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BD+C White Paper: Chapter 3, Financing Green Office Buildings

My somewhat ambitious goal for the remainder of 2006, at least with respect to this blog, is to provide a review, with commentary, for each chapter of the 2006 Building Design + Construction green building White Paper (which came out last month and is entitled Green Buildings and the Bottom Line). In my last post on the subject, I think I hit on most of the highlights from Chapters 1 and 2, The New Reality of Green Building and Where the AEC Industry Stands on Sustainability, respectively. So, to kick things off in this fledgling series of posts, here are my thoughts on Chapter 3, Financing Green Office Buildings.


Chapter 3 focuses largely on whether green buildings are more profitable, and thus more valuable, than conventional buildings, whether they are leased more quickly, and at a higher rate, than conventional buildings, the insurance implications that green buildings present, and whether green design is a factor that owners should emphasize when recruiting tenants, in terms of an eventual selling point to potential employees.

I have consistently argued that, in order for green building, including rating systems such as LEED, to remain viable over the long-term, owners must be given financial incentives, through tax credits or otherwise, in order to implement sustainable building practices. On a scale of 1-5 (strongly disagree to strongly agree, a score of 3 being neutral), respondents to the White Paper survey gave their highest rating to a statement providing for just that. “Owners should receive tax and/or other financial incentives for building sustainable buildings” scored a 4.27 on the survey, while the next closest statement, “[g]reen buildings have a marketing or public relations advantage over comparable conventional buildings,” received a 3.93. A series of other statements related to the financial benefits of green building, from their higher intrinsic value to their enhancing tenants’ employee recruitment and retention efforts, all scored between 3 and 4. Accordingly, the White Paper survey helps demonstrate that owners are clearly seeing real value from high-performance buildings.

The Value of Green Buildings

On page 11, Chapter 3 gives consideration to a well-regarded 2005 Canadian study, Green Value: Green Buildings, Growing Assets. The study evaluated twelve green projects in North America and six in the United Kingdom. It concluded that the main beneficiaries of green building are tenants, but potential health and productivity gains, however large, do not guarantee owners a higher asset value. Although the study confirmed an inherent value in green buildings, it called on developers, owners, and appraisers to figure out a better approach for accessing into this unlocked value. “[T]he commercial advantage that they would gain would become the most significant aspect of Green Value.”

“Value,” to me, seems like a somewhat nebulous concept. Is the value in the rent premium, if any, of a green building? Marketing advantages? Employee productivity? Resale value? (See my recent post about Chicago’s 1 South Dearborn). Regardless, the White Paper does a good job of pointing out the questions that green building proponents are trying to answer. Moreover, on page 10, it identifies “a number of newsworthy events [from] over the last year . . . that signal a dramatic shift in activity toward green building by the financial community.” That community would not sink one additional penny into green design elements unless there was a tangible benefit on the not-too-distant horizon. This flurry of activity on the financial side over the past few months is extremely good news, and Chapter 3 does an excellent job of summarizing it on pages 10-11 of the White Paper.

Rent Premiums for Green Buildings

I was particularly interested in what Chapter 3 concluded with respect to the rent premiums that green buildings may command. Are they rented out more quickly, and at a higher amount per square foot, than conventional buildings? The White Paper says “yes and no.” Why? Interviewees emphasize that it’s difficult to separate green elements from other amenities that a particular project might offer. Dan Rashin of Hines is quoted as saying that “[t]here are plenty of tenants out there who couldn’t care at all about LEED. But if they’re going to Class A [office space], they might be looking for it.” Donald J. Reed of Ecos Corporation notes that “some people on the [sustainability] advocacy side think that greenness trumps all sorts of other things, like location, but that’s only true for a small group of business buyers.” Finally, as Bill Green of Wachovia observes on page 17, “[i]f you see two buildings, and one has good views and one has good indoor air quality, the one with the good views will always win.”

While interviewees were certainly pro-green building, the White Paper’s inability to produce concrete evidence about green buildings’ ability to lease out more quickly and at a higher price was very surprising to me.

Lower Insurance Rates for Green Buildings

I touched on this in an earlier post about the new Fireman’s Fund green building insurance package, but the White Paper points out on page thirteen that more than 190 green-based insurance products and services are now on the market from insurers in sixteen different countries. Also, of particular interest to me from the liability perspective, page 15 notes that Lloyds of London now offers insurance against a green building failing to meet predicted energy savings or renewable energy technology performance levels.

Tenant/Employee Productivity

Many critics of green building point to overemphasized or misstated tenant/employee health and productivity benefits. Skeptics will find little in Chapter 3 of the White Paper to convince them otherwise. Studies continue to show that people work better in well-lit environments with high levels of air quality, but how does this translate into a higher asset value for an owner? While Page 12 provides an excellent description of a series of Carnegie Mellon-led studies about health and human green building benefits, the rest of the Chapter is unable to provide a direct correlation to the higher asset value that green buildings promise. As the Carnegie Mellon study observes, “measuring productivity of the knowledge worker is very difficult. . . . While speed and accuracy may be easily tracked in skilled/manual jobs, or even rule-based jobs such as call centers, knowledge-based work requires different measurement techniques to capture effectiveness at multiple tasks- both individual and collaborative.”

Socially Responsible Property Investment (SRPI)

SRPI isn’t addressed explicitly in Chapter 3, but the movement has been slowly gaining speed and I thought it was worth mentioning here nonetheless. Chapter 3 starts off by acknowledging a variety of green building funds which the financial community has initiated over the past few months. The Hines CalPERS Green Development Fund, for example, which launched back in September, received a great deal of attention from USGBC. (CalPERS is the nation’s largest public pension fund, with over $210 billion in assets, and Houston-based Hines has long been an active developer of sustainable real estate.) Liberty Property Trust, a $6.5 billion Philadelphia-based REIT, will certify its office building projects under LEED, which constitute seventy percent of its portfolio. Page 10 notes that Liberty has received rents ranging from twenty-five to fifty percent higher than market rate for its LEED Platinum One Crescent Drive project in Philadelphia and LEED Gold PPL Plaza in Allentown, Pennsylvania.


SRPI is happening right now, and the commitment that major players like Hines are making to green building within their real estate portfolios is proof, as far as I’m concerned, that green building makes financial sense. Chapter 3 of the White Paper makes a strong case for the financial benefits of green building while at the same time acknowledging the immense amount of work that remains to be done before industry skeptics are convinced that the sustainable bottom line really does add up.

2 Responses to BD+C White Paper: Chapter 3, Financing Green Office Buildings

  1. Preston December 5, 2006 at 6:43 am #

    Hey don’t forget, when you get to the one-page commercial on Green Globes (I can’t remember which chapter that is), they really place some emphasis on the fact that Green Globes (and the GBI) are ANSI certified, unlike the USGBC and LEED. Besides the fact that thousands of LEED projects are registered now…anyway, the White Paper’s already out-of-date because USGBC just received ANSI accreditation about a week ago.

  2. Stephen December 6, 2006 at 4:34 pm #

    Thanks for the comment Preston. If you check out the USGBC press release on the ANSI accreditation, you’ll see that LEED itself isn’t being accredited by ANSI. USGBC has received accreditation as a “standards developing organization.” I’m not really sure what that means, but I think I’m correct in saying that ANSI has yet to give LEED itself accreditation.

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