Development projects have become an increasingly complex challenge to navigate: owners and investors face hundreds of decisions to create durable, profitable projects that can pass the test of time. Justifying each choice increasingly hinges on balancing the cost versus return on investment (ROI). Compounding these tough decisions is the growing demand to quantify the environmental and social returns on investment of a project’s sustainability efforts to reduce energy use and carbon emissions.
As is common in the infrastructure and regulatory world, economic analysis is increasingly being used in the real estate industry to provide quantifiable insights into the long-term outcomes of design and investment strategies related to owner, occupant, and community impacts. Those efforts have been further supported by a deep and growing pool of scientific data and economic literature supporting the valuation of intangible components of real estate projects, including the value of social, environmental, and occupant benefits associated with better design strategies.
For example, the indoor environment is gaining recognition as an important factor in asset performance and occupant benefits. There is an innate understanding that design elements such as lighting and the use of natural materials in a workplace can influence employee health, satisfaction, productivity, and creativity, yet those benefits have traditionally been difficult to quantify.
To that point, the U.S. General Services Administration commissioned the Oak Ridge National Laboratory to put “socially driven HVAC” to the test at the Federal Building and U.S. Courthouse in Phoenix to identify quantifiable results. The study revealed that allowing occupants to use mobile technology to request indoor temperature changes resulted in an 83 percent increase in thermal comfort for occupants. When this study was expanded to large commercial buildings, the occupant-controlled temperature also demonstrated energy savings of 20 percent (cooling) and 47 percent (heating).
Such examples show a growing appetite to understand both the framework of sustainable measures that may be incorporated into building designs and the quantitative impacts of those measures. More than ever, evidence-based design decisions are integral to approaching investments in new construction and retrofits to identify both ROI and potential environmental, social, and governance (ESG) risks.
By using the best available building science data and marrying it with economic evaluation, decision-makers can better understand where they can achieve the most beneficial outcomes for their investment. How do those investments affect the cost of the project over its life cycle? What benefits are created from those investments, and how do they accrue to key stakeholders?
“Increasingly, it’s being recognized by industry leaders that poorly performing buildings produce impacts that represent material risk to the long-term interests of building owners. Architecture firms such as HOK and Gensler and owners such as Brookfield Properties, Lendlease, and Prologis have discovered that sustainable and resilient design features can produce social, environmental, and financial benefits for tenants and host communities, and can be valued objectively and defensibly with economics,” says John Williams, CEO and chairman of Autocase, which provides a cloud-based economic analytics tool. Autocase, a ULI Greenprint Innovation Partner, uses evidence-based research to understand how changes in the workplace can have a direct impact on both employee well-being and bottom-line financials. The company specializes in providing metrics that allows project stakeholders and policymakers to better understand a project’s impact using a metric that everyone understands—dollars and cents.
Applying Apples-to-Apples Comparisons
Real estate companies often use reporting platforms, such as GRESB, GRI, or CDP, to disclose efforts and progress toward ESG efforts. ESG reporting allows a project manager, investor, or decision-maker to compare the risk and return from an investment. However, reporting remains a voluntary effort, with no single uniform reporting standard. As such, there is variability in the information available to investors and stakeholders, which makes it difficult to fully understand and compare value generated from multiple project options. A standard set of valuation methodologies is needed to better evaluate the investment options related to ESG impacts.
Autocase is working to deliver those needed apples-to-apples comparisons with its quantifiable economic analysis. Specifically, Autocase uses triple-bottom-line cost benefit analysis (TBL-CBA) to measure relative sustainability (relative to building standards or base case design) with a standardized methodology that can be embedded into engineering, architecture, and design processes such as building information modeling (BIM). Investments and project evaluations are conducted with location-specific information underpinning the business case using the Autocase cloud, which includes data on nearly 5,000 municipalities in North America. Autocase is able to tap into location-specific data for myriad factors, such as utility rates, power grid emissions intensity, property values, wage rates, water scarcity, temperature, rainfall, and climate change projections, among others, all of which aid in providing insights on how the same investments may yield different outcomes from one region to the next.
