Does Greening Your Commercial Property Make Financial Sense?

By Joan Pino

The term ‘responsible property investing’ refers to the active selection and maintenance of properties that exhibit social and environmental conscientiousness. ‘Responsible’ in RPI expresses an objective of accountability as well as smart business, which translates into economic benefits directly passed on to the bottom line. Recently, commercial investors with RPI ambitions have been drawn to environmentally friendly or ‘green’ buildings on account of their clear alignment with the RPI outlook. At first glance green buildings may appear as an unnecessary increase in initial capital outlay, however; investors in green buildings have confirmed them to be sustainable ventures that maximize property value while minimizing risks associated with volatility of the market, creating an ideal investment for anyone.

Until this point in time, the ‘green cost premium’ has been a major deterrent to investors greening their properties. Over the past ten years, costs of green building materials have become more competitive with conventional materials, ultimately causing the green cost premium to disappear. According to a 2006 study conducted by the Davis Langdon firm, “many projects achieve sustainable design within their initial budget or with very small supplemental funding.” If this is holds true, the need for commercial real estate investors to financially justify opting for a green building would be eliminated.

Investors in green buildings have reported gaining several significant benefits unattainable with non-green properties. Studies have documented improvements in rental performance (rates, occupancy, and retention), risk management, and tenant relations. In addition to actively seeking green buildings, investors can make upgrades to buildings already in their portfolios through a variety of improvements which will make their properties superior investments. The costs of these upgrades can even be passed on to the tenant, the entity which stands to gain the most from the evident benefits (decreased operating costs, improved environmental air quality, increased employee productivity, etc.), through a green lease. The EPA’s ENERGY STAR® program has developed a tool called the Building Upgrade Value Calculator (BUVC) which allows building owners and/or tenants to assess the financial costs, benefits and implications of energy efficient measures specific to their building and situation. The tool provides a useful financial summary (net investment cost, pay back period, ROI, NPV, IRR, etc.) calculated from the given inputs (square footage, annual utility bill, costs and predicted annual savings of energy efficient measures, possible rebates and additional savings) to give investors an estimation of how green upgrades will affect their bottom lines. The BUVC works off the income approach of asset valuation (asset value=NOI/Cap Rate), assuming energy savings flow directly to NOI. Although the tool was originally designed for office buildings, most of its functionality is applicable to all space types (the figures that the tool generates specific to office buildings are potential impact on NOI and asset value). The BUVC is a MS excel workbook that can be accessed here. The ENERGY STAR website also has suggestions for cost-effective upgrades appropriate for different building types (retail, QSRs and casual restaurants, grocery stores, office buildings, etc.).
Investing in green buildings may have been impractical and costly in the past, however; the eradication of the green cost premium coupled with increasing risk aversion begs the question, why not go green?