Does Going Green Mean saving Green?

Nobody can argue the environmental benefits of green building but many wonder if paying now will pay off in the future. While skeptics remain unconvinced of the fiscal benefits for retrofitting existing buildings or constructing new sustainable buildings, believers are realizing the advantages on numerous fronts: Tax benefits, reduced construction costs, and increased property value.

The Government wants more sustainable development to help provide for a cleaner tomorrow. To ensure this objective is achieved, legislation has been created to regulate green building through federal, state, and local government. Penalties are becoming more severe for those in violation of increasingly environmental requirements. However those who meet and exceed these requirements will be rewarded for their conscientious efforts. This reward comes in the form of tax breaks.

Tax incentives have been created to give this sector a jump-start in the market making it affordable for developers and designers to go green. Under IRS section 179D it is possible to achieve a $1.80 per square foot maximum tax deduction for complying with certain energy conservation guidelines. The EPAct of 2005 also grants tax deductibles for complying with certain environmental building standards. It is unclear how long these tax incentives are going to remain on the table so if you are teetering on the idea of building a sustainable building, get off the fence and take advantage of these deals while they still exist. One of the leading organizations in setting the bar for sustainable building is LEED.

LEED stands for Leadership in Energy and Environmental Design and this organization provides four levels of accreditation (Certified, Silver, Gold, and Platinum), which need to be applied for by the developers of these green buildings. LEED evaluates five environmental categories: Sustainable sites, water efficiency, energy and atmosphere, materials and resources, and indoor environmental quality. Being a certifiable LEED building carries with it prestige and recognition throughout environmental and architectural communities. And if you follow the LEED construction requirements you are setting yourself up seamlessly to take advantage of the previously mentioned tax incentives. It is, if you will excuse the old cliché, killing two birds with one stone. And isn’t that what sustainability is all about? Working smarter and creatively to solve critical issues is at the very base of this green movement, but what good is creativity, certification and tax incentives when you can’t even afford the construction costs.

Construction costs of creating a LEED certified building haunted developers in their sleep but lets split up these costs and examine how high or low they are today. The nuts and bolts of the project are called hard costs. These costs are usually predictable and continue to go down as more competitive companies enter into the market. To keep these costs at a minimum evaluate which systems will provide the most utility for you at the lowest cost.

Soft costs consist of time and intellectual energy spent on evaluating and designing the project. When LEED was new, consulting firms existed to aid builders achieve this coveted LEED status. These consultants were not cheap. Now construction, architecture, and development companies have in house LEED accredited professionals significantly reducing these consulting fees to a fraction of what they once were. “Going green” is still going to cost you in the construction phase. A premium of about 1-2% of the total cost will be tacked on to the bottom line. So after all the hard and soft costs, LEED applications and extra tax work, is there any measurable value added?

For the first time we are now able to answer that question with concrete evidence and statistical data. The average American spends 85-95% of his or her time indoors. The average American Employee takes about 8.5 sick days per year. Providing cleaner air and more natural light in the work place has a staggering positive impact on employees. According to a new study done by CB Richard Ellis and Burnham-Moores, cleaner air reduces asthma as well as other respiratory illnesses by 8-25%. These cleaner conditions reduced the number of sick days of about 50% of the employees by 2.8 days per year. To put these savings into financial terms, employers save money by having healthier employees (less medical expenses) and the measured utility of fewer sick days translates to an additional $5 per occupied square foot in value. Natural light also increases employee productivity by $20 per square foot. So between clean air and natural light there is a combined additional value of $25 per square foot for a certified LEED building.

The rents in green buildings are usually 6% higher with a 3.5% lower vacancy rate than traditional office buildings. Cap rates fall 9% for LEED buildings, which increases the buildings income growth. Overall values for LEED buildings are 16% higher than non-certified buildings. The cost of capital is also less for sustainable buildings because they are viewed as an investment with less risk. These new numbers show the measurable value in green buildings.

