© JR DeLisle, Ph. D.

What Is Sustainable Development?Benefits & Opportunities for Developers and Communities

James R. DeLisle, Ph.D.February 5, 2008

© JR DeLisle, Ph. D.

Presentation Overview• Sustainable Real Estate

– Value Proposition– Most Fitting Use– Holistic Approaches– Alternative Metrics

• Sustainable Real Estate Movement– Nature: Structural shift, with cyclical risks– Need: Strong emotion, less empirical

• Issues– Risks– Barriers– Opportunities

© JR DeLisle, Ph. D.

Overview• Key Questions

– What is Sustainable Real Estate?– What are Green Buildings?– What, When, Where Why and How go Green?

• Our Challenges in Moving Toward Sustainabilty– Growing right with economic, environmental, ethical and social challenges– Responding to challenges of Global Warming and environmental degradation– Striking balance between needs of current and future generations– Developing customized, collaborative, inclusive values– Ensuring effectiveness and efficiency – Approaching the issue from a holistic perspective

© JR DeLisle, Ph. D.

Sustainable Real Estate• Definition of Sustainable Real Estate

– The use of scarce real estate in an efficient, economic, equitable and socially responsible manner that provides an acceptable –if not optimal– fit between users of space and the space that is produced that has an existing and enduring effective demand and balances the needs of current and future generations.

• Evaluative Criteria– Efficient, economic, equitable and socially responsible uses– Achieves goodness-of-fit between users and space– Satisfies current and future demand for space– Balances needs of current and future generations

© JR DeLisle, Ph. D.

The Real Estate Sustainability SpectrumWhat are the three key dimensions of Real Estate?

Linkages

Environment

Static

Sustainable….

S…. E…. L….

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How Look at Real Estate?

• Perspectives

• Dimensions: space-time, money-time

Space-time

Money-time

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Highest and Best Use vs. Most Fitting Use

• DefinitionThe reasonably probable and legal use of vacant land or improved property, which is physically possible, appropriately supported, financially feasible, and that results in the highest value” as of the date of the appraisal.

• Criteria– Legal– Physically possible – Reasonably probable– Financially feasible– Maximize value

• Most Fitting Use– “Satisficing or Optimizing” vs. Maximizing Value

© JR DeLisle, Ph. D.

Interdisciplinary Approach to Sustainability

Time

$

Portfolio Mgmt.Asset Mgmt.LeasingTenant ImprovementsTenant RelationsProperty Mgmt.Accounting/ReportingEngineeringFinancial Mgmt.

Construction Mgmt.Quality ControlsProject Mgmt.Architectural OversightCost Mgmt.Construction FinancingInspectionsPre-leasingReleasesFinal Inspection orSourcing if Existing

FeasibilityMarketabilityAppraisalEngineeringArchitecturalEnvironmentalLegalCost EstimationNegotiations

Hold/Sell AnalysisMarketingValuationBuyer SelectionBroker ManagementNegotiationsClosing

Planning Acquisition/Production

Operation

Disposition/Redevelop

© JR DeLisle, Ph. D.

Real Estate Valuation Model

Cost

Value

Income

* ReturnReturn = Income/Value

Value = Income/Return

Income = Value * Return

© JR DeLisle, Ph. D.

Frontdoor Model Toward Sustainable Real Estate

Land

Hard & Soft Costs

TRCm

TRCm

NIr

* Wcc

/ NIR

GIr

© JR DeLisle, Ph. D.

Backdoor Model Toward Sustainable Real Estate

Land

Hard & Soft Costs

TRCj

TRCj

NIm

* Wcc

/ NIRGIm

Market

RCR

© JR DeLisle, Ph. D.

Green Building and Project Finance

TRCm

NIr

* Wcc

/ NIR

GIr

SiteSelection

Materials& Labor

Financing

Risk/ReturnHurdle

OperatingEfficiency

LeaseStructure:WhoCaptures?

D/E

© JR DeLisle, Ph. D.

Sustainable Real Estate Value• Value:

– cost of materials– costs of construction– cost of financing– cost of fees

• Income– gross income– net level, pattern

• Return– absolute vs. risk-adjusted– attribution to income vs. value

© JR DeLisle, Ph. D.

