High Performance Green Building: What is it worth?

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A report compiled by Cascadia, the Vancouver Valuation Accord and Cushman & Wakefield, investigating the market value of high performance green buildings.

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High Performance Green Building: What is it worth?

  1. 1. HigH Performance green Building: WHat’s it WortH? investigating the market Value of High Performance green Buildings VANCOUVER VALUATION ACCORD
  2. 2. HIGH PERFORMANCE GREEN BUILDING What’s it Worth? May 2009 this study was made possible by the generous support of the following funders: contents INtRODUCtION ................................................................................... 3 Intended Audiences and Goals ................................................................................ 3 terminology – Sustainability and High Performance Green Building .................... 4 Background ............................................................................................................. 5 Consultants/Authors ............................................................................................... 5 Methodology ............................................................................................................ 6 Project team Summary of Key Findings ....................................................................................... 7 Primary authors High Performance Green/Sustainable Buildings and the LEED System ............... 9 theddi Wright chappell, Managing Director, Cushman Wakefield Washington Valuation Services, Capital Growth of the High Performance Green Building Sector ..................................... 0 Markets Group, National Practice Leader, Sustainability Valuation and Advisory Practice Valuation and Appraisal......................................................................................... chris corps, Principal of Asset Strategics; Co-founder, Vancouver Valuation Accord Valuation Methodology and Approaches ............................................................... 3 Project manager New Frontier in Valuation ...................................................................................... 7 Brandon smith, Chief Operating Officer, Cascadia Region Green Building Council ALLEy24 EASt, SEAttLE, WA ........................................................... 9 Executive Summary ............................................................................................... 9 acknoWlegements Developer ............................................................................................................... 2 the authors would also like to thank the following people for their invaluable contributions to this study. Project Description ................................................................................................ 2 Building Participants Rationale/Business Case ...................................................................................... 22 kathryn j. Baumgartner, LEED AP, Appraiser, Capital Markets Group, Cushman Wakefield, Inc. Key Green Features ............................................................................................... 23 ada m. Healey, Vice President of Real Estate, Vulcan, Inc. Post Occupancy Evaluation and tenant Satisfaction ............................................ 27 lori a. mason curran, MAI, LEED AP, Vulcan, Inc. Findings and Valuation Aspects ............................................................................ 29 john russell, President, Russell Development Co. Conclusion ............................................................................................................. 38 traci Wall, LEED AP, Property Manager, 200 Market Place Interview ................................................................................................................ 39 don Harrison, Senior Vice President, Asset Management, GWL Realty Advisors Peter j. laforest, Manager of technical Services BC Region, Property Management, GWL Realty 200 MARKEt PLACE, PORtLAND, OR ............................................... 4 Advisors Inc. Executive Summary ............................................................................................... 4 robert kavanagh, Vice President, Asset Management, GWL Realty Advisors Developer ............................................................................................................... 42 Peer reviewers and advisors Project Description ................................................................................................ 42 kathryn j. Baumgartner, LEED AP, Appraiser, Capital Markets Group, Cushman Wakefield, Inc. Rationale/Business Case ...................................................................................... 43 sandra cawley, Principal, Burgess, Cawley Sullivan Appraisers in Vancouver, BC LEED-EB Certification – 200 Market Building ...................................................... 43 Peter clark, Vancouver Valuation Accord Key High Performance Green Features ................................................................ 44 Helen goodland, Executive Director, Light House Sustainable Building Centre in Vancouver, BC Findings and Valuation Aspects ............................................................................ 47 sarah sayce, Professor, Kingston University in London, as well as her colleagues and students Conclusion ............................................................................................................. 57 Interview ................................................................................................................ 58 This report is part of a larger collaborative effort among private industry, nonprofit, and government organizations all interested in answering one question: Are high performance green buildings really worth more than traditional VANCOUVER CENtRE, VANCOUVER, BC .......................................... 59 buildings? This report encompasses the commercial real estate study. There is also a companion residential study which can be obtained by contacting Earth Advantage Institute, http://www.earthadvantage.org/, (503) 968-7160. Executive Summary .............................................................................................. 59 Project Description ................................................................................................ 60 steering committee Rationale/Business Case ...................................................................................... 6 aaron adelstein, Master Builders Association King and Snohomish Counties theddi Wright chappell, Cushman Wakefield Key Green Features ............................................................................................... 63 chris corps, Asset Strategics and Vancouver Valuation Accord Findings ................................................................................................................. 64 fiona douglas Hamilton, SEEC LLC Ann Griffin, Earth Advantage Institute rachael jamison, State of WA Department of Ecology julie mcBride, Olympia Master Builders sean Penrith, Earth Advantage Institute this product was funded in part through a grant from Washington State Department Brandon smith, Cascadia Region Green Building Council of Ecology. While these materials were reviewed for grant consistency, this does not tiffany speir, MBA of Pierce County necessarily constitute endorsement by the department.
