SAN FRANCISCO — Rapid advances in “green” building have happened without the involvement of major institutional real estate investors, but that’s about to change, according to a new report by RREEF.
“Green building is fundamentally altering real estate market dynamics. The upshot will be a redefinition of what constitutes Class A properties and even institutional-quality real estate,” according to the report, “The Greening of U.S. Investment Real Estate — Market Fundamentals, Prospects and Opportunities”.
Buildings claim 70% of electricity used in the U.S. and 30% of raw materials, and release 30% of all greenhouse-gas emissions, according to the report. And, the real estate sector has done less to reduce emissions than other sectors. So, many of the societal forces behind socially conscious investing — now a $1.6 trillion industry — are pushing investors to consider green buildings.
But greenbacks are also pulling investors toward green buildings. There are data “that support anecdotal claims that green buildings lease up quicker, at higher rents, and maintain higher occupancy levels than conventional buildings,” and that “logically, green buildings should trade at elevated values” because of their “superior” operating performance, the report states.
Added costs in new construction for green buildings tend to be overstated, even by seasoned real estate professionals, who tend to peg the premium at 15%, the report says. However, two earlier studies cited by RREEF found the premiums to be much lower and dependent on how green the new building is based on the U.S. Green Building Council’s LEED standards. Meeting basic LEED standards tacks on less than 1% to costs, both studies found, according to the RREEF report. Lower costs and added benefits — to the building owner and tenants — have attracted an ever-increasing number of investors to green building. “All available indications suggest that green investment is poised for tremendous near-term growth,” the RREEF report said. Demand will eventually favor green buildings so strongly that “property owners will need to adapt quickly — or risk the consequences of sharply shrinking demand for (traditional) property that, over time, becomes increasingly obsolete.”
“The risks of not moving quickly enough almost certainly will outweigh the risks of moving too quickly” into green-building investment, the study says. In addition to obsolescence of “brown” buildings, incentives now offered by governments and utilities for green construction “will be increasingly replaced by mandates and penalties.”
The report suggests that “in many markets, arguably all new product should be built green as a matter of course,” and that investors’ existing building stock should be looked at for renovation, with rising energy costs justifying the move to a more efficient building. “When capitalized expense savings compare favorably with renovation costs, the decision to retrofit is a relatively easy one.”
Downtown office buildings will be prime candidates for green makeovers, followed by hotels and apartments, while the potential greening of outdoor shopping centers and industrial buildings is limited.