Now it is possible for appraisers to accurately value these LEED certified buildings closer to their real long-term worth. Now it is possible for skeptics to evaluate these statistics and make more informed decisions about building green. Those who have been participating in the green movement have been enjoying government subsidies in the form of tax deductions, lowering construction costs, and real value added to their property for the past 5 years.

“Good environmental sense makes good economic sense,” said Neil Hall, CEO of regional community baking for PNC Bank. Mr. Hall believes in the value that green adds not only to his building but also to his customers’ enjoyment of each of their facilities. Gary Saulson, director of corporate real estate for PNC, shares this same view, “People are proud to do business with a socially responsible company, and communities favor new construction and economic growth with minimal impact on local resources.” Although the measurable dollar and cents value for building green might only now be emerging, the social value and prestigious reputation alone can attract more customers and better employees. Sustainable building helps promote a conscientious image of corporate responsibility and citizenship.

With monetary value and image value both being added to these LEED projects the benefits outweigh the costs hands down. An extra one to two percent of building costs in no way should deter anyone who is interested in receiving tax deductions, increased health, productivity, and property value, and recognition for being socially responsible.

To Improve, Or Not To Improve? Money Is The Question.

Commercial real estate has slowed considerably and landlords and tenants are wrestling one another over the costs of tenant improvements. Tenant improvements range from minor additions, or construction to completely redesigning and stylizing a space. Under a better economic situation the landlord usually pays for the tenant improvements and considers it part of the costs of doing business. However in these times landlords don’t have the necessary capital readily available due to high vacancy rates and many renegotiated lower lease terms.

There are two paths a landlord can take with regards to tenant improvements: One, is refusing to pay for tenant improvements at this time, and the second is to willingly negotiate with the tenant and reach an agreement.

The first option of holding out on the tenant improvements seems irrational to many, after all some rent is better than no rent, right? This decision can lead to an unsightly vacant building known as a zombie building. These zombie buildings, if in highly visible areas, can be a real eyesore to any community. The location and submarket also play large factors in whether or not the landlord will be willing to let these buildings sit un-leased. Leaving the space vacant is an option that some landlords are taking because they don’t want to get locked into a low rental rate when rents begin to rise and stabilize again. They are unwilling to tie up capital in tenants that, in this economic environment, might not be there before this recession is over. Some landlords –those who are financially fortunate—are leaving the space empty until conditions improve.

Those landlords who still desire tenants (and income) are negotiating the costs of these improvements. The structure of these negotiations has differed between each deal. Some landlords are discounting the tenants’ rent and asking the tenants to pay for the improvements. Another option is to increase the tenants’ rent and have the landlord pay for the improvements. Either way, the costs are being shared and people are getting creative in how to pay for these necessary improvements for business.

Architects and Interior Designers know that the pressure is on them to do more with less. They are the creative ones being called upon to perform a miracle and deliver style, quality, and functionality on a tight budget. There are several tactics being employed to keep costs down and functionality up. These include: flexible furniture, combining uses, and reusing as much of the floor plan and old furniture as possible.

Having flexible furniture doesn’t indicate the physical dexterity of the furniture but rather its uses and purposes. In today’s work environment employees are gearing away from traditional big offices separated by walls and glass and instead opting for smaller work stations more connected to their coworkers. In this weeks edition of the California Real Estate Journal, Andrew Tarango, tenant improvement manager for San Diego based Smith Consulting Architects, said that many companies are going to smaller work stations that cater to a younger workforce that isn’t necessarily interested in having big, private office spaces. Those employees want a space to touch down in and set up their laptop computers when they need to check e-mail or do other office work alongside shared spaces to meet with co-workers and work collaboratively. It is important that the furniture in these offices is adaptable to the uses or future uses of the work force.

One positive externality that comes from not building larger offices around the perimeter of any office space is the amount of natural light that comes through the windows. This natural light can lower the construction and energy costs of lighting by allowing designers to put in fewer lighting fixtures and skylights.

Architects at Gensler, ranked as the nations top architecture firm two years in a row, has utilized modular custom furniture. This type of furniture not only reduces construction costs on the walls but it allows for more flexible space and use of the furniture. As the companies’ needs change, its furniture arrangement can be transformed to meet those needs.

