The Green Shift: Market Forces Encouraging Sustainable Development

Whether one calls it a market shift, a trend or a fad, the movement to “go green” or build sustainable development in the commercial marketplace is an undeniable occurrence. Sustainable development is nothing new, though it is certainly a popular buzz phrase these days. European governments have been encouraging some form of green development from as early as the 1960s – and arguably before – mostly in the form of mandates or requirements by the government, that require developers to implement technologies and practices that increase energy efficiency and decrease negative environmental impact.

While it might have taken a while for such technologies and practices to be more broadly embraced on this side of the Atlantic, the impact of sustainable development is being felt “American style,” through the demand by market forces. While there may be some government mandates requiring sustainable development, market forces are the major contributing factor in the inclusion of green buildings into modern cityscapes: daily headlines draw the public’s attention to the debated evidence of global warming; energy costs are skyrocketing; and, concern over the impact our society has on the environment is heightened. Further, there seems to be a growing awareness that “business as usual” is no longer acceptable.

The marketplace is responding: hybrid automobiles are bestsellers; businesses around the country are trying to “out green” their competition; and businesses that are traditionally not “green-related” are jumping on the bandwagon (i.e. funeral homes and banks).

Big business has become one of the largest front-runners demanding sustainable development. This is important to the development community to recognize because big business can either be tenants or buyers of development services. Big business also tends to set trends that smaller businesses may ultimately embrace. Large corporations, Citibank and IBM for example, have banded together to create consortiums to require developers of buildings they intend to occupy to meet certain green standards. These requirements usually include the conservation of energy, water and other resources.

Companies are also becoming more conscious of the environment they create within their offices and the impact that such environments have on their most costly asset – their employees. Studies are highlighting the health impact of toxins emitted by carpeting or paints. Other factors becoming important in the design phase of commercial buildings include daylighting and access to fresh air, which are shown to increase employee productivity, thus improving a company’s bottom line.

Local governments have felt the pressure from citizens wanting action to be taken in response to the environmental and energy crisis. Municipalities are responding to demands on limited resources and infrastructure by providing incentives for builders and owners of green buildings that include fast track permitting, rebates on impact fees, abatement of sales and/or property taxes or the allowance of greater intensity of development. Such incentives can have a material impact on the financial analysis of a project. For example, fast track permitting incurs few additional costs to the municipalities that offer such an incentive while providing a substantial benefit to the developer by reducing carrying costs (including interest, taxes and insurance) and accelerating the cash flow from a completed project.

America’s market driven response is being played out in several ways. First, there is the debate of what makes a building “green.” The same forces that bring infomercials and newspaper ads guaranteeing weight loss and hair growth can also make empty promises with regards to minimizing carbon footprints and saving energy. Organizations like the U.S. Green Building Council (USGBC) and its equivalents on regional and local levels have provided standards and certifications that help sort out the legitimate from false or exaggerated claims, or what has now been dubbed “green washing.” The USGBC certifies buildings for LEED (Leadership in Energy and Environmental Design) at different levels (certified, silver, gold and platinum). This has become the dominant national standard but there are still other standards, including “Energystar” or “green globes.”

Green buildings are springing up in every area of the country. They can be found in large metropolitan areas such as New York City and Los Angeles, but also in smaller cities like Akron and Sarasota. While climate and region impact the design, the movement – which was first embraced by the commercial office segment – continues to expand its influence and is affecting retail and industrial segments as well. Large retailers have begun to incorporate sustainable applications in many of their locations.

Originally, green buildings were more of a concept than a reality. One was more likely to read an article about green buildings rather than to actually walk into one. That has changed, and as green buildings have become more common, data on costs and results is becoming more accessible. Additionally, contractors have more experience with sustainable technology and practices, which reduces costs. The more predictable the requirements of a job are to a contractor, the more certain the bid, resulting in lower margins. As a result, the differential in costs to “go green” is gradually disappearing. While construction costs may still be impacted by the degree to which a building is made green, the increased costs in one area can offset the costs in another. (For example, more energy efficient windows can reduce the need for HVAC capacity).

If the factors that have influenced the market shift towards sustainable development continue, new and existing developments that do not incorporate green features may become obsolete. Just as HVAC may have been thought of a passing fad by some in the 1950s, it is rarely considered an option in commercial real estate today. Aspects of green development that were traditionally called “experimental” a decade ago are quickly becoming the norm. And, if energy prices continue to climb, becoming more sustainable may be a necessity.

From a competitive standpoint, developers and owners need to be familiar with the impact that sustainable development is having in their particular market. Developers also need to know what incentives are offered by local governments, and how those incentives might change the economic scope of a particular project. Developers should understand the level of experience the local government has with green buildings. If building inspectors are not familiar with sustainable technologies, a developer can spend a lot of time and resources on education. Such municipalities may also require a project to be certified by a certifying agency in order for a developer to take advantage of incentives. It is important to fully understand all of the requirements for earning such incentives.

In order to maximize the efficiency of incorporating green principles into a development, a developer must assemble a knowledgeable team early in the design process. Sustainability can impact the type of property upon which a project is built and the positioning of the project on such property. For example, are there benefits for building on a brownfield? Is the property accessible to public transportation? These are just a few of the thoughts that need to be given attention before beginning a project.

Also, experienced team members are a benefit. The architect must understand the certification process, if applicable, and any pre-determined standards for green development. The developer’s attorney should address sustainable issues in the project’s various agreements at all stages of development including the purchase agreement, agreements with consultants, the general contractor agreement, restrictive covenants, easements, management agreements and leases.

As the ramifications of the green movement continues to be felt in the commercial real estate sector, developers and owners need to understand sustainability to remain competitive. Understanding the market forces at work and the public’s changing viewpoint with regards to health, energy and the environment can give a developer an advantage. The “greening” of society is leading to the “greening” of our buildings. For the astute developer, this can create significant development opportunities.

Michael McNatt is the founder of the McNatt Law Firm, P.A. located in Orlando, Florida. Michael is a U.S. Green Building Council LEED Accredited Professional (LEED AP) and practices in the area of commercial real estate, finance and general business law.