The Economics of Sustainable Buildings
Why it really costs nothing
Sustainability is having far-reaching impacts on building standards, codes and specifications. It is being written into municipal by-laws and zoning, with most municipalities choosing LEED® as their green building standard. In the commercial sector, sustainable buildings have become the new benchmark for Class ‘A’ office space.
By Vince Catalli and Ralf Nielsen
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Owners, developers, investors and building operators are well aware that costs are rising and revenue is not. Energy, water and wastewater, insurance and maintenance costs continue to increase. At the same time, the clock is ticking on climate change, cheap oil and clean water. Sustainability is the future. As professionals in the industry, we know that excluding sustainability from the criteria for a building’s success:
- Ignores the life cycle cost of water, wastewater, heating and cooling
- Ignores the impact that indoor air quality and natural light can have on the wellness of occupants
- Ignores the opportunity to reduce dramatically the waste generated in the construction and operation of buildings.
Building without considering sustainability seems ultimately untenable. So why aren’t sustainable buildings being built all around us. Even business sees sustainability as the new megatrend.
“As environmental data become richer and more accurate, companies will be able to chart their impacts in financial terms – making it easier for market analysts to identify the firms positioned to deliver an eco-premium.”
Could it be that the markets, the investors and developers still don’t see the value of more sustainable buildings? Has no one – after more than a decade of LEED and BREEAM – been able to demonstrate that saving energy, materials, waste and providing a healthy indoor environment also makes good business sense? We believe they have. The professional literature [this magazine included] are ripe with evidence. But is it enough? Perhaps not.
We need to recognize that our industry is highly fragmented, uses traditional business models, has complex difficult to navigate-stakeholder relations [real estate/land speculation, municipal zoning, community groups, etc.] and that investment/financing sources are highly diverse.
Given these realities, it is no wonder that Building Information Modelling/Management systems are only now emerging - when concept to production 3-D modelling software revolutionized entire value chains in aerospace, IT and consumer products 20 years ago Sometimes, it’s just not easy getting the right information in the proper hands.
The design and engineering community has been speaking, writing and promoting the economic benefits of sustainable buildings to owners, developers, investors and operators for years. Typically, we present the obvious cost savings [energy, water, waste] for future facility management.
It is widely accepted that energy cost savings of 25-30% can be achieved in existing buildings and new construction. We also know that integrated design, high-performance lighting, commissioning and site orientation can have significant effects on reducing peak power demand, further reducing long-term energy costs.
It could be said that water, with the increasing costs of potable water, waste water treatment, municipal infrastructure for storm water management and growing scarcity in some regions of Canada, should also be top of mind for owners, investors and operators of buildings and infrastructure. Just as greenhouse gas emissions from electricity production vary significantly across utilities, [see SABMag #24, July/August 2010] the “true cost” of water also differs.
Consider that when we use potable water, we are also paying for its disposal and treatment – often based on a hefty premium applied to our metered consumption. Then there is the “water-energy nexus.” Consider that when we move water from A to B, we are using energy, or when we heat and cool our buildings, this too, frequently involves using water, or that thermal power generation accounts for 63% of all water use in Canada.
Then factor in our changing climate, where water resources will be altered and potentially reduce their quality, quantity, and accessibility. This will require increased energy to purify water of lower quality or pump water from greater depths or distances. Thus the imperative to ratchet down the energy-water nexus.
Unfortunately, water is undervalued – economically - in Canada and, therefore, building owners and developers have yet to make a strong financial argument for investment in efficiency.
But let us look back to the obvious and explore what is top of mind with owners, developers and operators that has indirect connections to their built assets: employee productivity and retention, churn, valuation, risk and carbon
Productivity and Retention
While energy costs are in the realm of $2-3/sf, rent can be between $10-20/sqft, and productivity at $200/sf. We know that the primary cost of doing business is salaries.
If the average private sector compensation is $50,000, a 1% increase in productivity yields $500 per employee per year. Is there justification for a $500 investment in the quality of the employee’s workspace? Productivity benefits have been demonstrated and well documented - some putting the estimated impact of better performing buildings at more than 10% .
Intuitively we know sustainable buildings can promote better health, comfort and well-being of occupants. This, inturn, reduces levels of illness/absenteeism and in the case of work spaces, can better attract and retain employees.
It has been estimated that the total cost of turnover for one employee in the United States is over $25,000. But can we make a direct link between turnover and high performance, sustainable design and employee retention? Perhaps we need to provide better examples or conduct more research to build this case for owner-operators.
Churn
What about churn? We know there are environmental benefits and cost savings in designing buildings and their systems for ease of adaptability and disassembly [see SABMag #19, Sept/Oct 2009 article by Catalli]. Larger organizations in particular spend significant funds reconfiguring workspaces [group or individual employee], consolidating or distributing organizational functions, optimizing space density, adapting to new working hours and integrating new technologies and equipment.