  3. 3. 2 HIGH PERFORMANCE GREEN BUILDING HIGH PERFORMANCE GREEN BUILDING 3 What’s it Worth? What’s it Worth? May 2009 May 2009 introduction • Suggests the potential for an innovative lease structure that can be used to convert operational intended audiences and savings into asset value. goals • Expands on past research in Interest and investment in high this arena, responding to a performance green/sustainable pressing need in both the green buildings have grown substantially building and financial/investment over the last 5 years. Despite communities. this increased attention, these buildings account for only a small The consultants also identified percentage of the markets across several issues that either potentially the United States and Canada. affect asset value or have broader While there has been a great deal market implications. these include of discussion about the value that government regulation, energy these buildings provide, there is a price volatility, and water scarcity. significant disconnect between the these relate to aspects not valued building/design community and the in current practices but to aspects financial/investment community that are embedded in resources on how to quantify and validate this consumed by buildings or emissions value. Further, there is no consensus created by buildings. these issues between these communities may increasingly affect value and/or regarding what exactly is meant risk, and create potential liabilities by the term value. Often, the two for buildings that do not incorporate groups are using the same words but high performance features. speaking different languages. target audiences the primary purpose of this study is to help bridge the gap in this study provides a new resource understanding between these two to several key professional distinct but interrelated communities communities in the commercial by providing information about the real estate sector. After reading this valuation of high performance green study, buildings with a focus on commercial investment office properties. • Architects, designers, contractors, and other members this study does the following: of the building/design community will better understand the • Assesses whether green features valuation perspective of what impact asset value and market contributes to the market value positioning (based on detailed of a property. In doing so, they analyses of three commercial should be able to consider these office buildings). factors in the initial design process, resulting in more holistic and viable designs with broader investment appeal.
  4. 4. 4 HIGH PERFORMANCE GREEN BUILDING HIGH PERFORMANCE GREEN BUILDING 5 What’s it Worth? What’s it Worth? May 2009 May 2009 • Valuation professionals, lenders, One of the terms most frequently sustainable development, there are financial performance information underwriters, owners, investors, misunderstood and misused is the references in the case studies to a that is rarely shared with outside and other members of the word sustainable. In the building/ building’s sustainable attributes or observers. As a result, these analyses financial/investment community design community, it has very performance. In these instances, offer unprecedented information and will better understand which high specific environmental and ecological the term is used for descriptive strategies about the valuation of high performance green building/ applications. Conversely, the financial/ purposes, and reflects the owner’s performance green buildings. sustainable strategies might investment community (and the or investor’s various approaches to impact asset value and market public), use it in a much broader improve building performance in all consultants/autHors positioning of a building. context. In fact, in many real estate aspects. the use of this descriptive discussions, the terms sustainable, term is meant to characterize the theddi Wright chappell: theddi the authors of this paper are green, and high performance are used types of initiatives undertaken by the Wright Chappell is the managing hopeful that readers will find this interchangeably when discussing building owner or investor to create director of the Cushman Wakefield information helpful in understanding buildings with green attributes. a financially and environmentally of Washington Valuation Services, how the decision to move toward healthier, more efficient building. Capital Markets Group and national high performance green building Leaders of valuation groups from practice leader of the firm’s National practices may play a role in throughout North and Latin America, Background Green Building and Sustainability estimating the market value of a Europe, and various Pacific countries Valuation and Advisory Practice. commercial property. met in 2007 in Vancouver, BC, to this project was the collaborative theddi has been actively engaged in discuss the valuation implications of effort among private industry, the commercial real estate appraisal terminology – sustainability and how they should government, and nonprofits that business for over 20 years. She has sustainaBility and HigH be approached on a global basis. were all interested in answering extensive experience in national and Performance green the result of that meeting was one question: Are high performance international investment analysis Building the Vancouver Valuation Accord, green buildings really worth more and consulting services, having a document that was signed by than traditional buildings? worked on projects throughout the One of the greatest challenges representatives from 20 countries United States, Canada, Europe, and in bridging the communication and that adopted the definition of to explore this question, two of Australasia. theddi most recently gap between the building/design sustainable development created for the leading experts in valuing high served as the CEO of Sustainable community and the financial/ the United Nations by the Brundtland performance green properties in Values, Inc. in Portland, Oregon, investment community is the Commission in 987: the United States and Canada (see where she specialized in market, ability to successfully translate the …development that meets the Bios) were recruited to analyze and feasibility, and investment analysis concepts of one group to the other. needs of the present without ascertain whether high performance particularly related to valuation and For the purposes of this study, compromising the ability of green attributes contributed to financing of new, existing, and urban the building/design community future generations to meet their market values. the consultants redevelopment projects, as well as includes architects, engineers, own needs. approached the owners of three the identification and quantification contractors, designers, and design high performance green commercial of the benefits of sustainable and construction consultants. Real The Brundtland Commission defined office buildings (200 Market Place in development. theddi serves as the estate valuation professionals, sustainable development using seven Portland, OR; Alley24 East in Seattle, ambassador of sustainable initiatives appraisers, lenders, owners, themes, which included the concept WA; and the Vancouver Centre in for the Appraisal Institute and is developers, underwriters and other that environmental and social factors Vancouver, British Columbia) who a director of the Green Building real estate financial professionals are given comparable consideration were willing to make their data Finance Consortium. She was comprise the financial/investment to the economic factors associated available for analysis. the results an organizer of and presenter at community. In many instances, with real estate development. of this work are three detailed the Vancouver Valuation Summit the challenge may be the ability to case studies on green buildings in Vancouver, BC. She is a LEED translate either a design or valuation While the authors understand written from a financial/investment Accredited Professional who concept to the public at large. the that very few, if any, existing perspective. the owners of the graduated with honors from the reader’s indulgence is respectfully buildings currently meet the three subject properties gave the University of tennessee and holds requested in this regard. complete architectural and design research team access to lease rates, the CRE, MAI, FRICS, and AAPI criteria and requirements of truly operational expense data, and other designations.
