The Business Case for Green Office Buildings
November 15, 2007
Philadelphia's Comcast Center under construction. The finished building will be a candidate for LEED Certification. (S. Brennan photo)
Liberty Property Trust is a REIT that has embraced green building, and not just because it's the right thing to do. Greenbuild 2007 session convener John Gattuso, Liberty's senior VP of urban and national development, cut to the bottom line of green building in for-profit organizations.
The soft benefits -- branding, reputation and doing the right thing -- are all ample justification for Liberty, Gattuso began. But there are four cold, hard benefits that the business community must also embrace, and he used some prominent Liberty projects to illustrate his point.
Three example LEED buildingsGraham Wyatt, of Robert AM Stern architects, presented details of Liberty's 975-foot Comcast Center in Philadelphia. The 1.6 million square foot building will be a candidate for LEED Certification when it opens in 2008.
Wyatt said the argument for building green is absolutely compelling, and any rational developer would come to the same conclusion. "It's not an incremental benefit," he said, and widespread green building "will take place because people who are in it for a buck see that it's the right thing to do."
John An, of Atelier Ten architects, presented the Plaza at PPL Center in Allentown, PA. The 283,000 square foot building was awarded LEED Gold status. An said the building used "state of the shelf technology," emphasizing that the products and materials used to win LEED Gold were all commercially available.
Simulations of the Plaza building predicted 30 percent less energy use than code required; in actual monitoring, it has proven 42 percent better than code at 85 percent occupancy.
Scott Kelly of Re:Vision architects presented One Crescent Plaza, a small office building at the decommissioned Philadelphia Navy Yard. The PNY is being converted to mixed commercial and residential properties. The Navy continues to use a small part of the Yard.
Kelly said the three factors in achieving Platinum were the site, the team's experience, and the team's dedication. He cited a two percent cost premium for the LEED Platinum building, which the Pennsylvania Department of Environmental Protection declared was the state's highest performing building in 2006.
The business case: Developers justify higher first costThus far we had not heard a quantitative argument to offset the cost premiums cited. Then Gattuso reclaimed the podium and delivered on the promise of his session's title.
In the case of all three buildings, he made four observations:
- Sustainable design and LEED certification contribute to market acceptance of higher rent.
- LEED accelerates the time to market and expedites the permitting process.
- Green features help attract capital.
- Sustainable design drives significant property values.
Gattuso predicted that the market will someday see a bifurcation of class A buildings, dividing sustainable designs from those that are not; the latter segment will have trouble attracting foreign capital and will eventually become obsolete. Green building helped Liberty to secure a German investment partner at Comcast Center, he said, and green initiatives are increasingly an investment prerequisite of pensions like the $154 billion New York Common Retirement Fund.
Gattuso said that the REIT paid a premium of no more than four percent for
incorporating sustainable features into its projects (see Table 1), "and that
number is drifting down." The development cycle is no longer than usual, he
said, and operating costs can be reduced 20 to 30 percent, equating to $0.50 to
$1.00 savings per square foot passed through to tenants.
cost more to build?
Source: Liberty Property Trust 2007/ Energy Priorities
Rents on Liberty's green buildings are 15 to 40 percent above market, Gattuso said; One Crescent Plaza fetches $22 to $24 triple net, among the highest rents in Philadelphia, on par with the upper floors of the city's more elite buildings. Liberty's green buildings are pricing at 50 percent over comparable assets.
Why do tenants pay the higher rents that lead to higher valuations? Is it the architecture, the energy savings, the environmentally friendly features?
The business case: Tenants justify higher rents"Productivity is the key," Gattuso stated, "it's more important than energy costs and the environmental footprint, both of which are also critical."
Citing a recent DOE study, Gattuso said that worker productivity in a green
building has been shown to increase 15 percent. He then translated that
productivity gain into dollars (see Table 2) based on a blend of costs for
Comcast Center and One Crescent Plaza.
for green building?
Cost & revenue
Base rent with premium of 8% required to support the higher first cost
Wages & benefits @ 250 sf per employee
Productivity gain of 15%
Executive productivity gain of 15%
Source: Liberty Property Trust 2007/ Energy Priorities
Gattuso noted that even a conservative 5 percent average productivity gain, $15.60 per rsf, "almost pays the rent."
"This is a more sophisticated sales approach," Gattuso explained, "and we've had to train our sales force to help tenants understand these benefits."
"We're now starting to get solid data that supports the productivity assertions," he concluded. He referred to Liberty's own studies with same-tenant comparisons in green and brown buildings, of which the results are not public.
The developer's business case for green buildings is a linear process, he reiterated, where the faster time to market and the higher rents generate higher values, which in turn more easily attracts capital.