually studies cite 0.5% for certified to 5% for Platinum.
    “But various studies have estimated that the LEED “premium” can be up to 5 percent for the minimum LEED standard to up to 30 percent for the highest-level Platinum certification.”
    Try the studies from the USGBC website. http://www.usgbc.org/DisplayPage.aspx?CMSPageID=77#economic_analysis

    Or try these studies for LEED (green) value-
    “Sustainability and the Dynamics of Green Building – Eichholtz, Kok, and Quigley – 2010

    The propensity-score-weighted estimates show that buildings with green ratings in 2009 command rental rates that are substantially higher than those of otherwise identical office buildings, controlling for the quality and the specific location of the buildings. Premiums in effective rents are even higher. Ceteris paribus, the selling prices of green buildings relative to comparable buildings nearby are higher by more than 13 percent.”
    “The Economics of Green Building – Eichholtz, Kok, and Quigley – 2010
    Using a large cross section of data on commercial buildings gathered in late 2009, we then estimate the increment to market rents and asset values incurred by buildings which have been certified as energy efficient or sustainable by the two major rating agencies – the U.S. Green Building Council and EPA’s Energy Star. We find that green buildings have rents and asset prices that are significantly higher than those documented for conventional office space, while controlling specifically for differences in hedonic attributes and location using propensity score weights.”
    “Doing Well by Doing Good? Green Office Buildings – Eichholtz, Kok, and Quigley – 2009
    We find that buildings with a ”green rating” command rental rates that are roughly three percent higher per square foot than otherwise identical buildings – controlling for the quality and the specific location of office buildings. Ceteris paribus, premiums in effective rents are even higher – above six percent. Selling prices of green buildings are higher by about 16 percent.”
    “Green Noise or Green Value? Measuring the Effects of Environmental Certification on Office Property Values – Fuerst and McAllister – 2008
    The results suggest that certified buildings have an average rental premium of 4-5%. Furthermore, based on a sample of sale prices for 559 Energy Star and 127 LEED-certified buildings, we find price premia of 26% and 25% respectively with higher levels of certification achieving higher premia.
    Abstract
    This paper investigates the price effects of environmental certification on commercial real estate assets. It is argued that there are likely to be three main drivers of price differences between certified and non-certified buildings. First, certified buildings offer a bundle of benefits to occupiers relating to business productivity, image and occupancy costs. Second, due to these occupier benefits, certified buildings can result in higher rents and lower holding costs for investors. Third, certified buildings may require a lower risk premium. Drawing upon the CoStar database of US commercial real estate assets, hedonic regression analysis is used to measure the effect of certification on both rent and price. We first estimate the rental regression for a sample of 110 LEED and 433 Energy Star as well as several thousand benchmark buildings to compare the sample to. The results suggest that, compared to buildings in the same metropolitan region, certified buildings have a rental premium and that the more highly rated that buildings are in terms of their environmental impact, the greater the rental premium. Furthermore, based on a sample of transaction prices for 292 Energy Star and 30 LEED-certified buildings, we find price premia of 10% and 31% respectively compared to non-certified buildings in the same metropolitan area.”
    “Does Green Pay Off? By Norm Miller, Jay Spivey and Andy Florance – 2008
    The mean price per square foot is $242.75 therefore the average LEED impact on sales price per square foot is a positive 9.94% or roughly 10%.
    The Energy Star impact on selling price is 5.76% on the positive side.”


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