  5. 5. 6 HIGH PERFORMANCE GREEN BUILDING HIGH PERFORMANCE GREEN BUILDING 7 What’s it Worth? What’s it Worth? May 2009 May 2009 chris corps: Chris Corps is a • Gathered information on the and property specific information in 2007. the project was awarded chartered surveyor and principal green strategies employed at the and analyzing the costs and benefits Sustainable Development of the of Asset Strategics in Victoria, subject properties of these strategies objectively and year and Mixed-Use Development British Columbia. Chris instigated thoughtfully provides a basis for of the year awards in 2006 by the • Interviewed building owners, and co-led the Vancouver Valuation identifying and validating their Washington Chapter of the National managers, engineers, Accord and Summit, an initiative valuation impacts. Association of Industrial Office high performance green linking sustainability and value Properties (NAIOP). Following are building consultants, and that was signed by BC’s Premier summary of key some of the key findings from the others associated with the and valuation professionals from findings case study: implementation of green 20 countries. Chris has nearly 30 strategies • While the long-term implications years of experience in real estate the following sections present of the various high performance and complex business cases in the • Interviewed agents, brokers, the key findings of the research green strategies employed UK and Canada. He specializes and other market participants conducted on the three subject at Alley24 East can only be in investment and development regarding the market positioning properties. A more detailed analysis quantified via specific and viability, working on projects of the subject properties and supporting information can be detailed analysis over time, it is from London’s Canary Wharf to • Compared property specific found in the case studies that follow clear that the property: Dockside Green. With a background information to broader market these summaries. It should be noted » experienced a comparatively in linking sustainability to value, parameters: that the information presented quick absorption period; Chris instigated and led the 2005 Occupancy in each of the studies is slightly » » attracted and has retained international Green Value study. Rents different, which is typical in most » high quality tenants; He is vice president of Light House Tenant profiles real estate analyses. Consultants, » » achieved competitive rents; Sustainable Building Centre, an tenant retention investors, underwriters, and analysts » » and has a higher-than- advisory board member of the Green are consistently faced with the • Analyzed the properties’ average level of occupancy. Building Finance Consortium, and disparity in data availability and member of committees responsible performances relative to the • When the building was delivered, must rely on the information that is for defining valuation standards following: it was 90% preleased. this is an available in each specific situation. In used in 32 countries. Chris is the » Operational costs and savings impressive amount of preleasing almost every instance, there will be inaugural past chairman of Canada’s » Absorption and tenant under any circumstances. Given variations in the amount and context Royal Institution of Chartered retention the somewhat unproven location of the information available, making Surveyors and recently co-led an » Market competition attributes of the site at the time comparisons among investment initiative that identified over $1.7 » Established goals of construction, preleasing opportunities, underwriting billion in savings by linking value » Historical statistics at this level is a tribute to the possibilities, and valuation and sustainability. that initiative • Submitted assessments and assignments a continual challenge. ownership’s ability to target and can result in 25% reduction of conclusions for peer review the case studies that follow are no sign the tenants best suited greenhouse gases while eliminating including working analyses different, offering similar yet varying for the building, as well as the waste at no cost to taxpayers. of payback and financial information on each of the projects. owner’s insights into emerging assessments. market preferences for high performance green development. metHodology Project 1 – alley24 east, seattle, the consultants for this study are • Leases signed at Alley24 East valuation experts who specialize Wa the consultants took various steps were competitive with other including some or all of the following in assessing the asset value properties in terms of rental Alley24 East was one of the first to complete the case studies: implications of green practices rates, escalations, and tenant mixed-used developments in Seattle and principles. Both have practices improvement allowances. Specific • Conducted inspections of the to achieve Leadership in Energy that focus on maximizing the value data indicate that Alley24 East properties being analyzed and Environmental Design (LEED®) of real estate investments and held a strong competitive position certification from the U.S. Green • Completed primary and developments, especially through relative to its peers, at the same Building Council (USGBC). The secondary market research the adoption of high performance time exceeding industry averages project achieved LEED for Core green strategies. Gathering market for both rent and occupancy. Shell (LEED-CS) Silver certification
