While many “green” building techniques have become the norm for new construction, panelists at a recent ULI forum in Houston say significant opportunities exist for upgrading or retrofitting buildings with green systems and technology. The event, titled “The New Calculus: Technology, Energy, and Real Estate,” was organized by ULI’s Climate Change, Land Use, and Energy (CLUE) Initiative.

Houston’s historic Julia Ideson Public Library, built in 1926, has been
certified LEED Gold.
+ Going Net Zero: Hines’ La Jolla Commons
Retrofitting older buildings with the accoutrements of sustainability is imperative, said Tom Ike, vice president of Lutron, an international lighting controls firm. “If we do not address the existing-building market, we are not going to solve this,” Ike said. Focusing solely on new construction will not be enough to make the worldwide gains in sustainability that are needed.

Sustainability retrofit opportunities are deep and rich and go well beyond North America and into emerging retrofit markets that have been overlooked by some, Ike said, such as the Middle East.

“We are at an inflection point,” said Bill Sisson, director of sustainability at the United Technologies Research Center. “Corporations realize there is a lot of opportunity.”

Also, green retrofits do not have to focus on massive properties, like the 102-story Empire State Building, which was upgraded in 2011 with support from former President Bill Clinton’s Clinton Climate Initiative. Small buildings present huge numbers of sustainability opportunities waiting to be actualized in bite-sized projects. “Ninety-five percent of the commercial buildings in the U.S. are small—less than 50,000 square feet, [4,645 sq m],” said Mark Huppert, technical director at the Preservation Green Lab with the National Trust for Historic Preservation.

And, Huppert said, it is these small buildings—particularly the ones used for restaurants or grocery stores—that offer the greatest potential for easy retrofits and tweaks that can produce quick but meaningful gains in sustainability and energy efficiency. Many of the most promising properties are what Huppert calls “main street buildings,” which are mixed-use buildings, usually attached to an adjoining building, that line commercial streets everywhere.

As tenants in small buildings, restaurateurs and other small-business owners typically are so consumed by day-to-day operational decisions that sustainability issues stay on the back burner forever. An energy efficiency auditor can identify in a matter of minutes easy upgrades that can to be made, Huppert said. A few tweaks to fans, lighting, and refrigeration systems can result in enormous gains.

A key challenge to retrofitting a sizable number of older, smaller buildings is financing. Small-business owners often operate with a family-finance mind-set, knowing firsthand that any expenditure can whittle away at their household incomes, family vacations, or children’s college funds. Small-business owners often resist making outlays for sustainability because they lack the financial wherewithal.

As a promising solution, a number of utility companies have programs to assist small businesses in making these improvements, Huppert said. Plus, governmental and quasi-governmental entities, such as Fannie Mae and the New York City Energy Efficiency Corp., also provide financial support for retrofits, including a new Fannie Mae program for green retrofits of multifamily projects.

Other governmental agencies are significant players in the green retrofit and sustainable-construction movement, even beyond what is contributed by incentives, subsidies, and tax breaks. The U.S. Department of Defense, for example, is requiring that its construction projects perform to Leadership in Energy and Environmental Design (LEED) Silver levels. Green retrofits in federal buildings in the United States have been numerous in recent years as improvements to government buildings have been made.

Houston’s Julia Ideson Public Library
At the municipal level, Houston’s historic Spanish Renaissance gem, the Julia Ideson Public Library, built in 1926, has become a model of modern energy efficiency. “We talked about tearing it down for a while,” said Laura Spanjian, director of sustainability for the city. “But we didn’t. . . . We retrofitted it and turned it into a LEED Gold library.”

Failing to be green can also be costly. Older properties that have not been upgraded with retrofits to increase their sustainability will likely sell for a so-called brown discount price that will punish the seller’s bottom line. More than a dozen studies suggest that sustainable buildings command sales prices that are 10 percent higher than those commanded by unimproved buildings, according to the Green Building Finance Research Consortium. Green buildings are believed to achieve a 3 to 6 percent premium in rental rates.

“I would not want to be selling a building today that is not a high-performance building,” said Aaron Thielhorn, principal with Trammell Crow Co. “Investment capital wants to be in high-performance buildings.”

But if small businesses and mom-and-pop landlords may have trouble choking down the costs of sustainability, resistance to retrofits can also arise at large projects, said Thielhorn. Many office tenants do not want to deal with the uncertainties of retrofits and possible delays, so they opt to occupy new office space instead. Well-coordinated and seamless retrofits, similar to the one recently undertaken by Hines at One and Two Shell Plaza in downtown Houston, can be difficult to arrange without inflicting major disruption in the business operations of corporate office tenants.

One Shell Plaza
“The big investors really believe now,” said Gary Holtzer, senior managing partner and global sustainability officer at Hines. “Every day we’re seeing more and more investors ask about sustainability and energy efficiency.”

Large corporate office tenants are rejecting buildings that lack excellent green ratings and significant demonstrations of sustainability. A building without a LEED Gold ranking, for example, could be automatically scratched off the list of possible locations by many companies searching for new office space.

Office buildings with recycling resources, efficient lighting, rainwater harvesting, low-flow bathroom fixtures, on-site bicycle racks, and evidence of energy efficiency programs have a better chance of being appealing to generation Y employees.

“From a tenant point of view, it’s a recruitment tool. The younger generation has grown up with sustainability and that’s part of who they are,” Holtzer said. “They want their employer to match that.”

The rationale for demanding green office buildings goes far beyond the corporate need for recruiting a young workforce, though.

Sustainable buildings with excellent indoor air quality and healthy environments have delivered to tenant companies the impressive benefits of reduced employee absenteeism, increased workforce productivity, and a marked ability to retain employees, said Scott Muldavin, senior adviser, Rocky Mountain Institute, and executive director, Green Building Finance Consortium. “Thirty-three percent of absenteeism is related to issues with buildings,” he noted.

These health-related benefits create actual value for the underlying real estate and it can be calculated and presented to capital sources with solid credibility, Muldavin said. “It is financial. It is not soft. It’s not indirect. It’s financial.”

Other benefits aside, the typical evaluation of sustainability investment is centered on energy-cost savings. Whether it is an installation of solar panels or upgrades to heating and air-conditioning systems, decision makers consider the costs of the improvements versus the time it will take to recoup those costs. This is true for sustainable retrofits of older buildings as well as for developers who are planning new construction. Are green installations worth it?

Real estate appraisers should routinely calculate the sustainability improvements when preparing valuations, Muldavin said, in the same way a building’s location, tenant mix, or quality of design should be appraised. The sustainable value analysis should be part of investors’ acquisition analysis, used in their efforts to rebalance investment portfolios, or evaluated by landlords as they make decisions about equipment and technology expenditures.

However, the future calls for more than just saving energy. The next step could transform buildings into structures that create more energy than they use and deliver excess power back to the grid with so-called “net-zero” buildings. “Buildings are not going to be just users of energy, but sources of energy,” says Arah Schuur, acting program manager at the U.S. Department of Energy’s Commercial Building Integration Program. More on Hines’ ‘net zero’ building in San Diego.

Although the future challenges are great, progress is being made already by today’s leaders in the real estate industry to reduce carbon emissions and energy usage, said Helen Gurfel, executive director of the ULI Greenprint Center for Building Performance. She said a recent study of buildings in the Greenprint program showed year-over-year progress of an 8 percent drop in carbon emissions and a 4.4 percent reduction in energy usage and more than a 3 percent reduction in water usage.