February 15, 2008

Green buildings bring higher rental rates, Burnham-Moores Center study finds

San Diego

Over the past few years, Americans have been hearing only bad news about the real estate market: declining sales, rising foreclosures, tightening credit, plummeting prices. Recently, even the market for commercial properties has begun to soften.

But the trend toward green building provides a welcome cause for optimism.

A recent report by the Burnham-Moores Center for Real Estate at the University of San Diego details the growing popularity of energy-efficient, environmentally friendly “green buildings,” according to the San Diego Union-Tribune.

The report — the first systematic study of the green building market — shows that a growing number of developers have been erecting buildings to stringent environmental standards. And tenants have been willing to pay top dollar to rent in those buildings.

According to the report, which relies on data from 2006, commercial property customers were willing to pay an average of US$2.45 per square foot extra for renting or an average of US$15 per square foot extra for buying an industry-certified green office building.

The study found that the higher rents and purchase prices for green buildings were offset by lower energy bills. It found that operating expenses from energy costs at buildings that earned the U.S. government’s Energy Star rating averaged US$1.27 per square foot per year, a 30 per cent savings over other buildings, which averaged US$1.81 per square foot.

“The added value of the real estate is now exceeding the extra costs associated with going green,” said Norm Miller, director of academic affairs at Burnham-Moores. “I couldn’t have said that five years ago. And the costs are getting cheaper.”

Miller estimates that it takes between 1 per cent and 8 per cent of a building’s total cost to turn it green — a range that depends on how green you want it.

But those costs are based on retrofitting buildings. Jane Leonard, an architectural designer with the Stantec engineering consulting firm, said that for a new building, the cost of incorporating energy-efficient environmental systems is negligible.

“If you design your building with the intent from the very beginning to integrate green building principles, not only should it not be more expensive, but you should have a higher-performing building,” said Leonard.

It’s hard to say how green buildings will fare in the market now that prices for commercial space have started to weaken.

An inconvenient truth about the commercial real estate market is a growing vacancy rate.

Nevertheless, judging from Miller’s study, developers should probably start building green. “You might find you have an obsolete building on your hands if you don’t start moving in that direction,” he said.

The push for greener buildings started gaining steam in 1996, when the U.S. Environmental Protection Agency began using its Energy Star rating system to measure how efficiently new homes and commercial and industrial buildings were using energy. Buildings that were rated among the top 25 percent for energy efficiency were given an Energy Star rating.

According to Miller, it costs an average of 1 percent in extra construction and refurbishments to erect a building that would qualify for a silver certificate from LEED; 2.7 per cent for gold; and 7.8 per cent for platinum.

In the past seven years, more than 2.2 billion square feet of buildings have been certified by LEED. Not surprisingly, California has taken the lead in this revolution. As of 2006, it had 219 green top-flight office buildings totaling 52 million square feet of space, followed by Texas, New York, Minnesota, Colorado, Virginia and Washington, D.C.

DCN News Services

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