It's easy being green

In recent years, environmentally friendly hybrid cars have become increasingly prevalent in North America and Europe. Are green offices, home, hotels and shopping centers next? By Alison Granito

In a nation that was obsessed with mammoth, gasguzzling SUVs just a few years ago, some Americans scoffed at the notion that small, fuel-efficient hybrid cars would ever appeal to the mainstream.

But today, some best-selling models like the ecofriendly Toyota Prius have become household names and interest in hybrid cars and technology has never been greater. From high-end Lexus luxury sedans to huge Ford pickup trucks, automobile companies are retrofitting different makes and models with fuelsaving hybrid engines, which cut down on gasoline usage thanks to some help from an electric motor.

And as Hollywood celebrities increasingly strike environmentally sensitive poses behind the wheel of their Prius, hybrid cars are becoming popular for more than just their energy efficiency. Given the current price of gasoline, consumers seem willing to pay a premium for hybrids—even if they are unlikely to make it up at the pump.

But if the craze over hybrid cars is any indication, a much larger shift to a green lifestyle—in which sustainability, energy conservation and concern for the environment touches more than just life on the road—may be on the way.

Today, the children of the Baby Boom generation are moving into the workforce and becoming the main renters and buyers of home. Consequently, sustainability and a healthy environment are increasingly emerging as important factors in influencing where they work and live, according to several real estate industry observers. And as Generation X and Generation Y demand environmentally friendly offices and homes, private equity real estate firms, developers and institutional investors are increasingly looking at green developments as viable investment opportunities rather than items on an ideological wish list.

In October Starwood Capital unveiled a major commitment to build the world's first green luxury hotel chain. And in September, real estate development and investment firm Hines and the California Public Employees' Retirement System announced a joint venture to build environmentally friendly office towers; their new fund, which was capitalized with more than $120 million (€94 million) of equity, follows the successful sale of a previous green office project in Atlanta that Hines built in conjunction with the California pension fund.

“People are looking at the environment.” says Dan Rashin, who oversees Hines' green development joint venture with CalPERS. “If you see the trend in what's going on in our industry, there really is a focus on green—not only within the real estate industry but in a broader context. Specifically, what we are focusing on is tenants responding to buildings that are environmentally conscious, sensitive, sustainable, however you want to say it.

“We saw the response around the country. We specifically saw the response in Atlanta and saw we could do something that was both profitable, which is important to both of us, and good for the environment.”

It certainly helps that environmental concerns are on the political and personal radar of more and more people. But volatile energy prices are likely to continue, thereby driving further interest in green projects. At the same time, the development of accepted industry standards for green buildings has helped perk up investor interest in environmentally friendly projects.

In the US, the Leadership in Energy and Environmental Design (LEED) standards, drawn up by the US Green Buildings Council, have become the accepted industry benchmark in recent years. The LEED standards govern water savings, energy efficiency, sustainable site development, materials selection and indoor environmental quality. Buildings are ranked by designations such as gold and silver. For example, by recycling waste water or substituting local materials for those that need to be transported long distances, a building can earn points toward its LEED certification.

“In the '80s everyone wanted to have a smart building, but there was no definition of smart,” says Rashin. “One guy wanted talking elevators and another guy's smart building was all sorts of stuff behind the scenes. Essentially, anyone could call their building smart and nobody knew what that meant.

“I think having these standards and a checklist, where you can see what it means to be LEED certified or LEED gold or silver, makes it so that not only can tenants be told what that means, but it's also helpful for builders because they can say, ‘Hey, I can do this,’ and see the way to achieve the standards.”

Barry Sternlicht helped revolutionize the hospitality industry with the introduction of the upscale “W” concept, which he has likened to the Banana Republic of hotels. He may be poised to do the same thing with “1” Hotels and Residences, which his firm, Starwood Capital, is billing as the first green luxury hotel chain.

The “1” concept will build its first four hotels in the US from the ground up. Its initial offering in Seattle is expected to open in late 2008, followed by properties near Starwood-owned ski resort Mammoth Mountain in California; Scottsdale, Arizona; and Ft. Lauderdale, Florida. Its first European offering will be a renovation of a historic property in Paris. Starwood also expects the concept to enter New York, Los Angeles, Washington DC and other major urban and resort markets within the next 12 months, with a view toward having 15 hotels under construction within the next two years.