  6. 6. 8 HIGH PERFORMANCE GREEN BUILDING HIGH PERFORMANCE GREEN BUILDING 9 What’s it Worth? What’s it Worth? May 2009 May 2009 Project 2 – 200 market Place, • From 2007 to 2008, overall • the way in which sustainable costs), without raising the Portland, or operating expenses declined by attributes translate into value tenant's total costs; and an 0.64%, and they are projected to is not simple or direct, and may apportionment of benefits. If two-hundred Market Place was decline by an additional 3.29% in alternatively be found in other handled carefully, this has the the first multitenant property in 2009. factors such as higher profit, potential to encourage more the United States to achieve LEED increased staff productivity, or retrofits by motivating landlords • By consistently looking for ways for Existing Buildings (LEED-EB) savings in tenant operating costs and tenants through mutual to improve overall building Gold certification from the USGBC. rather than higher capital value. profit. performance, the building owner Since certification, the building’s is reducing the risk of early • this review concludes that the owner has continued to improve market obsolescence for the nature of the retrofit and savings HigH Performance building efficiency, as evidenced by property and ensuring that 200 were not pivotal in determining green/sustainaBle the building’s ENERGy StAR rating, Market Place will remain a major the purchase price of the Buildings and tHe leed which has increased from 79 at the competitor in the Portland office building to the buyer. the value system time of LEED certification to a rating market for as long as possible. of the retrofit was known and of 96 in 2009. the following are some contributory, but of insufficient impacts of Buildings of the key findings from the case size to change the decision to buy study: Project 3 – Vancouver centre, Buildings are significant users the building. Vancouver, Bc of energy, water, and material • two-hundred Market Place • the study nevertheless concludes leads its competition in resources, as well as major In 200, Great West Life Realty that value was received contributors to environmental tenant occupancy statistics Advisors (GWLRA) purchased indirectly and distinguishes with a current occupancy of degradation associated with the 34-story, 472,422 square foot between savings, cost, and the use of these resources. 99.6%. While this high level of building known as Vancouver value, illustrating how these are occupancy is most likely the Without significant increases Centre at 650 West Georgia Street reflected differently in valuation and improvements in building result of a variety of factors, it near Vancouver’s downtown office methods. this results in possible is indisputable that the building practices, the negative impact of and retail core. Prior to purchase, confusion about how sustainable the built environment on human is marketed and run as a high GWLRA identified age-related attributes affect asset value. performance green property. and environmental health is likely obsolescence in certain capital plant to increase dramatically in future • An incidental finding relates to • Based on comparisons of the and equipment (e.g., HVAC, lighting) decades. lease structures and how the lease rates achieved, tenant and the potential to improve energy relationship between landlord • Buildings in the United States and improvement allowances offered, performance with resultant savings. and tenant might be structured Canada represent about one-third and escalation factors, the leases A rolling renovation program was to support a sustainable retrofit of primary energy use and carbon signed at 200 Market Place are implemented to optimize revenue for mutual profit. It was identified dioxide emissions. similar to and competitive with flow and respect existing tenancies. that the same attributes that those signed at comparable • The energy retrofit project gave a 9% approximate return • In the United States, buildings properties in the Portland central achieved a 9% return on on investment (ROI) could represent about 72% of U.S. business district. investment (ROI). While a payback increase to 97% provided both electricity consumption. • Prior to LEED-EB certification, of four years was anticipated, parties agree to a lease term and • Over 36 million tons of building energy consumption escalated the extended implementation to structure more closely matching related construction and each year from 2004 through minimize tenant disruption meant the life cycle of the retrofit costs demolition debris are generated 2006. However, since the that the returns took longer but and savings; a redistribution by the United States in a single building’s LEED certification were successful. It also meant of costs aligned with debt year, and in Canada, buildings in 2006 and implementation of that the benefit was directed retirement; a reallocation of total are responsible for 25% of landfill a variety of energy strategies, less towards cash flow and more occupancy payments (e.g., rent, waste. energy use declined in 2007 by towards improving vacancy, operations, and maintenance 3.45% and in 2008 by 8.73%, absorption, tenant retention, and reflecting increasing year-over- other factors. year reductions.