The TBL-CBA has been used by governments for numerous municipal infrastructure projects since 2012, and now more of the real estate sector is starting to see the value in these calculations as well. Cost-benefit analysis is being used to determine ESG returns on investment accruing to stakeholders. “This data is the basis of a new form of development capital through which value is traded between project owners, occupants, and the host community to produce the greatest overall good,” Williams says.
As part of a pilot, Autocase analyzed Prologis’s International Park of Commerce in Tracy, California, to quantify the true benefits of a sustainable and healthy building. They identified six categories where the green warehouse exceeded code—indoor water use reduction, outdoor water use reduction, energy use, regional materials, indoor environmental quality, and recreation space. The task was to put a dollar value on the benefits from each category over the 25-year life span of the facility and associate these benefits correctly to each stakeholder group. Autocase used its cloud-based software to deliver a TBL-CBA to:
- Quantify the full life-cycle costs of these investments,
- Quantify the additional social and environmental impacts, and
- Assign a dollar value to those impacts.
Environmental impacts from Prologis’s green warehouse and site investments totaled $110,000, reflecting the net benefits from avoiding carbon emissions and air pollutants by reducing energy use from the electricity grid. Co-benefits from the pilot project also are derived in the form of social impacts, where increases in available green space space can lead to substantial public health benefits, reductions in flood risk, and uplifts in local property values. Social benefits stemming from Prologis’s innovative investment resulted in a net impact of $144,000 to the community. The cumulative net dollar value associated with assessing the financial, environmental, and social impacts was determined to be $1,573,000, reflecting the social return on investment of their sustainability strategies. Prologis has since expanded its application of to its entire North American real estate portfolio.
Analysis Shapes Urban Planning
TBL analysis can help cities at risk of natural disasters to better understand the economics and value behind mitigating risk factors such as drought, flooding, and heat island effect. With many years of experience, Autocase has applied the same economic analysis lens to public infrastructure and urban planning projects to help ensure that cities are factoring in a variety of issues and possibilities before making major decisions.
For example, the city of San Antonio and the San Antonio River Authority worked to develop a comprehensive plan to redevelop the Brooks area of the city, the location of a former military center. The goal was to create a redevelopment plan for Brooks that would serve as a catalyst for economic development. The city of San Antonio’s SA Tomorrow comprehensive plan identified place types, goals, and objectives, and Autocase provided an analysis to help quantify the benefits of that plan. Its analysis of the recommended economic development scenario identified an estimated $60 million in social and environmental benefits associated with factors such as flood risk, heat mortality, and water quality while reducing gray infrastructure costs. On one specific line item, Autocase’s analysis of using green complete streets to manage stormwater versus a strategy that used more concrete and managed turf showed a net benefit of $7.8 million.
Autocase also conducted a CBA of the new terminal building at New York City’s LaGuardia Airport with the design and planning project team. One aspect of the effort included running an analysis on Leadership in Energy and Environmental Design (LEED) credits across a broad variety of design/investment elements, such as optimizing energy performance, indoor environmental quality, and water efficiency, while a second aspect related to a cool roof analysis supporting an Envision Platinum certification. For example, in accordance with the LEED credit for Heat Island Reduction, the airport designers planned to replace the conventional gray roof with a cool roof that has a higher solar reflectance index (SRI) value—increasing from 79 to 81. Autocase estimated a benefit of reduced urban heat island effect attributed to the cool roof investments totaling a net present value of $397,196 over 36 years.
Specifically, TBL-CBA output can be used by architecture, engineering, and construction firms and public and private stakeholders in their project planning, design, and construction processes to monetize site-specific social and environmental externalities. It provides defensible and transparent business case analytics to quantify the value-add generated by project designs, thereby allowing for prioritization of projects that generate the highest return on investment. It also allows the user to generate business cases that target specific company or local policies such as carbon emission reductions. For some decision-makers, having a quantifiable analysis—a strong business case—to support that investment can not only aid in ESG reporting, but also help drive investment in those features that can generate more positive outcomes for the people, planet, and stakeholder profits.
Autocase is one of ULI’s Greenprint Center for Building Performance 2020 Innovation Partners. The Innovation Partner program is a collection of noteworthy technology companies and service/product providers moving the needle on energy and sustainability innovations.