Sustainability: The Great Differentiator

Stephanie J. Oppenheimer, APR for the BOMA Magazine

The surveys are in, and the evidence is growing: “Green” and sustainable commercial buildings make good business sense. One of the most obvious effects—reduced long-term energy costs—remains an important consideration, but a growing number of companies are admitting that a building’s green policy can play an important factor in leasing and location decisions as well.

The fourth annual Sustainability Study, conducted in the fourth quarter of 2010 by CoreNetGlobal and Jones Lang LaSalle, for example, showed that 64 percent of respondents feel that sustainability is a critical business issue today, and 92 percent consider sustainability criteria in their location decisions. Furthermore, 31 percent of corporate executives ranked employee productivity and health as their top sustainability concern, while an additional 11 percent rated employee satisfaction as the most important factor.

Another study conducted in 2010 by CB Richard Ellis (CBRE) on more than 150 ENERGYSTAR®- labeled or LEED EB Certified buildings showed that nearly 80 percent of publicly traded firms occupying those buildings have implemented green practices, and 46 percent of commercial building owners expect to do even more green building activity three years from now (see charts). The study also showed that LEED buildings enjoy higher occupancy rates than the general market, and they commanded higher rental rates—by an average of more than seven percent over the general market—during the first three quarters of 2010.

Expectations of easily benchmarked—and more difficult to measure–matrices, such as productivity, also played a part in the CBRE study: 93 percent of owners who pursued green strategies expected lower operating costs; 79 percent expected an easier time of attracting tenants; and 63 percent expected greater productivity of building occupants.

David Pogue, national director of sustainability for CBRE, said his company took its first serious look at the relationship between sustainable buildings vs. general market buildings with a study conducted in 2009, which also showed that sustainable buildings performed better in terms of occupancy and rental rates.

“When we repeated the study from two years ago,” Pogue says, “we again focused on 10 major markets where we had a concentration of buildings in our portfolio that are ENERGY STAR- and/or LEED-certified, which is how we define a ‘sustainable building.’ The results again showed a consistent, discernible improvement in rental rate achievement and occupancy over ‘general market’ buildings.”

Making the Productivity Case

Similarly, while measuring satisfaction and productivity is difficult, if not impossible, there are plenty of survey respondents who said that working in a sustainable building simply felt good. More than half of the 3,000 tenants surveyed in CBRE’s 2009 study, for example, said that they felt more productive and had fewer sick days.

“We recognize that the occupant findings are self-selected and anecdotal, but if you think about the economics of this, it could really shift the way we think about green buildings,” Pogue explains. “If energy costs make up $2 to $3 per square foot of operating expenses, and we shave 20 percent off through energy efficiencies, we’re saving about 50 cents per square foot. Conversely, if an occupant’s total costs are $250 per square foot, but they can improve productivity by 10 percent, now they’re looking at $25 per square foot savings, which is equivalent in many cases to their rents. That’s real money—tenants are going to flock to those buildings.”

“Yes, it’s going to be difficult to absolutely say, ‘I’m in a sustainable building—therefore I’m more productive,’ Pogue says. “Regardless, the findings in the Jones Lang LaSalle study are consistent with our internal studies, and tenants are beginning to make decisions based on it. People act on their beliefs; so if they believe they’re more productive in a sustainable building, they’re going to make decisions based on that. We can’t ignore it just because we can’t measure it.”

Image source: 2010 CBRE Real Estate Building Management & Occupant Study—Leed And Energy Star-Rated Buildings

Michael Anderson, manager of research and the knowledge center at CoreNet Global, agrees that defining a relationship between sustainability and employee satisfaction is difficult because there are no direct metrics to support it—but that’s no reason to fully discount it. “When we asked in our survey for respondents’ top strategies for engaging in sustainable strategies, we found that energy savings was at the top of the list,” says Anderson. “But in second place—by just one percentage point—was employee engagement. That tells us that employees are recognizing it as an important benefit, and they’re passionate about working in an innovative workspace.”

Paying the Green Premium

Meanwhile, our flagging economy has not negatively affected sustainability efforts: Despite collapsing markets and dropping rental rates and occupancy levels, the amount of green space has more than doubled in 25 of the nation’s largest markets over the last two years, and it has retained higher rental rates.

“I take great encouragement from that,” Pogue says. “If people in the worst of times still feel it’s important, then that attitude will only grow going forward. It’s an expanding movement.”

Anderson and Dan Probst, chairman of energy and sustainability services at Jones Lang LaSalle, admitted some surprise to see that companies are willing to spend more in a difficult economy, but the study illustrates its truth: In 2010, 48 percent said they’d be willing to pay up to a 10 percent premium for sustainable space, an 11 percent increase from the 37 percent who said they would be willing to pay more in 2009 and 2008. (In general, corporate executives are more willing to invest in space they own than they are willing to pay extra for leased space.)

“When you see changes of just a few percentage points between surveys,” says Probst, “it’s not considered statistically relevant, even if the changes may show a slight upward trend. But when you see a 10 percent jump, that’s important. It shows that sustainability has become a key driver in the corporate environment.”

“Five, six years ago, when sustainability was just a buzzword, I think a lot of people were doing it out of corporate image concerns,” notes Anderson. “But when the cost savings became apparent to real estate executives, it evolved into a core part of most companies’ strategies. Companies are willing to invest because of the very real cost benefit and return on investment (ROI). This year’s study also showed that 57 percent expect a payback within three years, which is an aggressive but attainable metric if you broaden your scope in terms of what can be included in your sustainability strategy.”

One such strategy is telecommuting: “I don’t think teleworking has been universally included under the umbrella of sustainability for the last several years,” Anderson says, “but it should be. It cuts down on a building’s carbon footprint, employees aren’t driving to and from the office, you can use less physical space, and you can manage space more efficiently.”

Other relatively easy programs to implement include waste recycling and green cleaning. “If you’re not doing this,” Anderson jokes, “you need to throw a shoe at your CEO. It’s an easy fix that really helps raise your ‘green’ visibility with employees and tenants.”

Probst urges that at the very least, property managers know their buildings’ current performance. “Prospective tenants are going to be asking a lot of questions, and you need to know where you stand. Sustainability is important to people, it plays a role in their decision making criteria, and you as manager need to be prepared. If you’re doing ENERGY STAR or don’t know your score, start there. Beyond that, be proactive; go to your owner with opportunities for improvement in energy and operations. Some ideas will require capital, but forward thinking managers need to identify opportunities, build the business case through ROI, and bring those ideas forward.”

“If you’re not actively seeking ways to improve sustainability,” Pogue agrees, “then you’re going to be a loser in the battle for tenancy. I foresee a time when decisions won’t be made so much in terms of Class A vs. Class B buildings, but in terms of sustainability as the differentiator. Don’t let your building fall behind.”

About the Author: Stephanie J. Oppenheimer, APR, formerly the assistant vice president of communications for BOMA International, is principal of Skylite Communications, a freelance writing and editing company based in Falls Church, Va.

Article originally appeared in the Facility Management Magazine: BOMA