Sustainability: Irretrievable Commitments

Land Value

ImprovementCost

TRCj

NOIn

Wcc

NOIeWccTRCje

Demolition & Lost Income

ImprovementCost

* Wcc

NOI gap

© JR DeLisle, Ph. D.

Sustainable Business Models

• Function: ( Quantity of Business + Cost of Business + Quality of Business + Continuity of Life)

(NOI)

(NOI)

(NOI)

(NOI)

(NOI)

© JR DeLisle, Ph. D.

Green: What it is & What’s Driving It?

• Background– Historical

• Cyclical phenomenon tied to energy costs• Lessons Learned

– Recent• Global Warming Catalyst tied to environment• Social Responsibility

• Urban Environmental Issues– Energy Depletion– Greenhouse Gases– Climate change– Stormwater Control– Urban Heat Island Effect– Transportation: Congestion and Pollution

© JR DeLisle, Ph. D.

Green: Where’s it Going?

• The Green movement is a Temporary Phenomenon…

• 500 + Corporate & Institutional Investors

• Major Interest Groups/Catalysts– US Green Building Council (USGBC)– Mayors 2030 Challenge – CSR: Corporate Social Responsibility– SRI: Socially Responsible Investing– RPI: Responsible Property Investing– Green Finance Consortium– Property Insurance

0%10%

20%30%40%

50%60%

StronglyAgree

Agree Neither Disagree StonglyDisagree

Corporate RE Executives

© JR DeLisle, Ph. D.

Green Buildings: Diffusion of Innovation

Rising EnergyCosts

Profit/Return Rising

Requirements

Deg

ree

of G

reen

Growth Maturity Decline

GlobalWarming

Innovation

CorporateSocial

Responsibility

0

1000

2000

3000

4000

5000

6000

7000

95 96 97 98 99 2000 1 2 3 4 5

Growth in Membership in USGBC

© JR DeLisle, Ph. D.

Green Communities: Competitive Positioning?

http://www.sustainlane.com/us-city-rankings/seattle.jsp

© JR DeLisle, Ph. D.

Other Drivers toward Sustainability• Corporate Social Responsibility• Socially Responsible Investing• Green Building Finance Consortium• Graaskamp on Social Responsibility:Man is the only animal that builds his terrarium about him as

he goes and real estate is the business of building that terrarium. So we have a tremendous ethical content, tremendous social purpose. The student is looking for a field in which entrepreneurship and a way of life can be integrated into social purpose. We like to argue that the entrepreneurship of tomorrow is going to be the individual who can inventively implement social policy.

© JR DeLisle, Ph. D.

Corporate Real Estate: Value Creation

Optimize

Minimize

Tactical Strategic

Maximize

Situational

Enduring

Enhancing

RE

Cos

ts

Perspective

© JR DeLisle, Ph. D.

Why are companies Going Green

Costs of Goods

Bus

ines

s Act

ivity

Gross Revenues

Real Estate Costs

Labor

Profit

Time

Profit

Corporate Business Model

Corporate Social Responsibility

© JR DeLisle, Ph. D.

Green Cost Savings• Green Cost Savings

• Context– Energy = 30% of operating costs– Operating costs = 39% of real estate costs– Real estate costs = 10-15% of business costs– 20% energy savings = .2-.6% of business costs

19%

0%

6%

3%1%

4%

28%

4%

6%

3%

26%

Electricity

Oil

Gas

Water

Sewer

External Building

Interior Systems

Roads & Grounds

Utility & Central Systems

Treatment & Envronmental Systems

Janitorial

Energy = 30%

© JR DeLisle, Ph. D.

How Green? LEED Certification

• LEED: What it is?– Leadership in Energy and Environmental Design (LEED) Green

Building Rating System™ – Benchmark for the design, construction, and operation of high

performance green buildings

• LEED Categories– LEED CI: Commercial Interiors– LEED CS: Core & Shell– LEED EB: Existing Buildings– LEED NC: New Construction

© JR DeLisle, Ph. D.

