The biggest question in the world of sustainable buildings revolves around the ‘value-add’. As more owners commit to green buildings, they are demanding hard facts on what they are getting back for their investment into sustainability. Unsurprisingly, the focus moves quickly towards energy and energy retrofit projects since they represent the biggest cost – and the greatest potential returns.
Retrofitting, however, is not as simple as it appears. It requires a disciplined approach that considers many factors which supersede the potential of any particular project:
Once the value of a project is proven, financing options can be considered. It is worth remembering that funding is often available from internal sources.
Putting the puzzle together, rather than looking at individual projects, is the best way to maximise returns and optimise value. And value is what is driving sustainable building today.
The impact of sustainability on value continues to be a conundrum for investors and valuers in the UK. At any point in time, the property market is subject to complex dynamics which effect value. Sustainability can, therefore, be lower down the agenda for investors. Subsequently, there is little evidence of buyers paying a premium for sustainability. However, investors must be aware of the sustainability risk which may lead to obsolescence and declining returns in the future.
JLL has analysed, on the behalf of its clients, the impact of sustainability risk on returns by using a discounted cashflow model and Monte Carlo simulation analysis. The findings demonstrate the susceptibility of properties to sustainability risk – which may impact upon service charges, rental voids, forecast rents, and yields.
‘Current market value’ reflects the existing market dynamics, but the future will see changes in building specifications and in occupier and investor demand. Properties will increasingly be considered against sustainability criteria in order to mitigate the potential negative impacts of this risk.
Many property owners and investors may prefer a sustainable portfolio built to LEED standards but are unsure whether the financial benefits will justify the costs.
An analysis of multiple new buildings by the construction firm Davis Langdon found that the average LEED building costs just 2% more than the average non-LEED buildings. In analysing LEED costs, individual green products and features can cost more than traditional alternatives, but this does not mean the overall project has to be more expensive. This depends on whether LEED is seen as an ‘add-on’ to the project, or is an intrinsic element of the whole process.
In JLL’s experience as project and construction managers, we’ve observed that a collaborative process that results in a greener building can also result in a better performing building, reduced construction costs and reduced developed time.
The Design-Build Institute of America found that integrated project delivery methods are more successful than traditional design-bid-build methods at achieving or exceeding anticipated LEED levels. An effective approach to green development can achieve LEED compliance at a lower cost than similar, less efficiently managed non-LEED buildings.
In the US, green tax incentives can offset the upfront costs by 30-50%. Existing incentives include deductions of $0.30-$1.80 per square foot for HVAC and lighting systems that meet defined standards.
One of the strongest cases for LEED buildings can be found in the utility cost savings. A study in GreenBiz Group’s Green Building Market and Impact Report found that the average energy savings for new LEED-certified construction projects had been over 32%. With these savings, the additional cost of LEED-level construction can be recouped with a few years.
n a study sponsored by the US Department of Energy researchers found that for 150 buildings studied, the energy savings resulting from sustainable retrofits were 18%, with a payback in just over eight months. Annual savings after this point were as high as $1.8 million per building.
A greater ROI is expected from the rent premiums and vacancy reductions linked to LEED certification. In five studies cited in the Green Building Market and Impact Report, LEED buildings have been found to command between 5-17% higher average rents than non-LEED buildings.
JLL’s analysis of the Philadelphia market, using our ‘Green Gauge’ market indicator to compare submarkets and building types, found that green buildings (LEED or ENERGY STAR) received a $4 per square foot rental premium. An average vacancy rate drop of over 3% was also identified, as well as a much faster absorption into the market.
The five studies mentioned previously demonstrated reported sale price premiums of 8.5% to 25% for LEED-certified buildings – well above the 2% premium for green construction. New buildings which are not built to LEED standards risk both lower market value and obsolescence as a greater number of properties are certified. Owners and investors should consider how not building to these standards will increasingly ‘date’ an asset in the future.
Considered as a whole, a LEED-certified building – constructed with efficient, integrated collaboration – should be as good for ROI and your budget as it is for the environment.
Originally published : October 2012