Image via Wikipedia

When I was asked to write the “Trends” feature article about sustainability in commercial development for the summer issue of NAIOP Now, I was both honored and thrilled.  My thought was; ‘this will be easy!’  To research the story I would simply talk to developers, architects, contractors, commissioning agents, etc., about the projects they are working on or are planning and develop a chart quantifying the number and size of sustainable projects versus non-sustainable.  Based upon the results of that research I would see a trend and be able to report on whether or not sustainability is catching on in Las Vegas.

So off I went on my merry way, confident in my reporting skills and optimistic that I would be able to discern a pattern of sustainability or non-sustainability in the Las Vegas commercial development community.  Confident that is until reality set in, that the developers are not developing product in Las Vegas, nor do they have any plans for the near future.  This fact was backed up during the NAIOP breakfast meeting on June 17, when the representatives of four major developers each indicated that the Las Vegas market is slow to rebound from the current recession.  New speculative office and warehouse product has been put on hold until demands for product returns.  Until that time, each of the developers indicated that they are investing some money into maintenance and upgrades of existing product, and in doing so are improving building efficiency (some greening), whenever possible.

Not much of a trend resource there!  So where do I go for my story?

I think that we can all agree that “sustainability” is here to stay.  But the big question is…to what benefit is sustainability to a developer?  The answer to that question is not very straight forward. To explore the question, we must look at what is driving the “green” movement.  In a single word that driver is “DEMAND.”  And that demand starts from the bottom up with a grass roots movement toward sustainable products and corporate social responsibility (CSR).

LOHAS.com (an acronym for Lifestyles of Health and Sustainability), reports there is now a $228.9 billion U.S. marketplace for goods and services focused on holistic health, the environment, social justice, personal development and sustainable living.  In research conducted by the Natural Marketing Institute, more than 63 million LOHAS consumers support businesses that share their commitment to natural living and the health of their families, communities and environment.

However, this movement did not spring up over night.  In the 1990’s, a San Francisco-based nonprofit organization, Business for Social Responsibility, was founded and today has grown to over 400 organizations, including about half of the Fortune 500.  Internal pressures for change in the corporate sector come from people realizing that there’s more to life and business than profits alone.  There’s been an increasing emphasis on what’s called “work/life balance”—as the work-addicted find a way “to get a life”—carve out time for other interests and needs outside of work.

More than 300 global firms have signed onto the UN Global Compact, pledging to demonstrate good global citizenship in the areas of human rights, labor standards, and environmental protection. More than 2,000 corporations now voluntarily report on their environmental and social performance. Fifty-four socially responsible mutual funds have been created in the United States and scores more in Canada, Europe, and Japan. Based on the premise that companies that “do good, will also do well,” approximately $1.5 trillion worldwide are now invested according to social or ethical criteria.

Early pioneers in the field of social responsibility that have developed well-respected brands and loyal customers include The Body Shop, Ben and Jerry’s Ice Cream, Stoneyfield Yogurt, Timberland Shoes, Patagonia, Tom’s of Maine and the Men’s Wearhouse. These companies typically support community projects and good causes, and find more innovative ways to support their employees and protect the environment.

How does all of this equate to the Commercial Real Estate Industry?  Quite frankly, a major part of life is spent in the work environment and therefore that environment has more effect on individuals than any other factor. 

In an article entitled “Gen Y’s Green Demands for the Workplace” By Leslie Guevarra and published in GreenBiz.com: “The 18- to 25-year-olds just entering, or poised to enter, the workforce aren’t likely to be satisfied with shared “hotel-style” desk assignments, drab cubicles or windowless spaces that have characterized offices in the past, according to new research that could strongly influence space and energy efficiency strategies in the corporate world.”  The article goes on to state that for them, work isn’t just a place they go to from 9 to 5, then go home. They want an office and a work culture that’s an extension of themselves and their home life — a place that supports what they value — and it better be green, according to a new study by Johnson Controls Inc. that has implications for employers, facility managers, human resources departments and building and office space designers.

Based on the study findings, employers can also expect that Gen Y:

Want their jobs to be located in an urban area within an easy commute by foot, public transportation or by car. In the U.S., 79 percent said they prefer to work in an urban setting, 51 percent they’d get there by car (and for 34 percent that would be a hybrid vehicle) 18 percent would walk,15 percent would use public transit and 9 percent said they’d use a motorcycle or scooter.

They also want office space to support collaboration, productivity and creativity. Forty-one percent said they’d prefer access to a team space, such as an area dedicated to their work group, and 32 percent said they prefer breakout spaces over conventional meeting rooms that are used by various work groups and usually need to be booked. Sixty-one percent want to work in natural light or with a combination of natural and artificial lighting.

If you want to know what offices will look like in the future check out Google’s Toronto office with its famous cafeteria areas that boast free employee meals, and a wonderful play area complete with foosball, video games, and upside-down umbrellas. The workstations as cubes, but not so high as to feel trapped or isolated.  Or check out the Zapos.com office located right here in Henderson.

For developers, this means building a product to accommodate this new attitude.  And we are already seeing proof that green is paying off.

In one of the first systematic studies to address questions on the benefits of investments in energy savings and environmental design; a study by Norm Miller, Jay Spivey and Andy Florance (http://www.costar.com/josre/pdfs/CoStar-JOSRE-Green-Study.pdf), provides substantiated and usable statistics.

Their casual surveys suggest much faster absorption rates for LEED certified buildings. Operating expenses based on energy costs also varied with Energy Star-rated buildings running $1.27 per square foot per year for energy in 2006 compared to non-Energy Star-rated buildings running $1.81 per square foot. These 50 cent or so differences continue to be reported in 2008.

The sample of properties where cap rates were known is modest but Miller/Spivey/Florance observe a differential in terms of lower cap rates by about 55 basis points suggesting higher values by just under 10%. Together, the higher occupancy rates, higher rents and lower operating expenses logically translate to higher values.  This study also shows that occupancy rates through 2008 remained 3.5% higher in Energy Star rated buildings over Non-Energy Star and jumped to 4% higher for LEED over Non-LEED buildings.  Direct Rental Rates for LEED building leveled out at an average of $11 per square foot higher over Non-LEED buildings.  A PowerPoint presentation of charts from this study can be found by clicking here:  http://www.linkedin.com/in/craigaruarkleedap

So what is the trend for sustainability in Las Vegas?

While the current market may not be seeing premiums paid for sustainable space, we are also not seeing as dramatic a drop in occupancy or leasing rates for properties that qualify as green.  An article by Tony Illia in the Business Press on June 21, 2010 reports that: “recent research suggests that certified green projects could grow 900 percent worldwide in the next 10 years…”

The trend is clear; “sustainability” is here to stay, and it is something that developers and lenders must keep in mind as we enter a new era of commercial development.