“SAME ANGLE,
DIFFERENT LENSES” SUSTAINABILITY SERIES
Cross-Industry Analysis on the True Impacts
of Sustainability
The Real Estate Industry Lens: Real Value
of Greening on the Valuation and Appraisal of Sustainable Properties
written by Isilay Civan, BArch, MSc, PhD2,
LEED® AP O+M, Senior Strategy Consultant & Location Leader at HOK Chicago
Consulting
as published in the Network, Pg15: http://edition.pagesuite-professional.co.uk//launch.aspx?eid=e2b9fd8b-6dba-4c60-878c-250ee57ba272
As more and more companies begin to invest
in greening their portfolios; either as isolated implementations, or through a strategic approach that deals
with the entire building/portfolio; there are heightened market-wide
expectation of increased value from such improvements. The question
remains, however, whether such expectations are being realized.
From the investors’ perspective, frequently posed
questions include: Are we seeing greater demands for green buildings where
we can reasonably anticipate an increase in sale prices or rental rates (along
with higher absorption and occupancy rates) for longer periods? How about the
accountability for and comparability of such findings? Are the simple payback and
return on investment calculations we have
been using to assess the real estate’s value adequate to determine how much value we can add
to the built environment through our sustainability efforts? If not, what is
a better way of quantifying the real value of sustainability so it can
be realized in savings or shown as proof for good standing,
lesser risk, and maintained value for longer durations?
Building owners and occupants are interested in knowing whether green buildings truly provide healthier and more
productive built environments. Some environmentally-concious occupants are also concerned about what happens to their individual
contributions. For instance, what happens
to the sorted recyclables if there is not a robust
recycling program at the city level? Do such disconnected efforts still amount
to something meaningful or are they worth the investment of time and money?
Studies show that if there is even a perceived disconnect among a
series of activities which may make the efforts less useful than initially
assumed, exisiting and potential support may be seriously diminished and may end up damaging the organization’s PsyCap (Psychological Capital: the positive
and developmental state of an individual as characterized by high
self-efficacy, optimism, hope and resiliency, which is argued to be the
ultimate competitive edge for organizations at the employee level).
Consider the investor’s perspective on realizing
unassailable benefits from greening his portfolio - ultimately a higher valuation.
This is dependent what his/her view of sustainability is. If it is a hit and
run approach (i.e., grab the low hanging fruit with minimal investment), that
is exactly what will be gained - quick gains in a short time frame.
For these efforts to turn into more consistent, longer-term
value-added factors, they need to have preset strategic goals (with specific key
performance measures (KPIs) attached to each).They need clearly identified
action items with measurable metrics and a corrective action plan, to change
operation if certain measures are not met. These need to be tracked and to
become part of the 5-year strategic plan of the company. This way, a predictive
assessment of the property can be made to strategically align the resources and
avoid premature obsolescence through repetitive deferred maintenance items that
bring the property’s value down.
This is not to suggest that value can only be achieved
through substantial capital investments. If one approaches sustainability in a
more strategic and comprehensive way, there will be many more opportunities to
achieve higher levels of sustainability at a lesser investment, with savings
that can be realized over a much longer period. In a strategic approach, rather
than simply picking some strategies that meet your budget allocation, you need
to choose the ones that potentially achieve three things: 1) help meet the KPIs
that you have established; 2) create synergies for multiple savings
opportunities; and 3) act as stepping stones for the next best-in-line opportunities
for gradual improvements to create a positive ripple effect and bring in
further savings at lower costs.
The simplest example is periodically comparing your capital
expense (CAPEX) plan with your operational expense (OPEX) plan to assess the
optimum timing of building’s system component replacements - when the useful
life and the operational cost break even. This gives you the ability to plan
for replacements, while continuing to stay sustainable without interruptions to
the process. When properly documented, these activities may also raise the
value of the building. However, the current accounting principles in real
estate valuation do not allow for the recognition of such increase-in-value
aspects of the sustainable efforts.
Moreover, we continue to make investment decisions based
solely on simple payback or ROI calculations. For the most part, these
calculations not only exclude the full life cycle aspect of the buildings or
the building systems, they also don’t consider any health, productivity, or
consolidated benefits that go beyond the cost savings that may be realized from
an isolated initiatives (e.g., connection to nature, workplace design,
alternative work, etc.).
I suggest that we use the increasing market pressure of
greening our buildings to seek a change for better recognition and quantification
of the added value to these buildings by virtue of sustainability factors. Start
by addressing value considerations beyond the traditional cost savings into our
financial statements and ROI calculations. This can strengthen the ability to
showcase the long-term potential of greening our built environment and pave the
way for improved access to funds for sustainable improvements. Not to act now
may potentially hinder governmental support (rebates and incentives) and
tenant/investor interest in sustainability. This will make it more challenging
when incentives become mandates and penalties are imposed for not adhering to
the rules and regulations that are then in place.
To achieve a healthier and more productive built
environment, the idea generation and concept development stages should involve
strategic thinking, clearly defined goals and a truly integrated design
process. Only then can you achieve efficiently run systems with optimized performance.
The earlier in the process such concepts are considered, the easier it becomes
to achieve truly sustainable goals.
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