How much less does it cost to build green? Two posts...
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.
Reader Comments (72)
Thanks Barry!! This is a great and timely article. I'll have to look up that study on the Adobe building, I'd love to see the credits that lined up for $400K in the green fit. Keep it up!
Sadly, the blog gives no direction on HOW to do green to cost less, only reports that some have and their positive results. It is only another opinion piece.
Further, it is a bait and switch. Life cycle cost is offered in the first paragraph as the "cost" that is lower. Of course the LCC is lower - that happens when people do things that are cost effective. Of course the headline is to catch the reader, who presumes the writer means capital cost.
If it were to tell us how, it would give:
- how to find agencies that will give grants;
- what typical green systems they give grants for and what are their criteria;
- how the examples reduced energy and water use;
- typical discount factors and study periods for the LCC that showed green costs less.
(BTW, I hope those that are up on the productivity benefits are also up on the research that productivity goes up whenever you make changes that express interest in productivity, as long as the workers know it.)
I am sure those who are psyched to go green will be emboldened, and see the blog as support. Many will talk at length about how we now "know" that green costs less, even if they have not said how. But for those of us that have to make things work, and sit face-to-face with the treasurer or CFO to talk money, it has no signal, only noise.
When means and methods for building Green, at all cost levels, are more accessible, and implementation is more mainstream, then absolutely Kevin, the differential will be negligible. I don't know if that's in the near future, however since there is an abundance of non green product and manpower ready and waiting. There will be some resistance at every turn in the near term. And, until the demand is high enough to justify the supply chain pulling in that direction, Green will remain somewhat of a specialty, hence the need for us LEED AP's. Our skills, whatever those are, will be commonplace in a little over a decade from now, when every superintendent will be able recite the Green mantra. That's when we'll know Green is no longer just an expensive alternative method.
I agree with Bob regading the short term goals of typical developers. However, this point may be mute in the near future as LEED certification costs are down to 1% (on construction costs >$50MM)... and with the government incentives and the fact that LEED certification will eventually be designed for each industry segment ---the cost to design/build "green" may be negligible in the near future.
The long term benefits of Green have long since been well established. The problem in terms of short term vs. long term is whose pocket the money comes out of and goes into. And paying for tomorrow's savings with today's dollars has always been a developers dilemma since it does cost MORE, not LESS to develop Green.
Statistically, the original developer will not be in the deal long enough to reap the rewards of the long term gains, and is forced to try and sell the concept to prospective buyers who are all but receptive to anecdotal evidence of employee health and such nonsense that doesn't put a penny in the landlords pocket. In fact, the up front expenses are recouped in the form of lower CAM. The exception of course is the owner occupied facility, but those are traditionally factored for long term payback anyway. The best, selling tool, will be in the establishment of serious empirical data on those CAM costs so the benefits to both landlord and tenant can be assessed as part of the purchase and cost of a project. Of course, this will require more Green buildings. Kind of a catch-22, unless the Govt provides sufficient incentives to put Green development on par with traditional projects. And that seems to be on the agenda.
Grant, it would be nice to see some information we could use to make this stuff happen instead of talking about it. While some are content to stay in the bleachers, I want to play the game.
And I wasn't kidding about the LCC factors. I can kill your green project LCC if I choose to use a (credit card) discount factor of 29%, and a study period of 3 years. I will bet that would make almost any green idea cost "more." Those factors tell a lot about the economic scenario the owner used, and sets a precedent others could cite.
Using an ICF such as Greenblock vs 6" stick build - the initial material cost is 3-4% higher. However your R-Value is 30 or better and your untility savings is up to 70% monthly. You also get insurance discounts and tax credits. You can use smaller heating and cooling units in the same sq ft house if went with stick build, thus saving you ongoing - usually pays for itself in less than 3 years.
I've saved as much as 60 - 70% off of the cost of some components of single-family residential remodeling by using architectural salvage items, i.e. doors, cabinetry, light fixtures, appliances. There will be a slight mark-up from the subcontractor for additional labor and modifications, but overall it's a great way to save and be green! Most metro areas will have demolition companies that offer salvage items. In the Dallas/Fort Worth area, check out this link: www.dhwsalvage.com .
my opinion on this topic is simply that building green is not strctily related to minor construction costs: here in UK some surveys / reports show how design & project "green" details bring up the cost of the product. No need to say that the LESS cost will be perceived in terms of running costs (energy, bills,...) from the final user, but also in terms of less billable aspects like comfort and quality of life (solar design, temperature control, just to randomly quote some points).
