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Weekly UpdatesINTRODUCTION
SUSTAINABILITY HAS BECOME THE WATCHWORD for imagining a new utopia where the relationship of the human endeavor with the natural world is properly aligned to the benefit of both. But this, like all utopias, lies in the future. The present is a dichotomous public conversation between those wishing fervently for this utopia and those that ostensibly cling to an outmoded and dangerous way of thinking. It is hard to believe that this has anything to do with the practical and profit-driven world of real estate. And yet, sustainable development, sustainable building, corporate social responsibility, climate change policy, greenhouse gas emission trading, federally mandated reductions in building energy consumption and the ever-present marketing of green are just the tip of the iceberg forcing a new conversation onto those who, build, hold, operate and invest in real estate assets.
REAL ESTATE RESPONSES TO THE GREEN TREND
A Google search for "Green Building" returns more than 20 million hits while a search for "Green Real Estate" returns more than nine million. Virtually every major magazine has featured articles and editorials on sustainable or green buildings in the past two years. Sustainability has become a vibrant cottage industry and a darling in the public's eye. There is even a TV channel ("Planet Green," owned by Discovery Channel) dedicated to promulgating this ethic. What is not at all clear, though, is whether and to what degree this is a fundamental change or a marketing bonanza.
As shown in Figure 1, real estate owners, investors and professionals are responding to this emerging market force in three ways. Although reliable numbers will be hard to find, common sense, plausibility and substantial engagement with this market (unless contradicted by relevant research) serve as the basis for the generalizations that follow. It is important to understand these responses so that we can start to meaningfully evaluate the market for sustainable building assets, both individually and in aggregated forms.
[FIGURE 1 OMITTED]
A visible number of real estate companies and other real estate stakeholders have not only embraced sustainability as the model for a new future, they have essentially become converts to the cause. Most often this results from corporate executives' personal consonance with the sustainability agenda. These executives have the power to push through enterprise decision-making guided by something other than the expected risk-adjusted cost benefit analysis coupled with profit maximization and dynamic efficiency.
Development tinged with varying degrees of philanthropy is driven by mission and ideological concerns that are a luxury not afforded nor desired by most real estate professionals answering to shareholders or the bottom line. Often, public sector building activity and ownership mimic this philanthropic tinge since there is little direct fiscal responsibility. Many green or sustainable programs instituted by federal, state and municipal governments lack measurement and verification of outcomes to determine the success of implemented strategies. Without measurement and verification programs, much of the money spent on sustainability options amounts to charity. In a sense, the members of this group have put good business practice aside in order to service an agenda.
A second and more widely adopted response has been to take advantage of public perception through some type of marketing strategy. In the case of many real estate entities, this has taken the form of a kind of eco-labeling of building assets or services through green building ratings. Whether it is Bank of America's new headquarters in Manhattan, touted as the "world's most environmentally responsible high-rise office building," or 111 South Wacker in Chicago, "the world's first speculative high-rise office building to achieve Gold LEED-CS certification," both offer up sustainability as a core differentiation. The claim is that they are not just Class A office properties, but they are sustainable Class A properties. What is meant by "sustainable," however, is often left to the imagination.
The related stakeholders that are interested in servicing these two types of green real estate ventures are more than happy to respond in any way necessary to the demand for green real estate and building projects of all types. For example, Engineering News-Record now provides a yearly breakdown of the top 100 design, construction and engineering firms by dollar value for green construction. Large contractors like Turner Construction, Swinerton Incorporated, all the major architectural firms and even insurance companies such as Fireman's Fund are eager to market themselves as sustainable real estate advocates. This does not even begin to address the many product suppliers and other vendors seeking to hitch their horses to sustainability.
The chief operating and financial officer of a worldwide real estate organization recently said, "[w]e view sustainability as an essential element of corporate social responsibility ... In our goal to be the real estate industry leader in environmental sustainability and energy management, we are implementing these opportunities into our own operations and those of our corporate and investor clients." (2) In the 1980s Bruce Yandle laid out the often deeply inter-twined relationship between social groups, who seek to regulate a market based on deeply held personal beliefs, and market players who have little interest in the beliefs but intense interest in how the passage of the regulation might benefit them or disadvantage their competitors. (3) Becoming a member of a corporate social responsibility reporting rating system is an attempt to differentiate a set of products and services in the market. It should be noted, though, that the actual metrics used in this context are not easily accessed or available for transparent review. It is not a coincidence that both the social groups and the market players spend a large amount of influence and monies trying to create regulatory schemes that will provide ideologically correct outcomes or financial benefits from rent-seeking activities.
If all public buildings in a particular city are required to have green building rating product certification and all requests for qualifications insist on previous experience with building projects that have attained certification, a perverse policy outcome results. Instead of increasing competition among the bidders to provide a better return for public fund expenditures, the number of bidders may in fact be reduced significantly.
Or take the creation of expedited permitting policies, based on obtaining the same kind of green building rating product certification, that can be found in a number of cities including Chicago and San Francisco. An attribute of this policy is the creation of a green unit in the city planning or development office, staffed by individuals who provide the expedited permitting and plan review at minimal or no cost to the developer choosing to "go green." Since no measurement and verification are necessary, the developer's decision to pursue sustainability is reduced to a simple cost-benefit analysis involving the carrying cost of the project and the (comparatively) small additional upfront cost of getting an eco-label for the building. Because there is often little or no correlation between the eco-label and the most important sustainable attribute, energy consumption, the developer is simply reducing his carrying costs by paying for a third-party rating scheme mandated by the city.
This is good for the city as publicity and political good will; it is good for the owner, who gains a bottom line advantage for the project; and it is very good for the third party being paid for the certification as a result of this legislated revenue stream. However, the building may not perform better and thus any benefit to the populace at large is forgone. From a business standpoint, this group is reaping some financial benefit but they are missing the opportunity to profit--in the best sense--from sustainability by going beyond marketing.
The third response to the green conversation finds many in the real estate industry looking for actual performance improvements, either in terms of the building itself or in terms of the financial benefits of investing in or acquiring buildings with sustainable characteristics. This group is not made up of converts and is leery of committing to a social agenda (though it should be noted that some of these professionals are hedging their bets by engaging in some green marketing, if convenient). This group under- stands how sustainability can be taken to its full business potential, but it wants to apply the same due diligence to this strategy that it would to any other. While these owners and developers have had less public visibility, this is by far the largest segment, which means most of the money is still on the sidelines, waiting for adequate information that can back up bottom-line decisions.
SOLVING THE INFORMATION PROBLEM
The significant value in engaging sustainability for the long-term benefits can only be realized by dealing with the core issues of risk and return--issues that need to be decided based on facts, not claims. It is our contention that the sustainability arena suffers not from a lack of information, but from a lack of the right kind of information.
First there is a problem of quality. The current information stream has become polluted with advocacy and lobbying rather than useful metrics. When it comes to sustainability, many developers and owners "don't know what they don't know," and the ones who "know what they don't know" aren't sure where to turn for credible information. The series of articles in this special issue attempts to bring to light the scope of the task and the often hidden risks in all phases of the sustainable building enterprise, from new construction to marketing to managing long-term performance.
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