  7. 7. 0 HIGH PERFORMANCE GREEN BUILDING HIGH PERFORMANCE GREEN BUILDING What’s it Worth? What’s it Worth? May 2009 May 2009 • In the United States, buildings groWtH of tHe HigH Valuation and primary basis upon which properties use about 3.6% of all potable Performance green aPPraisal are valued, and investment and water, or approximately 5 trillion Building sector lending decisions are made. gallons per year. the recognition and adoption of sustainable principles, practices, Given the breath and depth of the In response to these issues, a united states concept of market value relative and protocols on an international number of countries have created basis has led to more intense to real estate investment, it is the the high performance green building standards to certify buildings investigation of the value proposition goal of this paper to provide readers sector has been gaining significant that significantly reduce their of green strategies by real estate with a better understanding of the momentum over the past 5 negative impacts through a variety owners, investors, and market process used to arrive at market years. USGBC membership, which of factors. In the US and Canada, analysts worldwide. though a value and how this concept is included over 20,000 organizations the predominant rating system for number of practitioners have applied. the goal is to clarify some as of April 2009, has more than certifying high performance green included sustainable development of the challenges that investors, quadrupled since 2000. During that buildings is the LEED rating system. protocols in their building designs valuers, and analysts currently face same time, the USGBC has certified and construction as best practices relative to translating the attributes the following are the categories that 2,476 commercial projects and has for years, the incorporation of these of green development into an comprise the LEED rating system: projects seeking certification in all practices into mainstream real estimate of market value. Further, 50 states and in 9 countries. the • Sustainable sites estate has only occurred relatively by creating a greater awareness of USGBC had also accredited 8,55 recently. that incorporation has the methodology utilized to arrive • Water efficiency LEED Accredited Professionals most predominantly occurred at market value, it is hoped to (LEED AP) as of April 2009. By 2010, • Energy and atmosphere through the exposure and promotion facilitate a broader exchange of the approximately 0% of commercial of these practices by organizations types of data required to arrive at • Materials and resources construction starts in the United such as the U.S. Green Building accurate value estimates of green States are expected to be green, • Indoor environmental quality Council (USGBC) and the Canada development. and there were 95 state and local • Innovation and design government initiatives supporting Green Building Council (CaGBC) via the Leadership in Energy and the challenge that valuers, high performance green building as analysts, and potential investors To earn a LEED certification, an of December 2008. Current trends Environmental Design (LEED) standard. have is to discern to what degree applicant project must satisfy all of in high performance green building the various aspects of sustainable the prerequisites and a minimum indicate that there will be continued Based on criteria that consider development may impact market number of points in the various growth in the sector.2 not only economics but also the value. Based on the concept of categories to attain the established environmental and social impacts of market value, value is recognized project rating levels of Certified, Silver, Gold, and Platinum. Each canada development, the LEED certification when it is reflected in the form of has become the de facto standard of definitive, quantifiable data. In other rating requires a certain range of As of March 2009, the Canada building excellence and sustainability words, the financial/investment points be attained by a project. Green Building Council (CaGBC) in the United States and beyond. community requires evidence that had certified 95 buildings under Despite the triple economic, social, a measurable differential exists the LEED rating system and had an and environmental benefits (also between traditional and high additional ,58 buildings seeking known as the triple bottom line4) performance green construction in certification. CaGBC membership, that are espoused internationally, order to recognize and accept that which included over 2,200 the majority of owners, investors, a differential in market value exists organizations as of March 2009, has underwriters, and valuers in the between the two. grown tenfold since 2003.3 United States and Canada rely upon this report contributes to market the concept of market value as the understanding by discussing and 2 US Green Building Council – http://www.usgbc. analyzing three green properties All US information from US Green Building org 4 John Elkington, Cannibals with Forks: The Triple where the decision was made to Council - http://www.usgbc.org and all Canadian Bottom Line of 21st Century Business (Oxford: information Canada Green Building Council 3 Canada Green Building Council – http://www. Capstone Publishing, 1999). incorporate green strategies into - http://www.cagbc.org cagbc.org
  8. 8. 2 HIGH PERFORMANCE GREEN BUILDING HIGH PERFORMANCE GREEN BUILDING 3 What’s it Worth? What’s it Worth? May 2009 May 2009 building or upgrade programs. Valuation standards and Notwithstanding the multiple the foregoing recognized, the these case studies were written Definitions standards that exist, the core authors note that the North to help assess how incorporating definitions of value are very similar. American valuation theory these strategies into a development Worldwide, a number of standards this study relies on the U.S. recognizes four forces that influence program may impact asset value and define how real estate is valued: Appraisal Institute’s definition of real property markets. market positioning. market value: • In the United States and most • Social forces of North America, the Uniform the most probable price, as Since the case studies are presented • Economic circumstances Standards of Professional of a specified date, in cash, or from the perspective of a valuation Appraisal Practice (USPAP) is in terms equivalent to cash, • Environmental conditions professional or an appraiser, some the defining standard for valuers or in other precisely revealed • Governmental controls and discussion of the basis upon which in developing and reporting an terms, for which the specified regulations value is estimated is provided in the appraisal, analysis, or opinion. property rights should sell following paragraphs. Developed by the Appraisal after reasonable exposure in these forces are interactive.0 Awareness of the considerations Standards Board of the Appraisal a competitive market under and constraints inherent in the Foundation, USPAP has been all conditions requisite to a It should be noted that three of the valuation process will facilitate a adopted by the Appraisal fair sale, with the buyer and four forces (social, economic, and better understanding of both the Institute, as well as numerous seller each acting prudently, environmental) are components valuation process overall and, more other professional appraisal knowledgeably, and for self- of the triple bottom line, a concept specifically, the challenges that valuers organizations.5 interest, and assuming that that enjoys greater acceptance face in evaluating and valuing high neither is under undue stress.9 and incorporation into investment • In Canada, the Canadian Uniform performance green properties. decisions outside the United States Standards of Professional Clearly, this definition of market