How much less does it cost to build green? Twoposts...

Wednesday, April 29, 2009 at 11:44AM

Part I The one question I am asked more often than any other on the subject of green building is, How much more does it cost? For a long time I cited various statistics indicating premiums in the range of 2.5% to 5% or so. But a while ago it dawned on me that this was actually misleading. My new response is that "how much more" is the wrong question. The appropriate question is, How much less does it cost? Thinking only in terms of first costs is extremely short-sighted. What you really want to know about is the life-cycle cost. Over a building's useful life, the cost of operations and maintenance can easily equal or exceed the original construction cost. Building green, or carrying out green retrofits, nets substantial reductions in energy use, water use, waste water disposal, solid waste disposal, and maintenance, generally resulting in relatively short pay-back periods and high returns on investment.

An excellent case in point is the retrofit of Adobe System's headquarters in San Jose, CA. The cost of the retrofit was $1.4 million. Of that amount, $389,000 was offset by grants and rebates from the city, state, and local utilities. And while Adobe's staff grew by 35% since 2001, their electricity consumption is down 35%, natural gas use is down 41%, potable water consumption dropped 22% and their landscape irrigation consumes 75% less water than before. All this is netting Adobe an annual cost savings of $1.2 million and earned the project LEED-Platinum certification. But this kind of financial return still only tells part of the story. Green workplaces have been shown to improve productivity and reduce absenteeism. For most businesses, savings on operating costs for office buildings pale in comparison to productivity increases because salaries typically run five to six times higher than all other costs combined, so even small increases in productivity have a big impact on the bottom line.

In a future post I will go into more detail about research documenting improved worker productivity in green offices. It's pretty interesting stuff. But for the moment, a few statistics will paint the picture in broad strokes. A study published by Deloitte & Touche reports that in a survey of organizations that had carried out LEED-certified green retrofits, 87% saw an improvement in workforce productivity, 75% saw an improvement in employee health, and 73% reported that they had achieved cost reductions as a result of implementing green measures. Respondents also reported substantial reductions in energy costs and higher apprasial values.

Other recent studies of green buildings have documented higher occupancy rates, higher rents, and sales premiums as high as $171 per square foot as compared with comparable properties with standard construction.

So, how much less does it cost to build green, anyway? How much less does it cost to build green? Part II I am always frustrated when people ask me how much more it costs to build green. I tell them it's the wrong question to ask. The appropriate question is, how much less does it cost? It is a mistake to look only at first costs when considering the budget for a building or remodeling project, because operating costs, over the life-span of a building, can be two to three times the original cost of construction. So green upgrades that increase energy efficiency and reduce maintenance costs quickly pay for themselves and then continue to pay dividends for the life of the building. And that's not even taking into account the documented increases in productivity among workers in green buildings. That's a topic for another post. I wrote about this last month in a piece called How much less does it cost to build green? Today I want to expand on that topic with some excerpts from an article entitled Valuing Green Buildings, by my friend, Constantine Valhouli, of the Hammersmith Group. It was originally published in Urban Land magazine, a publication of the Urban Land Institute. You can find the complete article here. Do green buildings present a competitive advantage that can translate into lease premiums, reduced risk, and increased renewal rates? Given that buildings account for one-third of all energy and water consumed in the United States, there is increased interest in “going green” as energy prices continue to rise. The benefits of sustainable structures range from quantifiable energy and water savings—to the “brand” benefits brought about by actual stewardship of environmental resources.

“There is a strong business case for high-performance buildings,” maintains Brenna S. Walraven, executive managing director of San Antonio, Texas–based USAA Real Estate and chair of the Building Owners and Managers Association International (BOMA). Previously, green features were considered primarily on the basis that ‘if it’s good for our image, it’s good for marketing.’ Now there is greater awareness—and better documentation—of the financial benefits of high performance buildings.”Energy-efficient and water efficient features can increase a building’s value by lowering operating costs. High-performance buildings can generate a 7 to 12 percent increase in net operating income (NOI) by reducing operating costs, notes Dennis Fleming, managing director of Revival Funds, a Denver-based firm that funds sustainable real estate investments. Green buildings use on average 30 percent less energy than conventional buildings, points out Greg Kats, managing director of Good Energies, a venture fund focused on renewable energies based in Manhattan. If energy costs run, say, $2 per square foot, this becomes a savings of $0.60 per square foot. For a 100,000-square-foot building, this represents energy and water savings of $60,000 annually. With a 20-year present value of expected energy savings at a 5 percent cap rate, this savings adds roughly $750,000 to the value of the building—all for a small additional investment in the initial costs. As interest rates and energy prices rise, these benefits become even more pronounced—and green buildings become even more valuable. “Energy-efficiency has helped drive value for our portfolio,” says Walraven. By using Energy Star’s tools and ratings that normalize building efficiency for factors such as weather, occupancy, and building characteristics, Walraven explains that it was possible to identify low-cost opportunities to increase operating efficiencies for USAA Real Estate’s portfolio properties.

The result, she says, is that implementing the recommendations from the energy audit generated $10 million in savings on capital expenditures of $2 million.

That's not a bad rate of return in any economy.

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