I personally think the real question should be: given that a better and greener product (building) costs more (to be built), will it provide a positive benefits/cost performance (both from the energy, the environmental and the social point if view)? My answer is ABSOLUTELY YES: as in every area of the renewable energy/sustainability there is the need of economy of scale, high level of integration between designers, architects, engineers and other professionals, it will of course take time until when we will all accept the concept of a green building as a normal commercial and professional procedure, but this is the only reasonable and responsible way toward sustainability. Regardless the theretical aspects, energy demand statistics in all western countries show how a huge contribution to energy consumption derives from buildings, and already some countries (German above all I think, but also Scandinavian countries, Austria, and in the near future hopefully UK as well...sorry, I quote only EU countries only because I know more the situation here... I am sure that USA, Canada and many others are moving in the right direction as well!) have improved their building sector impact in a sustainable and economic way, showing that definitely is possible to achieve green objectives by also saving money, maybe not in the construction phase, but within the whole life cycle of the building product.
Best
Marco
my opinion on this topic is simply that building green is not strctily related to minor construction costs: here in UK some surveys / reports show how design & project "green" details bring up the cost of the product. No need to say that the LESS cost will be perceived in terms of running costs (energy, bills,...) from the final user, but also in terms of less billable aspects like comfort and quality of life (solar design, temperature control, just to randomly quote some points).
I personally think the real question should be: given that a better and greener product (building) costs more (to be built), will it provide a positive benefits/cost performance (both from the energy, the environmental and the social point if view)? My answer is ABSOLUTELY YES: as in every area of the renewable energy/sustainability there is the need of economy of scale, high level of integration between designers, architects, engineers and other professionals, it will of course take time until when we will all accept the concept of a green building as a normal commercial and professional procedure, but this is the only reasonable and responsible way toward sustainability. Regardless the theretical aspects, energy demand statistics in all western countries show how a huge contribution to energy consumption derives from buildings, and already some countries (German above all I think, but also Scandinavian countries, Austria, and in the near future hopefully UK as well...sorry, I quote only EU countries only because I know more the situation here... I am sure that USA, Canada and many others are moving in the right direction as well!) have improved their building sector impact in a sustainable and economic way, showing that definitely is possible to achieve green objectives by also saving money, maybe not in the construction phase, but within the whole life cycle of the building product.
Best
Marco
This is very debatable topic, but our experience with LEED oriented construction over the last 6 years is that it costs more than traditional means and methods. In the Atlanta market, a recent estimating effort on a class A office building showed smaller premiums than years past. This is due mainly to the fact that sustainable products are more readily available (even though demand has increased). Reasonable premiums were found in SRI 78 roofing, formaldehyde free millwork, FSC wood materials (doors/millwork), and IAQ during construction. The most substantial cost increases are found in MEP trades to gain credits for energy efficiency credits, IAQ management, water reduction and greywater reuse. These premiums are all relative to the type of construction and end use of the building.
I think most LEED AP's understand the these front end provide a cost return in building utility costs. Usually a life cycle cost study is performed by the design team to give owners a sense of what this return amounts to in dollars over time.
Unfortunately I've discovered for my clients, largely non-profits and private home-owners, it's not so simple. The extra costs of energy modeling and certification or commissioning are hard to justify for retrofits of existing buildings with inadequate documentation. And some of the new "green building" ordinances did not adequately consider the resources of applicants who are voluntarily upgrading an existing building and those who are getting a valuable new entitlement, and therefore might be expected to comply with more expensive initial improvements to save energy later.
In the current economic climate, we need more financial incentives and low cost resources for the cost-effective green retrofit, and less "one size fits all" emphasis on LEED Platinum buildings which have the advantage of new construction, uncontrained sites and much higher budgets.
Many of the green building experts claim that the initial premiums for going green on a new construction project is in the range of 2 to 5 %, however their is a measureable and worthwhile payback in costs and comfort. I don't disagree with this, however I'd say that this analysis of the costs may only apply to certain types of organizations and developments.
A university or hospital, for example, is already going to build a good to high quality building. Therefore the decision to build a LEED Silver or Gold building is not a very large step to make. 2 to 5% premium may be accurate, with paybacks under 10 years.