than within. Since the fourth force, Appraisal Practice is the value relates almost exclusively Further, by creating a deeper government regulation, is arguably dominant standard published by to the economics associated with comprehension of the methodology the enactment of what society wants, the Appraisal Institute of Canada.6 the transaction of property rights utilized to arrive at market value, these four influences are consistent this is closely related to the U.S. under consideration, i.e. what the studies should contribute to a with the triple bottom line. Appraisal Institute’s standards. something will sell or rent for. broader exchange of the types of data required to arrive at an accurate value • the most-used standard by a Neither the methodology that is estimate of high performance green single profession is the Manual of currently accepted and practiced development. If undertaken properly Valuation, or Red Book, which is by the valuation profession nor the and accurately, valuation can be published by the Royal Institution methodology that is typically used essential in understanding whether of Chartered Surveyors7 and used by the investment community or high performance green measures by its members in 32 countries. major lending institutions includes add value. specific considerations of social or • Internationally, the International environmental factors. It is largely Valuation Standards administered assumed these are reflected in the by the International Valuation price or rent paid in the market. Standards Council8 sets an agreed upon standard that multiple countries subscribe to and that is increasingly used as the core global valuation standard. 5 the Appraisal Institute, The Appraisal of Real Estate: Thirteenth Edition, p. 6. 6 See http://www.aicanada.ca/. 7 See http://www.rics.org/. 9 the Appraisal Institute, The Appraisal of Real 0 the Appraisal Institute, The Appraisal of Real 8 See http://www.ivsc.org/. Estate: Thirteenth Edition, p. 23. Estate: Thirteenth Edition, pp. 44-46.
  9. 9. 4 HIGH PERFORMANCE GREEN BUILDING HIGH PERFORMANCE GREEN BUILDING 5 What’s it Worth? What’s it Worth? May 2009 May 2009 Valuation metHodology approaches: the cost approach, the in the nuances of high performance issue, valuers are also faced with and aPProacHes sales comparison approach, and the green building, the accuracy of the challenge of comparing high income capitalization approach. this approach at this point must be performance green properties to the challenge that asset valuers, viewed with some skepticism. standard properties. Even greater analysts, and potential investors for cost approach disparities may exist in these high performance green building sales comparison approach situations, despite similarity in have is to discern to what degree the cost approach is based on the visual characteristics. It is also quite the various aspects of sustainable concept that market participants the sales comparison approach difficult to accurately adjust for development may impact market relate value to cost. this can be a is most useful when a number of the value of individual components value. Based on the concept of reasonable assumption in certain similar properties have recently for use within a sales comparison market value as defined today, value circumstances such as when been sold or are currently for sale approach. can only be recognized when it is a property is new and market in the subject property’s market. reflected in the form of definitive, conditions are stable. It is also Given the comparatively small therefore, this approach, similar to quantifiable data. often used when there is little or no number of high performance green the cost approach, must currently be evidence of market transactions, properties (in relation to the total viewed as a less reliable indication of to determine whether a discernible such as for public assets. Given pool of commercial and residential market value, especially when direct difference does exist between current economic conditions in the properties) and the even smaller comparison is being made. standard and high performance United States and globally, this number of sales of such properties green properties, there is a specific approach would likely prove less in recent years, there is arguably not income capitalization approach process that must be followed to dependable, particularly for an older, a sufficient, statistically relevant pool arrive at a credible estimate of value. existing property. In addition to of information to help appraisers In the income capitalization It involves a number of definitive these limitations, there is currently reliably compare and adjust non- approach, the current value of the steps, regardless of property type or no readily available national cost green buildings and values to those future benefits of property ownership level of environmental performance: estimating database for high with green features, or even to is measured. Given that this study • Data collection performance green development compare between green buildings focuses primarily on commercial upon which valuers, investors, or of the same type. this situation real estate that is valued on the • Market and marketability analysis basis of the quality and quantity of other property analysts can rely. has been exacerbated by current • Land and site analysis In addition, older assets may be economic conditions in which there its income stream and adequate more difficult to value using the is a lack of real estate transactions operational data is available, this • Improvement analysis cost approach as it employs the from late 2008 until the time of approach currently offers the most • Highest and best use concept of depreciation from a writing, or even longer in some reliable indication of market value determination, in which the variety of factors (e.g., obsolescence, sectors. for a high performance green concept of most probable buyer functional depreciation, condition, property. (the individual or entity most technical impacts) to arrive at Coupled with limited empirical data, likely to purchase a particular an estimate of value, thereby the plethora of options available One of the greatest challenges that asset and the highest net return introducing yet another set of to a developer with respect to high many investors face is assessing to the land) plays a key role variables into the analysis. Since performance green strategies the viability of sustainable sustainable features can have a creates a particularly challenging set strategies/high performance green these steps affect not only longer life, this introduces further of circumstances for the valuation development and the impact that whether the potential value of complexity in correctly depreciating community when it comes to its various elements may have on high performance green attributes a green asset. comparison of high performance the initial cost of construction.2 is captured but also how it is green assets and attributes. Given Given the integrated approach that processed. This is largely defined Considering the foregoing and in that any level of LEED certification is utilized by successful sustainable by the methodology used to assess the absence of cost data provided by can be achieved through a variety of design teams, construction costs value. the most commonly used trained professionals experienced different strategies, two buildings methodology to arrive at an estimate with the same rating (LEED Silver, 12 Design professionals often term this first costs. of market value includes three for example) cannot be assumed to But as any developer or lender will attest, many the Appraisal Institute, The Appraisal of Real other costs have usually occurred before a Estate: Thirteenth Edition, pp.4-43. be comparable. In addition to this project gets to the design or construction phase.