LEED New Construction• Innovation in Design 5

• Sustainable Sites 14

• Materials & Resources 13

• Energy & Atmosphere 17

• Water efficiency 5

• Indoor Environmental Quality

15

– Exceptional Performance in Achieved LEED-NC Credit– Innovation in other Green Building Categories

– Reuse existing building/sites– Protect natural and agricultural area– Reduce need for automobile use– Protect and/or restore natural sites– Develop only appropriate sites

– Use materials with less environmental impact– Reduce & manage waste– Reduce amount of materials needed

– Establish energy efficiency and system performance– Optimize energy efficiency– Encourage renewables and alternative energy sources– Support ozone protection protocols

– Reduce quantity of water needed for building– Reduce municipal water supply and treatment burden

– Establish good air quality– Eliminate, reduce and manage the resources of indoor air

pollution– Ensure thermal comfort and systems controllability– Provide for occupant connection to the outdoor environment

Geddes, EDA W NV

© JR DeLisle, Ph. D.

Other Approaches to Sustainability

• ABGR: Australian Building Greenhouse Rating, AUS 2005• BASIX: Building Sustainability Index, NSW 2004• BEPAC: Building Environmental Performance Assessment Criteria, Canada 1993• BREEAM: Building Research Establishment Environmental Assessment Method, UK 1990• CASBEE: Comprehensive Assessment System for Building Environmental Efficiency, Japan

2004• CEPAS: Comprehensive Environmental Performance Assessment Scheme, HK 2001• EMGB: Evaluation Manual for Green Buildings: Taiwan 1998• Energy Star: USEPA & DOE Rating on Energy Efficiency & Indoor Env.• EPGB: Environmental Performance Guide for Building, NSW• GHEM: Green Home Evaluation Manual, China 2001• GreenStar: Green Building Council, AUS• HKBEAM: Hong Kong Building Environmental Assessment Method, HK 1996• NABERS: National Australian Building Environmental Rating System, AUS 2001• SBAT: Sustainable Building Assessment Tool: South Africa

Ding, Grace 2007

© JR DeLisle, Ph. D.

Primary Research: LEED Market Penetration

© JR DeLisle, Ph. D.

LEED Platinum: New Construction Example

TotalNumber

= 35

© JR DeLisle, Ph. D.

Market Share by Type by LEED Rating

36 208 211 3

Total742435

325458

Type Platinum Gold Silver Bronze TotalCommercial Interiors 19% 14% 18% 0% 16%Core and Shell 6% 6% 5% 0% 5%Existing Building 19% 9% 5% 0% 8%New Construction 56% 71% 73% 100% 71%Total Number 100% 100% 100% 100% 100%

© JR DeLisle, Ph. D.

Existing Building : Share with Points/CategorySustainable SitesSite Selection 100%Green Site Plan 83%Green Site - Chemicals 83%Vegetated Ground Cover 78%Native or Adapted Vegetation 78%Bicycle Friendly 72%Public Transportation Access 61%Parking Capacity 56%Urban Redevelopment 50%Non-Roof 50%Light Pollution Reduction 50%Alternative Fuel Refueling Stations 44%25% Runoff Reduction 44%Treatment 33%Heat Island Reduction, Roof 6%

Efficiency10% Water Use Reduction 94%50% Water Efficient Landscaping 78%20% Water Use Reduction 72%No Potable/Irrigation Landscaping 44%Innovative Wastewater Tech 22%

Energy & AtmosphereMaintenance Contracts 100%Compr. Pre.Maint.Program 100%Additional Ozone Depletion 72%Optimize Energy Performance 56%Measurement & Verification 1 56%Continuous Commissioning 50%Measurement & Verification 2 44%Emission Reduction Reporting 33%Green Power 28%Measurement & Verification 3 17%Renewable Energy 11%

Materials & ResourcesContinued Existing Building Use 94%Construction Waste Manage. 83%Occupant Recycling 78%Recycled Content 72%Certified Wood 67%Resource Reuse 61%Local/Regional Materials 61%Rapidly Renewable Materials 33%

Indoor Enviromental QualityGreen Entryway Systems 94%Green Pest Management\ 94%Green Disposable Products 82%Construction IAQ Plan 78%Green Cleaning and Housekeeping 78%Green Mixing Areas 67%40% Views 67%ASHRAE 62-1999 67%Outdoor Chemical Storage 61%Compliance with ASHRAE 55-1992 61%Thermal Comfort Monitoring 56%CO2 Monitoring 50%Green High Volume Copying 50%80% Views 50%65% Daylight 50%Increase Ventilation 11%45% Controllability 6%90% Controllability 6%

Innovation & Design ProcessAccredited Professionals 100%Sustainability Education 94%Innovation 1 72%Innovation 2 50%Innovation 3 28%

Efficiency

Energy & Atmosphere

Materials & Resources

Indoor EnvironmentalQuality

Innovation & Design Process

Sustainable Sites

© JR DeLisle, Ph. D.