The decision to launch “1,” was driven in part by the guilt about the endless consumption in American society, according to Sternlicht.

“I could be wrong, but I think Americans are getting more socially conscious and that it's time for something like this,” says the Starwood chief. “And, I'd like to think we could do this profitably.”

“We are the biggest sinners in the world,” he adds. “I'd like to think there is some subset of a subset of people that feels this and wants to do something about it. I know I do.”

According to Sternlicht, that “something” will go beyond marketing a green façade or asking guests to reuse towels, a ploy he says that really just helps the hotel save money. However, he declined to describe specific elements of the hotel's design or how much meeting LEED certification standards would add to construction costs.

Starwood will bring in environmental group the Natural Resources Defense Council as an environmental advisor and will donate 1 percent of the revenue from each property to local environmental organizations chosen by a steering committee on which the NRDC will sit.

Hines has been actively involved in the green building movement for quite a while, as has its frequent investment partner CalPERS, says Rashin. With the focus on green buildings high among both members of the pension fund's board and California governor Arnold Schwarzenegger, the time was right to undertake a project, he adds.

So in 2004, a Hines-CalPERS joint venture called National Office Partners built 1180 Peachtree in Atlanta, which was the first pre-certified LEED silver building in the world. (It has since been elevated to LEED's gold standard.) The 41-story skyscraper incorporated a number of environmentally friendly design elements, including a water management system that provides all of the building's irrigation needs. In September, the building was sold to an affiliate of General Electric Pension Trust for a record price of $380 per square foot, according to the Atlanta Journal-Constitution.

“We thought the market was ready for it,” says Rashin. “But, one of the most important things is the establishment of the standards. Once you've got a standard, you can figure out how you can meet that standard economically. That combining with the social forces that are making this important to people, those are the three things that are coming together to make it viable.”

The new $120-million joint venture between CalPERS and Hines will build four green office projects. The first development is a 20-story tower in Bellevue, Washington, scheduled for completion by the end of the year, with another project likely in Southern California, according to Rashin. But, the joint venture is looking at projects in strong office markets across the country.

“We're not saying this is a market where people will like LEED and this is a market where it's not important,” he says. “Our job is to make CalPERS and Hines money. We're looking at the kinds of markets where there are falling vacancy rates, job growth and you can find that East, West, North, South.”

One of the knocks against green development has been the additional construction costs required. According to Rashin, however, it does not cost significantly more to meet LEED certifications up front. The real cost comes if you are trying to retrofit an existing building.

“If you're a developer of Class-A office buildings and you start with a mindset of being environmentally sensitive, it doesn't cost that much money,” he says, adding that it may tack less than 3 percent onto the cost of new construction. “It doesn't take a lot in terms of tenants paying a little more or leasing up your building faster to make it work.

“Where it costs a lot of money is if you design a very, very inexpensive building and then go back and say, ‘Now I want to make it LEED certified.’ Then it's ‘I have to change the carpeting, I need to change the roof systems, I need to change the drainage.’”

In most green buildings, whether they are hotels or offices, the things that make the building different from its less sustainable neighbor are often invisible to those who pass through the doors. Other benefits may be even more intangible.

“The social forces are definitely there,” says Rashin. “The environment is something that is extremely important to the younger generation. It's those people that are heading into the workforce and what we're seeing now is only going to get stronger.

“As far as tenants go, a green building is certainly making the list of things that are important to them. If you look at corporate users who build their own facilities, you see it there. They can spend a lot more money building green.”

The reason is something that would have been nearly unheard of just a few years ago, according to real estate industry observers. Many human resources departments are now driving the real estate decisions, using the sustainable or green office environment as a selling point to recruit and retain employees, especially younger professionals. And environmental concerns are increasingly ranking right up there with salaries and having a nice cafeteria.

“Let's be honest, part of what's driving this is that it's fashionable,” says David George of the London office of URS, which conducts environmental due diligence for major private equity real estate funds in Europe. “The other things that are driving it are commercial to some extent. Certainly with the volatility in energy prices it is a consideration in the rental values achieved. It is part of the equation for a potential renter or a building.

“If you've got very high energy demands it does become very expensive to rent the building. So that's an issue. It is a very competitive market and it's an additional selling point to potential renters if you can say that it is sustainable and it does have that green tag to it. I think that is starting to come through now.”