However, the empirical evidence of how costs and benefits interplay with sustainable buildings is not well developed. These are the day-to-day realities of owners with large numbers of distributed building assets or operations [e.g. health authorities, banks, retail, provincial corporations, etc.]. We need to do a better job in speaking the language of these clients and so uncover the true costs of churn.
Valuation
Investors commonly use the CAP rate, or capitalization rate as a measure of their asset’s performance. The CAP rate is simply the net operating income of the property as a percentage of the Total Asset Value [assessed].
Capitalization rates are an indirect measure of how fast an investment will pay for itself. Real estate appraisals use net operating income to determine potential CAP rates. One can see that if efficiency improvements are made to enhance the operating income or gain higher rents, then the CAP rate will be higher [more desirable].
One study estimated that there was a 16% increase in market value after converting the average “non-green” to a “green” office building. The same authors found that in the whole sample of 9,998 buildings [893 were either Energy Star or LEED certified], the premium gained in rent, adjusted for building occupancy levels, was above 6%.
Taking it a step further, their analysis also showed that a $1 saving in energy costs, from increased thermal efficiency, yields a return of roughly $18 in the increased valuation for an Energy-Star certified building. As far as we are aware, no such studies have been conducted in Canada. But perhaps with the increased base of LEED, BOMA BESt, Green Up data sets, similar findings may not be far away.
Beyond net operating income, the asset value can provide another vehicle to drive return on investment. An example would be contaminated sites, where the growth and innovation in remediation techniques drives down their cost, thus benefiting the savvy developer and investor who can apply these ahead of their competition to the benefit of the community, the environment and the local government.
Risk
Beyond these arguments for owners, operators and investors, there are perhaps other untapped opportunities. These are between sustainable buildings and risk management.
The obvious one is worker health and safety, where lower workmen’s compensation costs can come from improved indoor environmental quality. But not many insurance companies have made any connections between sustainable design and reduced risk. Some have offered premium discounts for owners implementing particular energy saving strategies.
That being said, our changing climate is getting the attention of the insurance industry. “Insurers have begun to embrace a more sophisticated approach to climate change, increasingly recognizing the issue as one of ‘enterprise risk management,’ which cuts across the domains of underwriting, asset management, and corporate governance.”
Property insurance companies are under taking many activities from changing their terms and conditions, promoting loss prevention, and promoting awareness of the pending problems of climate change. The methods already exist for property owners, developers and operators to understand the impact of climate change [20, 50 or 80 years into the future] on their assets.
Carbon
Energy=carbon=costs. Be it a carbon tax on top of the fossil fuels that owners and operators buy, or the ability to gain credit from energy efficiency retrofits on a market or trading scheme. Unfortunately, placing a price on carbon can be fraught with complexity and misinformation. The regimes in Canada and the US are still emerging.
However, building owners, particularly those with larger portfolios should be [at a minimum] preparing themselves by understanding the standards, tracking the provincial and national regulations, measuring and monitoring their energy and carbon emissions and training their facility, portfolio and energy managers. At a maximum, they should be developing an energy management strategy and program that integrates carbon considerations into their long-term capital planning processes.
Understanding possible planning and zoning restrictions, municipal by-laws and the selection of best possible renewable energy technologies to suit the owner, location and building type could be part of such a strategy and program.
It is obvious we can do a better job in understanding and communicating the value of sustainable, high-performance buildings to owners, operators and developers. Speaking their language and touching upon the “things that keep them up at night” – such as churn, risk management and asset value – will help. The studies, data and recommendations will come in due course.
But we also need to understand our value systems – how do we balance the functional-cost-quality-sustainability – and know where we want to place our investment? What proportion should be allocated for the enhancement of the workplace vs. the maximization of asset value vs. the operating costs?
Quality/sustainability is free
Forty years ago, when Philip Crosby wrote his ground-breaking book Quality is Free, things looked grim for North American car manufacturers. Crosby suggested a new approach. He argued that quality didn’t increase costs; it decreased them. He concluded that Quality is free. He showed that ignoring quality in the profit equation also ignores the cost of returns, rework, disaffected clients, loss of corporate reputation, increased operating costs, reduced sales, reduced profitability and reduced competitiveness. Investing in quality, said Crosby, paid back richly with dividends of lower cost, higher profit and increased competitiveness.
The same can be said for sustainable buildings - we can show that making these investments will also pay back with higher profit, increased competitiveness, reduced risk and enhanced asset value.
Vince Catalli, B. Arch., MRAIC, LEED AP is Sustainability Services Leader, Eastern Ontario, MHPM Project Managers Inc. Ralf Nielsen, B.Sc., M.E.Des, PMP, LEED GA is Director, Sustainability at MHPM Project Managers Inc.
