When I say “risky business”, what comes to mind? Tom Cruise dancing without pants to Bob Seger? Oh, please. Such foolishness.
Real estate development. Now that’s risky business.
As much as we like to think that architecture brings beauty and inspiration to the built environment (it does), the purpose of a lot of our work is to attract capital. In reality, the overwhelming majority of the buildings we design are intended to make money for our clients in some way.
The high-risk enterprise of speculative commercial real estate development is fundamentally about managing variables. Control the variables and outcomes become more predictable. When risk is reduced, performance meets expectations and capital flows.
And such variables! The first big one is the supply and demand equation. What are you producing and who wants it? In real estate, it’s the absorption rate. Then there are location variables: appraisals, comparables, acquisition costs, and barriers to entry like the entitlement process. There’s the cost of money, too. Access to capital. Deals must be structured, LLC’s created. Cap rates, cash flow, ROIs. When the conversation gets to LIBOR, basis points and EBITDA, I start sketching.
And what – you may ask – does all this have to with the AIA 2030 Commitment?
We’re all working very hard to make our buildings and spaces radically more energy efficient. This is how we architects and designers reduce fossil fuel consumption and help mitigate the increase in airborne carbon dioxide that leads to climate change.
But radically greater building energy efficiency comes at a cost. The environmental benefits of improved building energy efficiency don’t show up on a developer’s proforma. They’re called “externalities”. And the financial benefit of potentially lower operating costs goes to the building’s tenants. So unless your client also operates and occupies the building you’re designing, making the case for exceeding the requirements of the building code can be, um, difficult. Especially if you don’t speak a developer’s language.
So what’s a conscientious, well-meaning architect to do?
Well, the effects of climate change are a huge variable, too, right? Don’t higher-performing and resilient buildings mitigate risk for everyone? Many developers embrace that idea, but the “even if that Cadillac HVAC system pays back in only ten years, the project can’t absorb any more debt” argument is a conversation stopper.
We could make the net-present-value case: that the sum of future monies saved on operating expenses will “pay” for building system enhancements, but we don’t have a lot of proof yet that “Predicted” (I hate that term!) Energy Use Intensity matches actual energy use. And then there’s that old stone wall again: “That benefit goes to my tenant. What’s in it for me?”
My suggestion? Appeal to the biggest variable of them all: the market.
Boston’s Chief of Energy and the Environment, Brian Swett, was recently describing the City’sproposed building energy use reporting and disclosure ordinance to a packed roomful of commercial real estate professionals hosted by NAIOP Massachusetts. When the big question came from the audience – what will the City do with this energy use data after they collect it? – Mr. Swett had his answer ready: “We think the market will respond.”
Meaning, of course, that the City may not have to put onerous new regulations in place. Tenants may simply prefer to occupy a more energy efficient building. Better buildings would then become more valuable and less risky. In fact, the market is headed this way already. Here come your talking points:
Environmental Building News recently cited a study showing that Energy Star labeled or LEED rated office buildings across the US charge 3% higher rents, have greater occupancy rates, and sell for 13% more than comparable properties. This Jones Lang LaSalle research portal called “Global Sustainability Perspective” features an essay that reports a $4 per square foot rent premium, a 3% lower vacancy, and much faster absorption rates in some of their markets for LEED or Energy Star certified properties. This Colliers International report not only supports the higher rent and sales price data, they have research on greater employee productivity (3% to 7% higher productivity with reduced sick time and less turnover) that also makes the human capital case.
There you go. Money does indeed talk. Architects and environmentalists have been trying to make the business case for higher-performing buildings for a long time. Now the money guys are making the case for us, and they do speak the language.
This post originally appeared on the blog of Principal Mike Davis, FAIA.