On August 14, 2003, the northeastern United States and parts of Ontario were paralyzed by a sudden blackout that stopped 50 million people in their tracks. From New York City to Toronto to Detroit, computers crashed, air conditioners shut off and thousands of homes and businesses were plunged into darkness. Millions of workers evacuated their offices, descending long flights of stairs because elevators had stopped working. Others, less fortunate, were trapped in elevators and on subways for hours. The economic cost: billions of dollars.
While capacity was not the culprit, the blackout – like the recent California power crisis – has spurred discussions within the real estate industry about energy strategies. That sharpened focus has, in turn, intensified interest in the concepts and strategies associated with "green buildings."
What are "Green Buildings"?
Green buildings are structures that incorporate environmentally-sensitive building practices. For example, a green building might reduce electric consumption through the incorporation of energy-efficient appliances and fixtures, such as high-performance windows. Faucet aerators, water-conserving toilets and low-maintenance landscaping are strategies commonly implemented to conserve water.
In their initial construction, green buildings often contain a large amount of recycled materials. Flooring, doors and cabinets may be salvaged from demolished or rehabilitated buildings. Drywall and other construction materials may be composed of recycled content. Construction waste may be re-used as landfill, diverting large portions of refuse from waste disposal sites. Similarly, green buildings may incorporate rapidly renewable materials like bamboo instead of slow-growth wood.
Thoughtful design can also play a large role in green buildings. A building that is properly situated can reduce energy requirements by relying on the sun to satisfy some of the heating requirements, on shading to cool the building and on natural light to reduce the need for artificial light. Green buildings may also contain features that permit limited operation of certain building systems during a power outage or an emergency.
The Economic Debate over Building Green
The debate over green buildings within the real estate industry mostly centers on whether the savings generated from a reduction in operating costs outweighs the initial cost of implementing relatively new, and sometimes untested, green strategies. While few would doubt that green strategies can produce savings, the extent of those savings is not altogether clear.
Two other economic issues factor in the green debate. First, capital sources for real estate are inherently conservative in their underwriting, creating an impediment to implementing untested green strategies. Second, while the upfront costs of implementing green strategies are borne by the owner/developer, they are often passed on to the tenants through increased rents and other escalations. If the tenant does not subscribe to the owner's analysis of the offsetting savings of operating expenses, the project's success is at risk.
As green strategies become more commonplace and established these disconnects will steadily decrease.
Revenue-side advantages of green buildings are even more difficult to quantify. A pleasant, environmentally sensitive atmosphere – and the cache of a visibly modern, technologically advanced building – may attract tenants. But the attractiveness of these features may be supported only by anecdotal evidence. The Leadership in Energy and Environmental Design ("LEED") system, implemented by the United States Green Building Council ("USGBC"), makes some of these intangible benefits more concrete. LEED creates a "points" system to evaluate the environmental quality of a particular building. The USGBC hopes LEED will become a recognized way to confer prestige on environmentally sensitive buildings, with attendant market advantages.
Because of these uncertainties, the market for green buildings has been limited largely to owner/users with a particular commitment, corporate or otherwise, to the concept of green buildings.
Inducements for Green Buildings
Recognizing that the market may not, by itself, support environmentally sensitive strategies, legislation has been passed in many jurisdictions to stimulate development of green buildings. One such inducement is the availability of tax credits. In New York, an eligible taxpayer may claim a tax credit of up to $3.75 per square foot for interior work and up to $7.50 per square foot for exterior work if a structure meets certain environmental requirements. In addition, certain percentages of the cost of installing solar panels and similar equipment may be claimed as tax credits. Arizona, Hawaii, Idaho, Maryland, Massachusetts, New Jersey and Oregon have implemented comparable packages.
Advocates of tax credits and other incentives predict not only direct results, but a longer-term "chain reaction" as well. Under this theory, offering incentives for the development of green buildings can be expected to increase the number of green buildings. Then, as owners and developers become more familiar with the technology and methods involved, and the benefits become better known, the numbers may grow further. This expansion in market participation may also lead to economies of scale and in a reduction in the higher up-front costs currently involved in green buildings.
The Future of Green Buildings
As green building strategies mature, the debate will likely become more nuanced. When the economic costs and benefits of particular green building strategies are more clearly identified, the discussion is likely to focus more on specific, targeted considerations. For example, in light of the 2003 blackout and the California energy crisis, tenants may be more willing to pay a premium for green building systems and features (such as solar power lights) that will allow for limited operation of particular building systems during emergencies. To keep pace, lease documents may be recast to allow the landlord to recover the cost of specific green systems and features that enhance reliability and redundancy of building operations – ensuring building performance and safety in the event of blackouts or other utility interruptions. Limited application of green technologies may, in the near term, be more realistic than broader strategies.
Clearly, the events of the last several years have demonstrated the need for a comprehensive review and consideration of the country's energy strategies. It may also presage practical consideration of green buildings to deal, more immediately, with some of the same issues.