A developer which usually builds buildings as cheaply as possible, and buries the energy costs in the lease or makes the tenants pay utilities themselves, has little incentive to build green. The leap for this developer to "go green" is so large that the decision is never made. Therefore this delta never gets measured, which leads to the 2 to 5% figure being disingenuous for the building industry as a whole.
As a landscaping company specializing in low water use plantings and efficient irrigation systems I can attest to the savings a client can achieve. I have had projects where water use dropped over 70% when converting from a turf type/ formal landscape scenario. The amount of water that is being wasted is mind boggling on a large scale especially here is Southern California.
While wonderful to make the case for Life Cycle Analysis, too many USGBC fanatics, as well as the general public, continue to have the impression that using wood is a bad thing. In fact, wood is the Alpha Material, and actually contribute to the lower cost LCA as well as a Carbon Negative net result due to sequestration.
I have a Client seeking to raise $450 Million to build GREEN Disaster Proof Housing within the USA.
Can your Company help my Client raise $450 Million or do you know of a Company or Hedge Fund or Private Equity Group who could raise $450 Million for my Client?
Please email me at jeffrey.muchnik@gmail.com or call me at 619-504-9939 to discuss.
Thank you
Jeff Muchnik
The short term "costs of certification" certainly are outweighed by the life cycle costs, especially in new construction, but the political will to "buy the plaque" for government construction is not always there. In a transparent process it is very difficult to convince the public that there are not costs incurred in achieving a LEED certification.
How much more does it cost not to?
Green is more than just energy.....
Modeling/design and proper sizing can result in huge equipment savings to offset commissioning and slight premiums on quality building components.
....on and on.... so much more..... but ask yourself this-or your client, " Do............?"
Oh, forgot. That's an Ecohill trade secret.
Although I agree with most of what has been previously posted on this subject, here in Austin, even developer driven projects may choose to 'go green' for marketing purposes. New projects in the CBD are to be green, so those beyond may need reason to show what their 'payback' is for building in certain, more environmentally sensitive parts of town.
We are also very fortunate to have a local utility, Austin Energy, that incentivizes green building!
Bottom line- it can be good for everyone's business!
Kevin K. is correct...it depends on where you are starting from and what you measure (over what time period).
At Rocky Mountain Institute, we have found that the higher a client aims, in terms of sustainability, the more likely it is that they will save capital cost (initial construction dollars) by "tunneling through the cost barrier" and driving to more passive, simpler, smaller and cheaper systems to provide their buildings energy needs. I like to say "if you aim low, you'll probably reach your goals"...at a higher cost.
For free video and PDF case studies of buildings that make the "business case" for high performance, visit our website and feel free to download and use these clips and stories, including the adobe one cited in the article, in your next presentation. www.bet.rmi.org
Why should it cost LESS when the clients get MORE?
Green buildings can indeed be less costly than an equivalent minimally code compliance structure. If you design a building with a holistic and integrated approach, where the envelope, mechanical systems, lighting, domestic hot water system etc are working together to create a sustainable building, then it is very possible to have a lower 1st cost. Utilizing efficient and well placed and designed glazing, reduces the envelope load on the HVAC system. A well designed envelope can be used to eliminate mechanical cooling/heating in some instances. Mechanical systems reductions have a significant impact on the size of the electrical infrastructure required, from the transformers, switchgear and panels to the size of the electrical rooms needed to house the equipment. Utilizing well designed low flow water fixtures reduces overall pipe sizes and waste water infrastructure connection requirements. Using permeable pavement materials can reduce the sizing requirements for stormwater.
I have worked on a number of projects where taking the innovative and sustainable approach has resulted in reductions to the overall cost.
Some sustainable materials such as certified wood do have a greater cost, but we should not look at items on an item by item basis. If you give good architects and engineers the basic owners project requirements and a base budget 5% less than the current market price for a standard building of equivalent size, I am sure that we can provide a design that will be significantly more sustainable than the standard building and with a lower cost. And the sustainable design will have significantly lower life cycle costs.
I believe the key is to have an integrated design approach. Get the architects, engineers, cost estimators, and possibly the contractor around a table and give them the basic requirements and let them provide solutions. It will not look like a regular building, but then it shouldn’t.
I am yet to read Barry's posts, but at the level of building per se in Bangalore India we can confidently say close to 8% less it takes to build a green home and it costs 30% in maintanance.
Chitra
Brilliant article!
Sanjoy
www.regainparadise.org
Oh.........made a mistake...what I meant was 30% less in maintanance..
Regards,
Chitra