Wall Street Goes Green, As seen in Barron’s December 2006. For the full article: http://charleslockwood.com/pdf/barrons_article.pdf
Trillions of dollars of commercial real estate owned by REITs, corporations, and other investors around the world will soon become obsolete and drop in value.
This looming obsolescence of commercial properties—from office buildings to shopping centers, warehouses, and distribution centers—threatens real estate portfolios around the globe, and it also raises some new profit-making opportunities.
What’s going on?
A significant real estate market shift is gathering momentum: Green buildings are going mainstream.
The numbers tell the story. In September 2006, the U.S. Green Building Council’s rigorous LEED (Leadership in Energy and Environmental Design) rating program—which evaluates and gives Certified, Silver, Gold, and Platinum ratings to green buildings—had certified 669 buildings. Waiting in the wings, were 4926 green buildings that had filed for LEED ratings, indicating an enormous surge in U.S. green building activity and market demand. he McGraw-Hill 2006 SmartMarket Report predicts that green U.S. non-residential construction alone will comprise as much as 10% of all non-residential construction starts in 2010.
Recognizing this burgeoning trend, speculative developers like Hines, the Durst Organization, Alter Group, East West Partners, and Microsoft co-founder Paul Allen’s Vulcan Real Estate are all constructing green buildings in cities across the U.S., including Atlanta, Chicago, Houston, Los Angeles, New York, San Francisco, and Seattle.
Some savvy REITs and other investors are already searching for unrecognized green real estate investment opportunities, like partly empty B office buildings in A markets that can be economically renovated to green standards, bring in premium rents, and generate favorable long-term returns.
A real estate market shift doesn’t happen unless it’s profitable, and this green shift is no exception.
Green buildings are generating a significant Return on Investment (ROI). According to the McGraw-Hill 2006 SmartMarket Report, green generates 3.5% higher occupancy rates, 3% higher rent rates, an average increase of 7.5% in building values, and it improves ROI by 6.6% on average. Green buildings are fetching significant sales premiums. In Chicago, the John Buck Company spent US$270 million constructing the LEED-Gold 51-story 111 South Wacker Drive tower in the city’s Loop market. Completed in late 2005 when the Loop market was struggling with an 18% vacancy rate for Class A office space, the building leased up quickly to prestigious tenants. In January 2006, 111 South Wacker Drive was sold to a German investment fund for US$386 million, a $116 million profit, or a total sale price of $401 a square foot.
As the market shift to green buildings gathers even greater momentum in coming years, “standard” buildings will become the real estate industry’s version of the buggy whip.
Rapid and massive obsolescence has challenged the world’s commercial real estate markets before. When earlier innovations were introduced into commercial buildings—like central air conditioning in the 1950s and 1960s—all properties lacking this innovation quickly became outmoded, and their value fell as top tenants headed for the nearest exits.
To avoid massive obsolescence, today’s real estate owners must undertake green renovations of their properties now to gain the upper hand on their competition. The pressure will be particularly intense on long-term investors, like REITs, which own so much commercial real estate in many nations. The marketplace shift to green is gathering momentum. Massive obsolescence is looming on the horizon. Profits are there for the taking. It’s time to act. For the full article: http://charleslockwood.com/pdf/barrons_article.pdf
Author Bio: Charles Lockwood, author of the June 2006 Harvard Business Review article “Building the Green Way,” is an environmental and real estate consultant based in southern California and New York City.