  10. 10. 6 HIGH PERFORMANCE GREEN BUILDING HIGH PERFORMANCE GREEN BUILDING 7 What’s it Worth? What’s it Worth? May 2009 May 2009 may be higher than for a traditional cost approach levels of both operational and market value, placing the greatest building. However, to accurately performance risk. reliance on the approach that was • Is there an adjustment that assess and value high performance considered the most accurate. should be made to reflect the • How are the leases structured? green design components, In every step of this process, a long-term benefits of sustainable Who pays for what and who strategies, and development, the valuer’s role is to translate market components or strategies? to receives the benefits of any costs must be weighed against information and reflect market accomplish this, one would first savings? the benefits derived from these preferences and behavior as the have to accurately identify and strategies. Incorporation of concepts • How might the high performance ultimate indication of market value. quantify the long-term benefits. such as life cycle cost analysis and green strategies employed impact other methodologies to appropriately • What materials/components the following items: compare components and assess were used? Will these impact the » Absorption – how quickly a neW frontier in performance over either the life estimated life of the building or building leases Valuation or holding period of an investment the depreciation assumptions? » tenant retention/renewal are necessary to provide a true assumptions Value vs. Worth • Were incentives offered that and accurate indication of value. It » Downtime between leases could impact/offset some of the should also be borne in mind that » Maintenance and operational this concept is experiencing growing building’s costs? sustainable attributes may have costs acceptance in European valuation a higher residual or reversionary • Does the longevity and benefit of » Utility costs circles, and has application with high value, which means there is and sustainable features affect the » the level of risk associated performance green asset valuation. end-of-life value that has to be depreciation rate and building with the property overall considered more carefully with obsolescence? Compared to market value, worth sustainable attributes in green can be used to express aspects that sales comparison approach summary buildings. might lack monetization but that • What are the differences between In many instances, client nevertheless influence or form an Currently, the methodology to the physical characteristics of the requirements dictate an appraisal intangible part of market value. An accomplish these comparisons high performance green building that incorporates all three example of this is a living wall (a wall lies mainly within the income being evaluated and those of its approaches to value, and the covered with plants): these plants on capitalization approach. market peers? appraiser has to reconcile the the vertical faces of a building have different approaches. However, aspects (e.g., cost/benefit, savings, • Can these differences be market value) that may be difficult options quantified as adjustments? in reality, not all approaches may be applicable. the Uniform to quantify. However, they contribute In the current economic • Does the market recognize Standards of Appraisal Practice to how the building is perceived environment, investors, analysts, the different elements and will (USPAP) guidelines do not require by owners, investors, occupants, valuers, and underwriters are consumers pay (more) for them? the use of all three approaches, and the broader public. Some of finding that there is limited market but rather those which are, in this might not find its way into the • Will the high performance green data upon which to rely. this theme fact, most applicable. therefore, market value but could nevertheless elements impact marketability was prevalent in the preceding in those instances where all benefit the occupier, who in essence of the property? Will they affect sections. However, there are still three approaches are not deemed “pockets the value.” marketing time or other factors? business decisions that have to be necessary to provide an accurate In a context where high performance made every day, so those who are income approach indication of market value, valuers green attributes might not always required to conduct proper analyses must explain why an approach was • Was the building commissioned? translate to market value, worth must rely on the limited information omitted and also indicate which of Commissioning3 could impact is clearly a potentially important that is available. It is important to the approaches provides the most assumptions relative to the concept. However, valuation understand what useful information accurate indication of value. standards and especially appraisal is available and the minimum factors 3 Commissioning is the process wherein trained Once these analyses have been practices in North America have not that should be considered. professionals, such as mechanical engineers, test the mechanical, electrical, and plumbing completed, the value indications are yet adapted to formally address this systems to verify that they are operating reconciled into a final estimate of distinction. optimally and as designed.
