Photo courtesy Liberty Property Trust
Craig Cope has a hot new property on the market. Liberty Property Trust, where Cope is a vice president, just finished building a three-story, Class A office project in Chesapeake packed with green features. With energy-efficient glass, a water-saving landscape, bicycle racks and preferred parking for fuel-efficient vehicles, Independence Place stands as a model to sustainable building.
The 73,000-square-foot project in Battlefield Corporate Center is so loaded with environmental-friendly details that in December it earned gold certification under the LEED program (Leadership in Energy and Environmental Design) of the U.S. Green Building Council.
Pennsylvania-based Liberty is a true believer in the power of going green. It describes itself as “the nation’s leading developer of high-performance green office and industrial buildings” with 35 LEED projects nationwide.
Yet the recession brings challenges. While a down-and-out economy seems a perfect foil to green’s energy-saving mantra, Independence Place is not leasing up quickly. As of early March, tenants had claimed just 6 percent of the space. Compare that with another Liberty LEED project, also in Chesapeake and roughly the same size. Liberty Three opened in 2006 and was fully leased in nine months.
“It’s been slower than we thought,” says Cope. Still, he thinks a gold-certified building stands out from the competition. However, it doesn’t guarantee higher rents — at least not in the current economy. “As much as we thought that we could get at least a dollar per square foot more or even $2 more than a noncertified building, we’ve come to the conclusion that we can’t get a rent premium at all right now,” he says. “But maybe we get a deal we wouldn’t have gotten otherwise.”
Bait in a down market
That’s how green construction is playing out in the market now. While brokers may not score higher rents, these buildings offer the bait to attract clients in a down market. After all, there’s still the feel-good factor. Developers say green design hasn’t lost its appeal to boost a tenant’s public image by demonstrating a more responsible carbon footprint as well as energy savings. In the future, Cope fully expects green-design elements to become essential. “If you’re not certified at some point, you will become functionally obsolete.”
A decade after the inception of LEED certification, more than 18,000 buildings in the U.S. are LEED registered and certified, and the numbers keep growing. Virginia can claim 60 LEED-certified buildings — up from 41 a year ago. Plus, 515 projects are registered and will seek LEED certification, according to the green building council. These buildings include offices, mixed-use projects, schools, residential projects, and government and military facilities.
The momentum boosting green construction is evident on other fronts as well. Architecture firms and general contractors are retraining staffs. Some designers are seeking to get an edge by obtaining LEED accredited professional designations. W.M. Jordan Co. in Newport News, the state’s largest general contractor, has hired a full-time LEED coordinator. In addition, it requires mandatory training for subcontractors working on green projects.
Another sign of green’s mainstream status: real estate companies are touting “green” buildings in marketing materials — sometimes before a building is even certified. A building must be fully constructed to achieve LEED certification, although developers can register a building, the first step in the LEED process.
Highwoods Properties is working to boost its green footprint. The North Carolina-based real estate investment trust plans to build a Class A building at Stony Point Office Park in Richmond, adding to its 2.6 million-square-foot portfolio in the metropolitan area. The project won’t break ground until the market improves, but Highwoods plans to seek LEED certification, says Hank Robertson, director of development in the Richmond region.
Builders in general are increasingly doing LEED certified projects, he says, because LEED is such an industry buzzword. “We think that there will probably be tenants that for whatever reason will want to be in a building with those elements.”
Other Highwoods buildings already incorporate energy-efficient designs even though they aren’t LEED certified. While a good goal, Robertson notes that LEED standards don’t work for every project. Last year Highwoods developed a building for a client who wanted LEED certification. That meant placing the building so more natural light would shine in — something the primary tenant didn’t want for security reasons. So when it comes to seeking LEED status, “we try to be smart about it,” says Robertson.
In a recession, green equals smart for many clients. Michael Pellis, a project manager with the Richmond-area architecture and engineering firm Baskervill, says there might be fewer clients with the capital to build projects, “but the people who can afford to do things are demanding LEED.”
The story’s the same for the Timmons Group, an engineering firm with a half-dozen offices in Virginia. Project manager Charlene Harper says building owners are sold on green design. “They love the idea that they’re taking a responsible approach to commercial development. They’re looking at this as a huge marketing advantage, to be able to say my site is LEED certified.”
A survey of 754 real estate executives last year by New York-based Turner Construction shows solid industry confidence in the potential cost savings. Despite the credit crunch, 75 percent of commercial real estate executives surveyed said they wouldn’t back away from green building projects — which typically cost 3 percent more to build — than traditional construction.
Turner’s Green Building Market Barometer suggests that most executives — 84 percent — expect lower energy costs with green buildings, and 68 percent anticipate lower overall operating costs.
Debate continues on when energy savings kick in. the timing varies with a building’s size and use. According to the U.S. Green Building Council, buildings can achieve 30 percent or more energy efficiency simply by using integrated design with little cost upfront. However, it can take two to eight years to recoup the increased building cost through lower heating and cooling costs.
Adding to the green momentum is a growing number of tax incentives. While legislation to require green construction in Virginia’s state buildings failed this year, President Barack Obama’s stimulus plan extends tax deductions for reduced energy-consumption in the workplace. For instance, upgrades in lighting could qualify for a deduction of 60 cents per square foot. Meanwhile, larger projects such as a 500,000-square-foot building, designed to reduce energy costs by 50 percent, could qualify for a deduction of as much as $900,000, says Trish Martineck, director of communications for HKS Inc., a Dallas-based architecture firm with offices in Virginia.
Localities also are jumping on. Arlington County has adopted building code standards that require green certification in some cases. And the city of Richmond will require all new municipal buildings to meet the silver LEED standard by next year.
Christopher Hill, a construction attorney with DurretteBradshaw in Richmond, says the new tax laws may cause commercial real estate companies to seek legal advice. “It’s so new that where lawyers like me can help is to work with local associate general contractors to make sure that everybody’s contracts meet with this ever-changing group of regulations, and with the way an owner wants a building to get built.”
Besides navigating tax laws and incentives, issues of insurance and bonding also are coming to the fore. “When you get a third party to ensure that a building is green, that tends to make insurance companies a little uncomfortable, because … we don’t have 100 years of experience with whether a building is green or not,” says Hill.
Firms with experience in green projects are confident in their market strategy. Cope says Liberty Trust promotes the savings green-designs can produce — 50 cents to 75 cents less per square foot for operating costs, mostly in reduced energy use, he says.
“It’s not as much of an issue now, but two or three years from now when the economy comes back, I think it will be,” he says.
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