Distribution of LEED Certification by Level

020406080

100120140160180

Platinum Gold Silver Bronze

Commercial InteriorsCore and ShellExisting BuildingNew ConstructionLEED

Share:Rating by Type

© JR DeLisle, Ph. D.

Geographic Dispersion by Type of Green Activity

© JR DeLisle, Ph. D.

Sustainable Building Assessment Tool (SBAT-1)

Gibberd, J 2003

© JR DeLisle, Ph. D.

Responsible Property Investing (RPI)• Overview

– Nature: going beyond compliance with minimum legal requirements

– Goal: better manage the risks and opportunities associated with environmental, social, and governance issues in property investing.

– Rationale: reduce risk and pursue opportunities while addressing the challenging issues facing present and future generations.

• Scope– A variety of efforts to address ecological integrity, community

development, and human fulfillment in the course of profitable real estate investing.

– Level: Portfolio, asset, or property management

© JR DeLisle, Ph. D.

Drivers and Barriers to RPI

Concern for risk and return 4.6Opportunities to outperform 4.3Business advantage 4.2Moral responsibility 4.1Voluntary codes of behavior 3.9Internal leadership 3.9Cost avoidance 3.9Customers 3.7Employee recruitment/retention 3.2Investors 3.1Peer activity 2.8Stakeholder pressure 2.7

Insufficient financial performance 3.9 Insufficient tenant demand 3.7 Lack of products to invest in 3.4 Lack of information 3.3 Incompatible with fiduciary duty 3.2 Legal Restrictions 2.7 Internal resistance 2.4

Drivers Behind RPIBarriers to RPI

Source: RESPONSIBLE PROPERTY INVESTING:

A Survey of American ExecutivesGary Pivo, 2007

© JR DeLisle, Ph. D.

Green Building Finance ConsortiumFounding Members

– National Association of Realtors– BOMA International– CB Richard Ellis– City of Seattle– Kennedy Associates Real Estate

Counsel– Cherokee Investment Partners– Swinerton Builders, Inc.– Davis Langdon– EPA EnergyStar Division– Northwest Energy Efficiency Alliance– Revival Partners

Collaborating Groups

– The Appraisal Institute– Royal Institute of Chartered Surveyors– CoreNet Global– American Institute of Architects– World Business Council for Sustainable

Development– Commission for Environmental Cooperation– Vancouver Valuation Accord– U.S. Green Building Council– High Performance Building Protocol Committee– Lawrence Berkeley National Laboratories– ASHRAE 189P High Performance Building

Standards

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GBFC Mission/Challenge– Structure

• Independent organization• Collaborative Approach

– Mission/Challenge• Enable Private Sector Investment

• Appropriate recognition of the “value” of Green Building Investment

• Development of Property Specific Process

• Focus on risk assessment – downside and upside

• Greater emphasis on existing buildings

© JR DeLisle, Ph. D.

Underwriting Sustainable Buildings: GBFC

• Underwriting QuestionAre the benefits of investment sufficient to compensate for the

risks undertaken?”

• Standard– Fiduciary purpose, not tactical or strategic

– Independent (3rd party) testing of investment assumptions

• Approach– Value is incorporated, but the focus is risk

– Underwrite to specific investment criteria• Return Hurdles• Risk Tolerances

© JR DeLisle, Ph. D.

Institutional Investors vs. Corp. on Statements on Green

1.0 2.0 3.0 4.0 5.0

Green is temporary

Green buildings reduce greenhouse gases

My organization prefers LEED buildings

Gov can do more to promote green

Indoor environments are important

Tenants willing to pay for green

Market will go green on its own

Research justifying green is sufficient

Bottom line precludes green buildings

Developers must be forced to go green

Strongly Agree Strongly Disagree

NCREIF Respondents All Respondents

© JR DeLisle, Ph. D.

