Green building: balancing fact and fiction.(LEADERSHIP ROUNDTABLE)(Roger Bezdek of President-Management Information Services, In

BACKGROUND

A new phrase has entered the vocabulary of real estate: "green building." Everywhere one turns, there is yet another conference, article or marketing campaign advocating for green or sustainable real estate. The Urban Land Institute (ULI) has a monthly column, CoStar now includes green ratings in its building attributes, and many other self-appointed organizations are being created to address the new market. Major private and public real estate portfolios and their managers are responding to boardroom edicts with announcements that they will only acquire green buildings. Many architects have changed their standard contract forms to incorporate green advocacy, and legislators have been implementing green regulations ranging from Connecticut's new requirement that all buildings over $5 million pay for and attain green certification to Chicago's expedited permitting for projects proposing to commit to a green certification.

Amidst the hype, questions remain. What are the minimum requirements for meaningful green standards? What is measurable and verifiable? What is not? The green marketing phenomenon has not always been backed up by credible technical, policy or risk management information. Much of the literature depends on references only one step removed from marketing material. Claims are commonly made that green buildings will save energy (often very substantial amounts), increase service-worker productivity and decrease absenteeism, increase valuation, lower cap rates, decrease operating expenses and even command increased rental rates. Some of the claims for green buildings are truly striking, such as the assertion that putting up a green building certified with a particular rating system will decrease the incidence of asthma, or that increased natural light and access to views will result in better student performance.

The hyperbole of much of the green building movement emerges from its roots in environmental advocacy. As concern about the impact of climate change has migrated to corporate boardrooms, evaluating approaches to mitigation has moved to a business decision or fiduciary framework. Real estate professionals must look closely at green buildings precisely to distinguish the marketing perception of value from actual underlying cost and benefit along with their attendant market opportunities and risks.

Surveying this new landscape, the Real Estate Center at DePaul University, Chicago, and Alberti Group organized a two-day conference in Chicago entitled, "Managing the Risk of Sustainable Buildings: Policy, Performance and Pitfalls." The conference brought real estate professionals together with attorneys,, insurance and surety professionals, architects and engineers, and policymakers. It was the first conference of its kind because it sought to deal with the issues not from the point of view of advocates or believers, but of decision-makers seeking objective information to make risk-adjusted cost-benefit decisions. The theme of the conference speakers was not whether creating sustainable or green buildings is laudable, but how sustainability can be achieved with solutions that are also economically sound.

DISCUSSION

MODERATORS: One of the most important reasons for pursuing green buildings has been the growing problem of energy security and availability in this country. Combine this with the more recent calls for decreasing energy consumption as a result of concerns about global climate change, and it is evident that policymakers are faced with a very difficult task. The 2007 Energy Security and Independence Act is just one example of attempts to meet this challenge.

Given the vast scope of this problem, what are some of the bigger issues and what will be the role of renewable energy in future?

BEZDEK: Let me start with something that is well known to economists, the Jevons Paradox. Loosely put, this tells us that the more efficient we become in using a given resource (in Jevons' day it was coal for steam engines), the more we consume of that resource. Even though there is some debate about whether this will happen with the current energy supply from oil, natural gas and coal, there is more than enough evidence to indicate that this has been the case for the last 30 to 40 years. As the illustration (Figure 1) shows, the efficiency of energy use has increased dramatically, but at the same time energy consumption per capita has far outstripped the efficiency of use. (1)

[FIGURE 1 OMITTED]

This fact brings home the importance of keeping energy efficiency and energy consumption clearly separated in our minds. Energy efficiency is a very good thing, but this does not equal a decrease in total consumption and may in fact lead to an increase in overall consumption. Since energy security and greenhouse gas concerns are linked directly to the overall energy consumed and not to the efficiency of the energy resource units, any policy that counts disproportionately on energy efficiency as a solution will likely prove ineffective.

Energy consumption worldwide is forecast to grow from 421 Quads to 721 Quads by 2030 (Figure 2). This massive forecast increase in energy use already takes into account significantly increased energy efficiency in all sectors. The forecast shows two further points of interest. First, it shows that renewable energy sources will make up a negligible portion of the fuel input. Second, it shows that oil, coal and natural gas will continue to be the fuels of choice for energy production for the near future. In fact, though not on this chart, photovoltaic, solar thermal and wind energy in the U.S. will account for only about one percent of the energy consumed in 2030. If this is the case--and it appears likely that it will be--concentrating only on policy decisions to subsidize these industries while demonizing oil and coal will further exacerbate U.S. energy supply, reliability and security problems.

[FIGURE 2 OMITTED]

MODERATORS: You have been involved in the economics of renewable energy for more than 30 years. What are your thoughts about the move towards using renewable energy as an important attribute of green buildings?

BEZDEK: Anything we can do to decrease building energy consumption--while ensuring that basic building services and functions are preserved--may help, but I think there are three basic issues to examine. First, wind and solar technologies suffer from intermittency and lack of reliability associated with the natural processes they seek to exploit. If it's dark or cloudy or calm, these technologies will not provide the kind of power that is necessary to act as a primary supply source. This means that, as far as I can tell, some other fully redundant system must be available to deliver energy to the building. Backup generators or power sources can be very expensive and in some cases, such as diesel generators, a significant source of pollution. This situation makes it difficult for renewable energy systems to be a primary provider of energy for a building or complex of buildings.

Second, the payback period for the majority of renewable energy systems is still in doubt in many applications for extensive private sector use. These systems may be just around the corner from becoming economically viable, but at this time, most require substantial subsidies and tax incentives to continue their growth.

Third, it should be noted that the renewable energy and energy efficiency industry could become the basis of substantial economic opportunities for the U.S., including the creation of many "green collar jobs." Recent work seems to indicate that this sector of the economy will be growing at a significant rate, which we can hope may further reduce the time until more renewable energy technologies become economically viable.

MODERATORS: The use of energy by buildings in the U.S. has been put variously at somewhere between 30 percent and 40 percent of the total consumed. A strong motivator for the reduction of this energy consumption comes from calls for a reduction in [CO.sub.2] emissions to help prevent climate change. What do you see as the economic outcomes of policies that take up aggressive [CO.sub.2] reduction targets?

BEZDEK: Attempts to reduce [CO.sub.2] emissions should concentrate on transportation sectors, but given the rapid growth of vehicle and air transportation in countries like China and India, it seems unlikely that the tide can be stemmed. In 2002 there were about 800 million vehicles in the world; by 2030 there will be 2 billion--or more. (2) A similar escalation in air traffic is expected, and annual growth rates in air transportation services in China and India are forecast to be in the range of 8-12 percent annually for the next quarter-century. Although hybrids, electric cars and other technological changes are gaining ground, they have not been adopted in sufficient numbers to stop the current growth trends in transportation liquid fuel requirements in the near future. This means that the building sector could become the major focus for regulation that aims to reduce the rate of growth of [CO.sub.2] emissions. Such a burden on a single sector will be difficult if not impossible to bear.

MODERATORS: Let us imagine that we were able to solve the technical problems in increasing energy efficiency and decreasing energy consumption along with achieving a number of other green attributes. We would still have to face some basic real estate issues related to proper incentives for owners and tenants. When it comes to sustainable building, what are the differing incentives for owner-occupants versus income-property owners?

JEWELL: First you have to agree on a definition of sustainability and/or green. Are you talking about superior energy efficiency, which has a direct impact on operating costs? Or more subtle elements, such as "green cleaning" or the presence of bike racks and showers to accommodate occupants who wish to leave their cars at home and cycle to work instead?