Last week was time for the 2016 installment of the U.S. Department of Energy (DOE) Better Building Summit. As in prior years, the Summit was full of friends and leaders from across the real estate industry.
I had the opportunity to participate in a session moderated by Dr. Jason Hartke (DOE), David deVos (Prudential Real Estate Investors) and Jennifer McConkey (Principal Real Estate Investors). I want to reflect on one question we received during our session. A member of the audience asked about industry expectations for future energy cost saving potential – 10, 20, 50%? This is a reasonable question, but the tone and implication of the question seemed to suggest that operational energy cost savings was the principal or primary motivation for incorporating sustainability into real estate.
In the spirit of the Summit’s focus on “Better Buildings”, I think it is important to put this question into a broader context. Opportunities to create value and manage risk go far beyond marginal reductions in utility costs. In fact, leading property companies and funds actively deploy sustainability strategies across the real estate life cycle, including:
- Entitlement and Permitting: Real estate development is a risky business. The most fundamental risk is the failure to get a project out-of-the-ground and completed. Pre-construction planning, entitlement, permitting, and financing are hurdles for almost every project. Sustainability strategies can increase the chance that a project gets done by increasing community acceptance and providing social and environmental benefits.
- Programming and Design: Typically, real estate development is a battle between developers pushing for more and opponents pressing for less. Aggressive sustainability strategies provide one way to create more real estate while generating lower environmental impacts. This can be parlayed into bigger, more profitable projects that benefit people and the environment.
- Leasing: The next step is to get the new development leased. Here sustainability strategies have obvious benefits. Premium tenants prefer green space. This means that green space leases faster, sometimes for higher rents or to more creditworthy tenants.
- Tenant Retention: Once a development is leased up, it’s critical to hold on to tenants. Again, sustainability creates value by keeping tenants happy and increasing retention rates.
- Operations: Of course, sustainability strategies can help manage operating costs by reducing energy demand and promoting water conservation. Thoughtful monitoring, aggressive management, and new technology offer cost-saving opportunities in even the best building.
- Sale: The final – and typically most important – milestone occurs when it is time to sell the asset. Superior design, lower operating costs, and better leasing characteristics help sustainable properties appreciate faster than conventional properties and create the potential for them to sell for more. This enhances investor returns when it matters most.
The GRESB Real Estate Assessment recognizes companies and funds that use this kind of thinking to integrate sustainability into their business – taking deliberate action at each stage to manage risk and create competitive advantage. “Integration” sounds like a buzzword. Put more simply, an integrated business strategy makes these companies better by creating the potential for them to make more money with less risk than their conventional counterparts. For companies with integrated sustainability strategies, the return on sustainability is measured far beyond utility cost savings.