The One-Year Payback

The average payback time for sustainability features in real estate portfolios is just 1.2 years, yet managers are running the risk of asset obsolescence by failing to invest in them. Ken Hubbard of Hines and Wendy Rowden of Jonathan Rose Companies, who joined PrivcapRE for a panel discussion on the economics of sustainability, argue that the impact on NOI growth and tenant retention is clear, even if the data is not.

Few in the commercial real estate sector would argue against the need to embrace sustainability. However, the data to support the argument for investing in “green” initiatives remains less than convincing.

“The correlation is very direct,” says Ken Hubbard, senior managing director of Hines. “How you prove it is really the challenge?”

Data proving the relationship between sustainability initiatives and building performance is far more thorough. It was produced through annual surveys by the ULI-Greenprint Council for Building Performance and by GRESB, the Global Real Estate Sustainability Benchmark, which monitor almost 60,000 real estate assets (and their corresponding portfolios) globally, measuring water usage, electricity consumption, emissions, and waste— even tenant satisfaction and community involvement.

Hubbard says that this performance measurement will eventually lead to a cohesive argument for the economics of sustainability. While there is no direct data correlation between the introduction of one sustainability measure and an improvement in tenant retention, absorption rates, or rental rates, he feels that measuring a building’s performance on energy usage, waste, and emissions—and communicating that measurement to tenants—will be critical to ultimately proving the economics of sustainability.

“We measure energy efficiency, we measure water, we measure waste,” Hubbard says. “There is a whole host of things that we will be measuring in our buildings. The accumulation of facts is becoming better and better and better, and software is becoming more sophisticated, so that you can actually see what you’re measuring.”

“You’re asking for a value equation,” Hubbard says. “The energy companies are very involved. Once they’ve moved into your building and they’ve picked your building, they are very actively involved with you. They want to know what the measurement systems are, what the results are, the air quality, water consumption, energy consumption. They become your partner, and as time goes on, guess what, they’re not going to move out of that building. They might be the tenant, but they own the building, and hopefully you’re responsive to what their needs are.”

Wendy Rowden, managing director of Jonathan Rose Companies, says being sustainable is about being a hands-on asset manager.

“For us, green is a part of our DNA; we view it as best practices,” Rowden says. “We really focus on what I call ‘practical greening,’ so it’s capital expenditures that have a relatively short investment payback and that reduce or control operating expenses. So clearly [those measures] improve net operating income and although we don’t yet see higher rents for having greened a building, we do see higher occupancy compared to our peers.”

Hubbard agrees that sustainability in 2014 is more about using best practices, rather than providing the competitive advantage it offered when “green” first entered the real estate lexicon. “When the sustainability initiative began, it was somewhat novel,” he says. “And then it moved into the next zone, where it became more of a best practice.”

Rowden says landlords needed to not only introduce sustainability initiatives; they needed to communicate them to tenants. Failure to do so is akin to throwing cap- ex down the drain. “It’s important for the tenants, the residents in our apartment buildings, and for the tenants in our office buildings to be part of that conversation. Otherwise you’re wasting money,” she says.

Jonathan Rose has introduced competitions in certain assets, Rowden says. These initiatives give tenants challenges to encourage more sustainable behavior. One such scheme is at a master-metered, affordable housing project for seniors in Newark, N.J., where Jonathan Rose received a grant by the U.S. Department of Housing and Urban Development to install wireless meter controls in tenant units. The challenge for the landlord was educating “nice grandmothers” about adjusting their air conditioning rather than opening the window to let in cold air.

“The floor that shows the most [energy consumption] improvement gets an all-expenses-paid bus trip to Atlantic City. No gambling money, but they love it,” she says. “I used to say, if you can train your grand- mother to change her behavior, you can get anybody to do it. The reality is that otherwise we all revert back to what’s easiest.”

Rowden and Hubbard agree that, given the relatively short average payback time on sustainability features, managers and owners are foolish not to make the investment.

Hubbard says the average payback time for an energy-efficient retrofit is 1.2 years, “which means it’s coming out of an operating expense.”

“Your building is going to be obsolete if you’re not making longer-term investments in it, and there are a lot of things you can do that have a payback of three to five years that ought to be considered. But if you look at the industry average, it’s still 1.2 years,” he says.

Rowden says her firm typically looks at “an investment payback of under five years.” She adds that disclosure by municipalities on building energy performance would increasingly drive tenant leasing decisions.

“The failure to make these hands-on investments will result in the building trading at a discount down the road. It’s an important risk mitigator and, we think, ultimately a value enhancer.” ■