The retail industry has lagged behind the sustainability curve for some time, but is now quickly catching up as developers, landlords, and tenants seek to “green” their retail facilities to realize operational gains, demonstrate environmental stewardship, and capture increasingly conscientious consumers. However, because little information is available on the best leasing structure to benefit both landlords and tenants, many opportunities in retail real estate and store planning remain on the shelf.
Later this year, the U.S. Green Building Council will launch Leadership in Energy and Environmental Design (LEED) ratings for retail facilities to help illuminate best practices in the retail real estate market. Contrary to common belief, greening the retail building market involves much more than buildout; for example, it encompasses site selection, structuring of a green lease, tenant-space buildout, operations and maintenance, and communication strategies.
Shopping centers comprise 7.2 billion square feet (669 million sq m) of space in the United States, and retail companies spend close to $20 billion annually on energy. Studies and surveys confirm the connection among sustainable practices, energy savings, and shopping preference. A full-line discount retailer reducing energy costs by 10 percent, for example, can boost its net profit margins by 1.55 percent and sales by $25 per square foot ($269 per sq m). The gains are greater for an average supermarket, with this same reduction increasing net profit margins by 16 percent and sales by $44 per square foot ($474 per sq m). Restaurants benefit, too, with a 10 percent reduction in energy costs boosting net profit margins by 4 percent and sales by $17 per square foot ($183 per sq m).
Wells Fargo is pursuing collective LEED for Existing Buildings: Operations & Maintenance certification for 2,500 stores nationwide as part of its merger with Wachovia. By creating policies and procedures that use more efficient systems and environmentally responsible materials, Wells Fargo believes it can realize significant savings and provide a better indoor environment for employees and the public. For example, when a company its size reduces energy use by 5 percent, it is the equivalent of taking ten stores off the grid.
Shoppers are attracted by corporate sustainability as well. According to the 2007 Gfk Roper Green Gauge study, 74 percent of consumers say a company’s environmental practices are important when they make key decisions about where they shop, and 77 percent say these practices influence the products and services they recommend to others. In addition, some municipalities are adopting green building codes for new commercial developments that affect both developers and tenants, offering added incentive for retailers to stay on top of this trend.
Recent interviews with various retailers during creation of the Green Retail Guide—a reference book being published by USGBC to accompany the LEED for Retail rating systems in order to help project teams achieve certification—uncovered an unexpected dynamic: retail tenants said they wanted to pursue LEED certification but could not find like-minded landlords, while landlords said they were interested in sustainability but had difficulty attracting retailers excited about LEED standards.
One disconnect occurs in the way green partnerships are formed. A large retailer with environmental initiatives may not be communicating its goals clearly to the real estate team responsible for the property and signing new tenants. A dialogue among tenants, landlords, and owners is needed early in the process.
Tenants can be instrumental in educating landlords. Last fall, Chipotle Mexican Grill purchased solar panels to install at 75 restaurants. As they sought permission for the installations, Chipotle’s enthusiasm and deep commitment to sustainability helped introduce landlords across the country to new practices. While a few developers declined because they did not like the panels aesthetically, others invited the company to use even more of their roof surface for installations.
Likewise, landlords can educate tenants. Achieving LEED certification can be a challenge for landlords because of the variety of tenant needs. Sometimes the landlord supplies the tenant with nothing more than a building pad; other times, the landlord supplies a building that is a simple box with lighting, mechanical, and electrical infrastructure, and the retailer builds out the space, Developers can encourage tenants to consider green building and operations and educate them through tenant guidelines that provide information on elements like low-flow fixtures, maintenance of lighting at a certain wattage per square foot, and use of paints, coatings, and adhesives with low levels of volatile organic compounds.
A more aggressive strategy for landlords is to include use of these measures in the lease language. The negotiation process also can provide an opportunity for cross-education. If landlords incorporate energy-efficient systems, they might want to explain these systems and charge tenants more to recoup their investment. Likewise, if tenants purposefully use less water or energy, they may want to enter into an agreement to have their space submetered to receive the benefit of their efforts.
In the retail realm, the most important factor governing business success may be location: it is critical to be visible and in a locale that suits the targeted shopping demographic. Location also affects LEED points in terms of access to infrastructure, though retailers continue to select locations according to proven formulas that lead to sales.
LEED certification cannot be achieved if prerequisites are not met, such as on-site recycling, which can be difficult without landlord cooperation. In addition to encouraging landlords to provide recycling facilities on the property, tenants can discuss the benefits of other practices that achieve LEED points as well, such as improved indoor air quality that results from implementing a green cleaning policy for the facility. At minimum, tenants can request that landlords allow tenants to engage in green cleaning in their own space. Tenants also have an array of measures within their control. For example, Coldwater Creek has worked with both its millwork and carpet manufacturers to produce products with recycled content for its store buildouts.
Even if developers are not pursuing LEED certification, they can assess which sustainable criteria make sense for them to pursue on their properties. Measures such as drought-tolerant landscaping, water reuse for irrigation, low-flow plumbing fixtures, or roofs that reduce the heat-island effect contain inherent advantages. Through provision of supporting documentation, the credits for these strategies should be transferable to tenants’ LEED for Commercial Interiors applications. The most effective outcomes occur when landlords are excited about their developments’ environmental benefits and disseminate this information to tenants. When developers can point to LEED-certified stores at their properties, it increases their marketability and public presence.