Green commercial real estate: valuation and opportunities

In light of the recent research, it seems that it is more important than ever to take collective action to protect the environment, cut down on emissions and invest in renewables. Experts from all industries are coming together to develop sustainable long-term strategies, operating under environment-oriented legislation, and the movement can be seen in just about all fields. Real estate is no exception. What was considered high-end or perhaps even futuristic 15 years ago is now an emerging market that can not only help the planet, but also provide invaluable opportunities to real estate investors. Green commercial real estate is the next big thing and the demand for eco-conscious offices is increasing, especially in prosperous areas with a vibrant business environment. Are we experiencing a massive shift in commercial real estate and what does this shift mean for investors?

Why are green offices trending?

The image of the ideal company offices has changed tremendously over the past decades. If a few years ago owners focused more on utility and cost savings, how they are paying attention to a wider array of factors, including eco-friendliness. Traditional office buildings manufactured using old technologies and materials are slowly losing popularity and being replaced by ethically built offices with open floor plans and wellness benefits. A few reasons for this include:

•          Green offices are made with cleaner, healthier technologies, and that translates to a healthier working environment. Staff working in a healthy environment reduces the risk of workplace-related illness, which saves money for the employer. Needless to say, employees who work in a healthier environment are more productive and more likely to stay loyal to the company.
•          Adopting a green office policy is one of the hallmarks of a professional company. Nowadays, business owners can feel a certain pressure to be environmentally friendly and go green because it helps with brand image and provides a competitive advantage.
•          A green office building improves operations and adds value to the company.

The features of green commercial real estate

The future of commercial real estate belongs to green buildings, but not every structure can achieve “green” status. In order for this to happen, the building needs to be appraised by a local inspection body, obtain a green rating and meet criteria such as:

•          The use of sustainable materials that do not deplete natural resources. These materials have to reduce building maintenance and costs, provide design flexibility and aid in energy conservation. According to the Environmental Protection Agency (EPA), green building is “the practice of creating healthier and more resource-efficient models of construction, renovation, operation, maintenance and demolition.”

•          High air quality, which is essential for worker health. With this in mind, materials that pollute the air and may cause respiratory illnesses after long term exposure are strictly prohibited in green building.

•          Conserve energy: energy-rated windows and doors, eco-friendly insulation and solar panels are essential for green buildings.

•          Reduce waste: commercial buildings that have recycling bins, balers and compactors on premises are often preferred by business owners because they help manage waste effectively. There are a surprising number of benefits of using a baler, including reduced waste collection costs.

Benefits of green building

The benefits of green buildings are not limited to the business owners to rent the office space, but for the real estate investors as well. One study at the University of San Diego found that owners of sustainably-managed buildings anticipate 4% higher return on investment than owners of traditionally-managed buildings, as well as 5% increase in building value. Apart from that, their properties are more competitive and they are more likely to find occupants compared to non-green buildings. Although building or buying an eco-friendly building is not cheap and new technologies come at a cost, these buildings pay for themselves in the long run, whereas old ones provide savings only on the short term. Needless to say, traditional buildings will lose popularity in the long run and even if they are somewhat profitable now, the investment might not hold up in ten to fifteen years.

The challenges of green commercial real estate investments

Like any trend that shakes things up, green commercial real estate is also disruptive and implies a few challenges for real estate investors:

•          Not all markets are sufficiently developed to favor green real estate investments. In areas that do not have a dynamic, innovation-oriented economic activity, many clients will be skeptical of green properties. Contrary to common belief, the U.S. are not the best market in the world for green commercial real estate. Japan, China and the E.U. are actually ahead in this kind of real estate development and offer more inceptives for builders.

•          Not anyone can build a sustainable green property. In order for the investment to reach its full potential, real estate experts need to have a local network of contractors who are familiar with the particularities of green building and waste management.

•          Green real estate depends on local guidelines and regulations. As new materials and technologies are being constantly researched, investors need to be very dynamic, open to change and oriented towards innovation.