The Northwood Group

Building Partner Investors

Sustainability & Commercial Real Estate Investment

March 11

Green and Sustainable Building: What Does it Mean for You?

The trend in the world of commercial real estate is going green. The environmental impact of the “built” world is becoming more of an international issue every year. It has been reported that over 50% off all pollution comes from buildings. As a comparison, transportation makes up less than 25%. So even if we all stopped driving our cars the impact is minimal compared to the overall problem. Sustainability in buildings is becoming more important to builders, property-owners and tenants.

This awareness has spurred the creation of programs such as LEED (Leadership in Energy & Environmental Design) to provide designations for buildings to meet certain criteria in relation to design, sustainability, energy and overall impact on the environment. The buildings are awarded points based on compliance with different categories and then given different levels of designation depending on the criteria they adhere to.

The LEED program has done a tremendous amount of good to raise awareness and bring these types of issues to the forefront. The challenge that I observe with the LEED program is that it is a one-time designation that doesn’t ultimately reward building performance. In fact, there are some systems that are beneficial in some areas while actually less efficient in others.

As a real estate practitioner and investor, I am more acutely interested in the overall efficiency and sustainability of properties. I want to know how a building can operate better and with less energy consumption. There are many new delivery systems and technologies coming on line that can reduce operating costs. It will be very interesting to watch how these technologies evolve and impact the world of commercial real estate investment in the coming years.

In the meantime, does sustainability and building green pay? Studies show that LEED-certified buildings have higher average lease rates and higher average sales prices per square foot — the logic being that if operating costs are lower then that will directly affect the net operating income in a positive way, thereby increasing value. There are many companies that are choosing only to lease in LEED- certified buildings, which is increasing demand as well. So regardless of increased efficiencies, commercial property values are also being driven by the demand created by the “green” trend.

This trending towards environmental and energy sustainability is not going away any time soon. The impact will be different based on real estate property size, type and location. However, a commercial real estate investor in the market today needs to look carefully at the impact of the green trend as it evaluates different investment opportunities.