  11. 11. 8 HIGH PERFORMANCE GREEN BUILDING HIGH PERFORMANCE GREEN BUILDING 9 What’s it Worth? What’s it Worth? May 2009 May 2009 resources alley24 east • www.vancouveraccord.org 22 yale Avenue North, Seattle, Washington, USA (access to additional case studies and other information) • www.dsireusa.org (for incentives executiVe summary • When the building was delivered, it was 90% preleased. It should be throughout the United States) noted that this is an impressive Alley24 East is a mixed-use office • www.usgbc.org (U.S. Green development located in the South amount of preleasing under Building Council) Lake Union neighborhood of Seattle. any circumstances. Given the It is composed of two buildings somewhat unproven locational • www.cagbc.org (Canada Green that are connected above ground attributes of the site at the time Building Council) level: the south tower is six stories of construction, preleasing • www.appraisalinstitute.org and the north tower is five stories. at this level is a tribute to the (seminar on valuing green the development was completed ownership’s ability to target and buildings) in February 2006. It was one of the sign the tenants best suited for • www.rics.org (information from first mixed-used developments in the building and the ownership’s the Royal Institute of Chartered Seattle to achieve LEED® Core insight into emerging market Surveyors) Shell Silver certification by the U.S. preferences for high performance Green Building Council in 2007. the green development. • www.rmi.org (Rocky Mountain project was awarded Sustainable Institute) • Leases signed at Alley24 East Development of the year and Mixed- were competitive with other • www.greenbuildingfc.org (Green Use Development of the year awards properties in terms of rental Building Finance Consortium) in 2006 by the Washington Chapter of rates, escalations, and tenant the National Association of Industrial improvement allowances. Office Properties (NAIOP). The Specific data indicate that Alley24 following comments summarize East held a strong competitive some of the key issues from the position relative to its peers, study: while at the same time exceeding Alley24 East
  12. 12. 20 HIGH PERFORMANCE GREEN BUILDING HIGH PERFORMANCE GREEN BUILDING 2 What’s it Worth? What’s it Worth? May 2009 May 2009 industry averages for rent and systems by trained professionals, can make a notable difference in tenant and owner satisfaction. More satisfied occupancy. As evidenced by both these vetted assumptions can tenants can lead to improved tenant retention and less downtime between the property specific and general be incorporated into a formal leases, ultimately resulting in better bottom line results. occupancy data presented valuation or evaluation analysis. in this study, Alley24 East deVeloPer • Building management provides continues to experience above ongoing accountability of energy average occupancy and achieve Vulcan, Inc. was founded in 986 by Paul G. Allen, a cofounder of Microsoft consumption using meters that competitive rental rates at the Corporation. the Seattle-based company was set up with Jo Allen Patton to monitor electricity usage for each same time. manage Allen’s business and charitable endeavors. Vulcan, Inc. oversees several tenant. This benefits tenants and • While the long-term implications owners since both parties can business ventures, including Vulcan Real Estate, which has a significant presence of the various high performance track and manage utility use. in Seattle largely due to its participation in the redevelopment of the South Lake green strategies employed this is unlike developments with Union neighborhood. Vulcan Real Estate has demonstrated a commitment to at Alley24 East can only be one master meter where some sustainable real estate through a variety of development projects, including quantified via specific and tenants may be allotted a pro Alley24 East. detailed analysis over time, it is rata share of energy costs based clear that the property on square footage regardless Project descriPtion » experienced a comparatively of actual energy usage. In such quick absorption period; situations, tenants that use less Address 22 yale Avenue North » attracted and retained high- energy may be paying more than quality tenants; their fair shares of energy costs Net Building Area Office: 186,299 » achieved competitive rents; if the building power source is (Square Feet) Retail: 24,557 » and has a higher-than- shared with tenants with above total: 20,856 average level of occupancy. average usage, such as call Date Completed February 2006 centers. Given the implications of • tenant rankings of Alley24 East Owner Vulcan Inc. / PEMCO Mutual Insurance Company individual metering, more owners in the New Building Institute’s implementing this practice and Developer Vulcan Real Estate Building Performance Review more tenants requesting it can be Architect NBBJ reflected high or moderately high expected. It is quite possible that scores in tenant satisfaction Builder Skanska USA individual metering will become related to building temperature, a more common component Construction Cost $42,000,000 air quality, acoustics, lighting, in green lease clauses, being and general health and negotiated by one or both parties productivity factors. in the transaction. • Alley24 East received enhanced • One of the greatest variables in commissioning. From a risk operational/building performance and valuation perspective, this (and generally one of the most is perhaps one of the most difficult to control) is tenant important components of the behavior. SS Credit 9 tenants at entire LEED certification process. Alley24 East are provided with In fact, this integral step in illustrated tenant manuals, attaining a LEED certification educating them and facilitating could be one of the most implementation of high important aspects of LEED performance green design and Streetside retail view certification as it relates to asset construction strategies within value. By providing third-party their spaces. Educating tenants validation of the operational on how they should operate in a efficiency and anticipated high performance green space performance levels of building

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