Investors & Corp Respondents: Green Decisions

1.0 2.0 3.0 4.0 5.0

Green approaches are too fragmented

Easy to quantiy "greeness"

LEEDs will be standard

KPIs must reflect green

Green is continuum not Y/N

Decisions consider Econ & Non-econ

Need incentives for existing buildings

Green should be part of CSR

Green in 3rd party contracts

Once green, easy to maintain

Strongly Agree Strongly Disagree

NCREIF Respondents All Respondents

© JR DeLisle, Ph. D.

Biggest Barriers: Corp vs. Inst. Investors• Efficacy and Cost-effectiveness

– The party paying not one benefiting– Building payback is short-term– Office space is a commodity product– Hold periods too short to justify

• Knowledge– Too many unknowns– Lack of long term benchmarking– Lack of demand by clients/tenants– Lack of research & public education

• Commitment– Retrofitting existing isn’t justified– Tenants don't know or care – When tenants decide, developers will follow

• Education– Requires new methods/education– Educating the public on the pros and cons– Cost/benefit analysis

Institutional Investors

• Costs, costs• Perception of higher costs• Must be financially feasible

• Knowledge of benefits to various parties

• Lack of knowledge

• Lack of incentives• Investor buy-in• Investor interest

• Costs then education• Education of public

© JR DeLisle, Ph. D.

Greatest Opportunities: Corp vs. Inst. Investor• Education

– Consistent, fact based, education– Education of managers & investors– Identifying "low hanging fruit"

• Competitive Advantage– First mover advantage– Better work environment; productivity– Marketing as customers demand green

• Spatial Impacts– Improved performance and operations– More comfortable building & operation

• Environmental Benefits– Sustainability & ecology effects– Reduce resources; energy savings– Carbon reduction, waste reduction

Institutional Investors• Image• Self-sustaining, renewable

energy

• Good PR, leadership• Marketing, Market Advantage• Good public policy• Lower operating costs

• Cost savings • Increased productivity

• Actually improve air• Doing the right thing• Environmental benefits• Reduce carbon

© JR DeLisle, Ph. D.

Research Issues: Corporate vs. Inst. Investors• Performance

– How measure benefits?– Do studies show operational savings?– Factual data on effects, net costs– What added costs, new and existing

• Lessons Learned– What mistakes have you seen– Keep open mind and not one answer for all– How change traditional way of doing things?

• Education– Who teaches skills, materials and techniques?– Beyond materials & energy, what works?– Does green give competitive advantage?

• Approaches– Beyond LEEDS; RPI & energy star?– How create more incentives?

NCREIF

• What is real benefit?• How much does it really cost?• What is payback period?• Benchmarking; how measure?

• What interests of clients?• How be cost competitive?• How improve social benefits?

• What are clients interests?• Who is going to lead?• How quantify and justify?

• What trade-offs• How affect value?

© JR DeLisle, Ph. D.

Biggest Risks: Corporate vs. Inst. Investor• Complexity

– Too complicated, too fast– Continuing to ignore existing buildings

• Efficacy– Projected savings not recaptured– Higher costs more to maintain in long run– Tenants or users don't like the product– Too much hype, too fast; bogus case studies

• Uncertainty– Not knowing what the economic effect is– Unproven technologies that don’t work– Unexpected side effects, such as air quality

• Market Acceptance– Not Getting public buy-in/losing support– Developers spend & tenants don’t respond

• Interventions Institutionalized– Being forced with unintended

consequences– Movement entrenched in building codes

Institutional Investor• Too much, too soon• Not catch on; too complex

• Failure of untried products• Negative performance impacts• Surge in new construction

• Discussion out of hand• Too much, too soon• New technology

• Lack of tenant interest• Temporary phenomenon

• Excessive gov interventions• Too knee-jerk, high-handed

© JR DeLisle, Ph. D.

Summary• Sustainable Real Estate Movement

– Nature: Structural shift, with cyclical risks– Need: Strong emotion, less empirical

• Sustainable Real Estate– Value Proposition– Most Fitting Use– Holistic Approaches– Alternative Metrics

• Issues– Risks– Barriers– Opportunities