LEED Certification and Sustainable Commercial Real Estate Development

LEED Certification Title CardLEED Certification and Sustainable Commercial Real Estate Development

By Derek Namerow, Staff Contributor

Environmentally sustainable real estate development has traditionally been perceived to be at odds with the financial motivations of architects, owners, and developers due to the generally higher up-front cost of designing and constructing “green” commercial real estate.[1] The expense of sustainable materials and construction, along with the extended planning process required to reduce a building’s carbon footprint, has the potential to deter developers from building green.[2] The U.S. Green Building Council (“USGBC”) and its Leadership in Energy and Environmental Design (“LEED”) program have successfully challenged the perception of increased cost. LEED has had a measurable environmental impact, while unexpectedly being a profit maximization tool for developers.[3]

The USGBC, founded in 1993, is a nonprofit organization with tens of thousands of member organizations and chapters with a mission to “promote sustainability in the building and construction industry.”[4] In 1998, the USGBC established LEED, a comprehensive building rating system, to measure the level of sustainability of real estate construction.[5] The USGBC has several different point-based LEED Green Rating Systems depending upon the type of construction; the most widely used system is known as the LEED for New Construction and Major Renovation.[6] The LEED system awards points based on such factors as sustainability, water efficiency, energy and atmosphere, materials and resources, indoor environmental quality, and innovation in design.[7] Today, approximately 4.6 billion square feet of real estate is LEED certified in the United States.[8]

The green building market is over $260 billion worldwide, and the already exceptional demand for green construction is projected to grow substantially in the coming years; the USGBC estimates that over $960 billion will be expended on green real estate by 2023.[9] The LEED program, while satisfying its stated goal of reducing buildings’ the carbon footprint through sustainable design and construction, has also provided many additional benefits to real estate developers, and ultimately provides a competitive advantage over non-LEED certified buildings.[10] Owners, whose commercial buildings have become LEED certified, have a much easier time attracting tenants than their conventional counterparts.[11] Class A buildings, which are generally the most prestigious commercial buildings, and therefore the most desirable to tenants, have seen a dramatic increase in green construction.[12] Although building green is not a requirement to achieve Class A status, real estate investment and management firms have noticed that “clients do not think it’s Class A unless its green.”[13] Owners of green buildings also take advantage of substantially reduced operating costs, which impact their bottom line and return on investment significantly.[14] LEED certified buildings use approximately twenty-five percent less energy as well as qualify for considerable incentives, such as “tax credits, grants, expedited building permits, and reductions in fees” further maximizing profit for owners and developers.[15] Finally, green commercial real estate can command higher rental rates and average four percent lower vacancy rates than non-sustainable properties.[16]

As sustainable real estate development continues to grow in popularity, it has exposed that, contrary to public opinion, the up-front cost of building green is only marginally more expensive than conventional construction.[17] Polls have found that individuals in the real estate industry perceive the costs of green building to be approximately seventeen percent higher; however, in reality, the additional costs amount to less than a two percent increase.[18] This marginally higher construction cost is more than made up in long-term savings and increased rental rates.[19]

While the USGBC and the LEED rating system is at the forefront of sustainable real estate development, green construction is still in its infancy and the industry will likely see many new players in the coming years.[20] One such startup called “The Well Building Standard” has a business model based on the LEED rating system, but aims to design buildings that “make people happier, healthier, and more productive—just by being inside them.”[21] As the green building industry continues to grow, led by the USGBC and the LEED system, the cost misperceptions will continue to decline and owners and developers will further recognize the financial benefits of sustainable development, all while achieving the USGBC’s fundamental goal of reducing the environmental impact of real estate development.

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[1] Vanessa Quirk, Where is LEED Leading Us?…And Should we follow?, ARCH DAILY (Apr. 23, 2012), http://www.archdaily.com/227934/where-is-leed-leading-us-and-should-we-follow.

[2] Id.

[3] Corey Whelan, Building Certification: What Does LEED Really Mean? CBS DFW (Apr. 10, 2013, 8:00 AM), http://dfw.cbslocal.com/2013/04/10/building-certification-what-does-leed-really-mean/.

[4] USGBC History, U.S. GREEN BUILDING COUNCIL, http://www.usgbc.org/about/history

[5] Anthony DeLaPaz, LEED Locally: How Local Governments Can Effectively Mandate Green Building Standards, 2013 U. ILL. L. REV. 1211, 1223 (2013).

[6] Id.

[7] Supra note 3.

[8] Patrick Clark, This Is Your Office If Ex-Goldman Twins Get Their Way, BLOOMBERG BUSINESS (Oct. 23, 2015, 8:00 AM), http://www.bloomberg.com/news/articles/2015-10-23/your-office-building-might-save-your-life.

[9] The Business Case for Green Building, U.S. GREEN BUILDING COUNCIL (Feb. 10, 2015), http://www.usgbc.org/articles/business-case-green-building.

[10] Id; Whelan, supra note 3.

[11] William Pentland, The Brilliant Economics of Green Buildings, FORBES MAGAZINE (Mar. 18, 2012, 11:45 PM), http://www.forbes.com/sites/williampentland/2012/03/18/the-brilliant-economics-of-green-buildings/.

[12] Id.

[13] Id.

[14] Supra note 9.

[15] Id.

[16] Id.

[17] Nora Knox, Green Building Costs and Savings, U.S. GREEN BUILDING COUNCIL (Mar. 25, 2015), http://www.usgbc.org/articles/green-building-costs-and-savings.

[18] Id.

[19] Id.

[20] Patrick Clark, This Is Your Office If Ex-Goldman Twins Get Their Way, BLOOMBERG BUSINESS (Oct. 23, 2015, 8:00 AM), http://www.bloomberg.com/news/articles/2015-10-23/your-office-building-might-save-your-life.

[21] Id.

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