Buildings are an environmental challenge. They cover green land, devour energy and eat up natural resources from wood to water. Commercial real estate accounts for nearly 50 percent of all greenhouse gas emissions and energy consumed in the U.S. annually.
Malls are among the worst offenders.
Slowly, retail developers are changing how they think about the environment, partially because state and local governments are raising the requirements for real estate operators — in fact, greening is often more a political reality for developers than it is a choice.
But most significantly, developers are more interested in building in an environmentally friendly way because it protects their bottom line — in addition to the environment.
Right now, few developers fully embrace green building, which involves using environmentally responsible construction practices to build high-performance structures that minimize their use of natural resources and impact on the environment. However, nearly all developers are considering greening their existing portfolios and incorporating at least a few green strategies into new properties.
Developers are doing everything from replacing traditional lightbulbs with more efficient LED bulbs to improving their recycling management programs and adding solar panels on rooftops to supplement their energy supply. According to the U.S. Green Building Council, a nonprofit advocacy group devoted to educating and encouraging developers to use sustainable building practices, the market for green building products and services hit $7 billion in 2005, a nearly 40 percent increase from a year earlier.
Since 2000, roughly 500 million square feet of new commercial property has been certified by the USGBC with the Leadership in Energy and Environmental Design designation, which denotes a high-performance building that meets certain standards of sustainability. Little of the LEED-certified property is retail.
The $7.8 billion Forest City Enterprises is the first of the major retail real estate investment trusts to go beyond greening their properties and invest fully in green development practices. The company’s Northfield Stapleton project, which opened in October on the former Denver International Airport Site, is the first retail town center to achieve LEED status.
The 1.2 million-square-foot Northfield Stapleton project was given the silver certification based on the use of a sustainable site; water, energy and atmosphere efficiency; use of materials and resources, and indoor environmental quality.
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Though the development team, led by Jon Ratner and Brian Levitt, kept mum on the premium they paid to develop a LEED silver property, they did hint at the expected returns on the investment, including a cash incentive through a government energy savings program.
“We have a triple bottom-line approach,” said Ratner, the company’s director of sustainable initiatives. “We’re not just looking at the financial return of our properties, but also at the environmental and social impact. We look at people, planet and profit.”
Northfield Stapleton was built under the LEED Core & Shell guidelines (see glossary on page 9.) But the developer also steered tenants toward more environmentally friendly stores with its sustainability tenant incentive program. The program grants cash incentives and an energy allowance for tenants who achieve certain levels of sustainability. It also offers marketing incentives.
Other developers are taking their own baby steps toward LEED. But the up-front costs to build sustainably is halting many in their tracks.
“If you can marry what’s good for the environment with what’s good for shareholders, it will work,” said Robert Taubman, chairman, president and chief executive officer of Taubman Centers. “It needs to have an economic incentive and a good return on capital. It can’t just be about good deeds.”
Others echo Taubman’s concerns on price.
“Green development is at the forefront of all commercial development discussion today,” said Dan Hurwitz, chief investment officer and senior executive vice president at Developers Diversified Realty. “But the challenge is finding a way to do it that is cost-effective so that the returns are commensurate with the investment. We’re not at the point of doing it yet.”
Resistance to green development may be more to a perceived fiscal hit than an actual one.
According to The Costs and Benefits of Green Buildings, a watershed report on the costs of green development published in 2003, the average premium for green construction is less than 2 percent — not the oft-quoted 10 percent — which translates into roughly a $3 to $5 premium per square foot, depending on the number of green systems in the building. For a platinum LEED certification, which requires the most rigorous sustainability levels, the average premium is 6.5 percent.
When talking about a 300,000-square-foot regional mall, this is certainly a steep cost. Ultimately, though, the up-front investment yields considerable savings. Given that green buildings generally use 30 percent less energy than a traditional building, and energy costs are constantly increasing, the reduced consumption translates to an average of $5 per square foot over the life of the property, equal to or more than the average additional cost associated with building a green product, according to the study.
Thus, the economic incentive is hefty enough to motivate even the shrewdest developers to move toward sustainability.
Simon Property Group, which recently won the National Association of Real Estate Investment Trusts and Environmental Protection Agency’s Leader in the Light award for its energy and natural resource management programs, plans to build at least one of its projects “100 percent green,” said David Simon during a conference call.
“We think the cost per square foot will be offset by the savings we may have on the utility costs. We’ve got a very competent team in this area that is very focused on looking at all sorts of alternative energies,” said Simon.
A developer doesn’t have to go LEED crazy in order to better serve the environment and incur savings, either. Rehabilitating older buildings can be much less expensive than focusing on LEED certification for new development.
General Growth Properties, for example, has 210 million square feet of commercial space across the country. It is hoping for LEED certification for its planned community in Summerlin in Las Vegas, but has broader plans for its existing portfolio. As part of its Global Green Project, it hopes to reduce its electrical consumption by 10 percent, which is equal to the energy consumption of 10,000 U.S. homes for the year and equals $9 million in savings in operating costs. And while much of the technology is expensive, management sees them as necessary outlays.
“There are a lot of things we haven’t done because we have felt prohibited by the expense,” said John Bucksbaum, ceo of General Growth Properties. “That said, we look at every option. I won’t allow ourselves to be curtailed only because of economics.”
The company has also installed 5.6 million square feet of Sarnafil’s EnergySmart Roof, a cool roofing materials system designed to minimize smog and global warming and invested $15 million in new HVAC systems to replace inefficient older models. It expects to recycle 50 percent of its waste by next year.
Westfield Corp. is debating a solar-power program for its exterior lighting. The company has already transitioned to a solar program at two centers in California. Westfield has also undergone an interior and exterior lighting retrofit program, which is taking place in 23 centers nationally, with 12 properties completed in Southern California and New Jersey. Finally, it is piloting a “weather track” smart irrigation system in San Diego, which processes weather forecasts and adjusts its irrigation schedule accordingly.
“The industry is walking the line between environmentalism and cost,” said Bucksbaum. “But I don’t think we can only look at the returns of being green today, or tomorrow, or one year from now. What is the payback in three years, five years? I think the most important question is, what is the cost to us if we don’t do this?”