By Dave Pogue
CBRE, Global Director of Corporate Responsibility
Editors' Note:¬†In early¬†October, an engaged council of architects and designers gathered at NAREIM‚Äôs Architecture and Engineering Meeting in Chicago to consider problems and debate new ways real estate may adapt to keep up with the functional and cultural needs of human life. Dave Pogue presented on how¬†environmental considerations are having a measure impact on real estate investment industry.¬†
At the turn of the century, there was little if any focus on sustainability in the commercial real estate field. In the year 2000, not a single foot of space was LEED certified, fewer than 500 buildings nationwide had earned an EPA Energy Star label, no cities had enacted any level of energy disclosure requirements, and GRESB was nearly a decade away. On the corporate side, the year 2000 also marked the first year for firms responding to GRI, CDP was formed but not yet used, and no firms were recognized as EPA Partners of the Year.
How times have changed. And how quickly! This relatively conservative, and very fragmented industry has dramatically embraced sustainability broadly and energy efficiency specifically in a way inconceivable 15 years ago. In an effort to understand the impact of this shift, CBRE sponsored a comprehensive study last year to measure the amount and geographic diffusion of green buildings in the top 30 US markets. The study, part of the CBRE Real Green Research Challenge, was led by Professor Nils Kok. Working with a team of researchers from Maastricht University, and supported by EPA Energy Star and USGBC, Dr. Kok and his team created the Green Building Adoption Index which was released earlier this year.
To conduct the study, we first identified the top 30 markets by the amount of space available for lease. The market boundaries and property size and quality characteristics, including minimum building size in each market, were determined by CBRE market experts. Publicly owned and corporate facilities were excluded. The markets included in the study contain more than 3.5 billion square feet of space and represent more than 34,000 buildings. To be considered ‚Äúgreen,‚Äù a building must have earned either an EPA Energy Star Label or full building LEED certification. We gave a five year life to a LEED certification and a two year life for Energy Star if not renewed. The first year reviewed was 2005 and the study looked at certifications earned through December of 2013.
The results were surprising to even those of us who work directly in this area and have witnessed the momentum first hand. It was no surprise that the numbers in 2005 were very low. There were a few buildings that had pursued Energy Star recognition but the practice was still not widespread or prevalent. Approximately 1.3% of all buildings were EPA labeled, representing a total of 5.5% of the total space. Even at this early date certification was primarily a large building phenomenon. LEED certification, on the other hand was barely noted. LEED EB was not yet a factor, so nearly all LEED certifications were for new buildings. Only one tenth of one percent of all buildings in the 30 cities reviewed held any type of LEED certification in 2005.
By the end of 2013, the marketplace for sustainable buildings had completely changed. Overall, the numbers for both EPA Energy Star labels and LEED certifications had skyrocketed. Nationally, more than 13.2% of all buildings now held either, or both, certifications. More surprisingly, these buildings represented 39.3% of all space in the 30 largest markets. More than 30% of all space was now energy star labeled, while 19.4% was LEED certified. Especially impressive was the adoption of LEED EB. From a literal standing start nine years ago, 15.4% of all space in these markets was now EB certified.
As expected however, the adoption numbers are not equally diffused. In five of the markets more than 50% of the space qualified, meaning in those markets it was now more likely that a particular building space would be green than not. Overall Minneapolis was the ‚Äúgreenest‚Äù city in America with an astonishing 77% of all space certified. This was followed by San Francisco at 67.2% and Chicago at 62.1%. Houston and Atlanta rounded out the top 5. Where there are winners there must also be losers. The bottom 5 cities were Pittsburgh, followed by Kansas City, Stamford, Detroit, and Baltimore with adoption rates ranging from 16.9% in Baltimore to a low of 10% in Pittsburgh.
We spent some time trying to understand why there were such differences between the cities. Several factors became quickly evident. Many were ‚Äúgateway‚Äù cities with strong investor, including global, appeal. Most included a large number of larger buildings, which tended to be disproportionately certified. Nearly all leading cities have a strong occupant demand driven by key industries such as high tech, oil and gas, creative arts, government agencies, and financial services. Most also were the site of large corporate headquarters. And finally several of them were in communities that embrace environmental stewardship and sustainable practices.
An excellent example of how these factors matter could be found in San Francisco. Certainly it is a gateway city with strong, international investor appeal. It is a dense city with many large buildings. The occupant demand for sustainable locations is very strong from a mix of tenants, including especially high tech, led by Google, Salesforce, and LinkedIn etc. And finally, the community has a strong tradition of environmental stewardship. Taken together these factors all contribute to the strong showing of San Francisco.
A separate example could be made for Houston. Several of the same factors, such as being a gateway city, strong investor demand and existence of many big buildings are present here. What is different however is the nature of the tenant demand. Oil and gas dominate this market and those firms have aggressively embraced green buildings as a way to demonstrate their concern for environmental stewardship, even while their primary business activities are criticized for being at the nexus of the carbon emissions issue.
Pittsburgh, number 30 on our list, presented more of a complex outcome. Only 1.8% of all buildings qualified for a green label, representing only 10% of the square footage. Each of those numbers was by some measure the lowest among the reviewed cities. What is interesting however is the fact that the Pittsburgh community embraces sustainability in their public and corporate real estate. An important factor we now understand is that much of the Pittsburgh rental supply is located in older, historic buildings that due to design features have not been able to qualify for certification. Notable however, this market is relatively small so the actions of a few key buildings can make a significant difference. In our review we came to understand that several large properties are currently pursuing LEED certification. Once gained that would have a major impact on the numbers there. What became apparent in the study was that each community offered a somewhat different path on this journey.
We will be updating the study next year which will give us the opportunity to more closely look at a few issues. Will some of these markets have reached a saturation point and will now level off? We are also interested in taking a closer look at those cities that have enacted energy disclosure regulations over the past several years to see if the adoption curve is in any way influenced by that factor. In addition, we will look more closely at sub-market data in several of the cities to determine if the diffusion is greater in different parts of those markets. Also, we will be doing a more detailed review by building size to determine where certification seems to matter most. And finally, we will be making better use of the CBRE market researchers to gain more nuanced insights into the real estate and occupant makeup of the individual markets to better comment on and predict future behaviors in all of the markets.
To view¬†CBRE's Green Building Adoption Index full report, click here.¬†