Gensler has also implemented combining uses as a strategy in many of their recent projects. Combining uses implies that instead of using a space for one specific purpose, the space is used for multiple purposes to cut down on costs and maximize space. For instance law firms traditionally separated the break room from the law library. Now, as a response to employees wanting more shared space and the Internet making most law libraries available online, the break room and law library have been combined into one space. Gensler has had several projects like this where workstations have been put into break rooms or shared space areas to facilitate and accommodate impromptu meetings.

But before any of these improvements even begin, a major cost saving technique will be implemented, reusing as much of the floor plan as possible. It sounds like a simple step; it is a simple step, however sometimes it is completely overlooked. Keeping walls intact can free up more money for upgrades in other areas such as new carpeting or wood floors. Floor plans are not the only thing being reused, furniture and office décor are also being recycled in these tough economic times.

This process piggybacks off of the recycling concept and reminds us that we don’t have to reinvent the wheel. Reupholstering couches and office furniture creates a new look at a cheaper price. This tactic is being exploited by those trying to cut costs and by those who might have fared a little better during the recession, yet prefer not to advertise it.

“We have people who have money but don’t want to announce that they want to spend money,” said Anne Benge, principal in San Diego at furniture dealer and facility services provider UniSource Solutions. It might be harder to justify purchasing brand new office furniture after a round of lay offs. UniSource Solutions provides interior design consulting and has found that some companies that have used their services aren’t driven by monetary principles alone, meaning they aren’t just looking for the cheapest deal.

Due to the amount of layoffs CEO’s, CFO’s and other officers have taken on more responsibility meaning less time for other projects. Obviously public perception is always important to a company’ image so spending wisely and what people see you spending your money on is significant. Spending too much on these improvements could leave your clients wondering if you really have their best interest in mind or if you are more concerned with appearances and office furniture, which is why recycling furniture and other office décor can solve many issues.

Tenant improvements don’t have to be dreaded anymore in down times. If the landlord is willing to negotiate with the tenant on financing the necessary improvements, even in a poor economy the tenant can still create a quality work environment. Flexible furniture, Combining uses, and reusing the existing floor plan, furniture and décor are all creative solutions and can stretch the effectiveness of your budget.

Costs of the Holidays

Even during the most wonderful time of the year we are bombarded with costs and the bottom line. But that’s no reason not to spread the usual holiday cheer, or is it? How much should a company that has just downsized, laid off employees, or scraped money together through this recession shell out in client gifts, or holiday office parties?

Clients are a companies’ livelihood. Investing in them is vital to future prosperity and success. Despite these troubling economic times, going out of your way to show clients how much you appreciate their business is always acceptable, in fact it’s just good business. As hard as it is to let employees go, guilt should not infiltrate current business activities. With this being said the gift to clients should not be so extravagant to slap ex-employees in the face by any means, but client relations should not be compromised if possible.

Many companies are scaling back their traditional Christmas parties that were once fully equipped with songs, brandy filled eggnog, and employees enjoyment for that “other” use for the copy machine. Yes, sadly it’s true. This once glorious evening of office drinking and randomly awkward romantic affairs has been snuffed out by the bottom line Gestapo. Many employers have instead minimized this occasion to a tame and controlled afternoon lunch. But the reality is that the old holiday company party isn’t free—or cheap. The lunch option cuts back on these holiday costs by over 50%. These savings can be pumped back into the company to create more business, more jobs and more money.

But, despite the alluring savings I am a firm believer in employee moral. I think it is vital to take care of the ones who take care of you. If costs are too high there are still ways to creatively pay for a social gathering. A potluck gets everyone involved and interested in the party and is sure to create a good office atmosphere. Having the party at a bar where maybe every employee gets two drink tickets but then has to buy anything beyond that. I actually think the recession has been good for a lot of companies because it has forced them to get smart with how they spend their money, whether that means how many employees they have, or how they pay for a company event. I say do not let the holiday office party fade into the night! Get resourceful and figure out how to do it for less.

In the end remember to keep client gifts and or relations up and running even through tough times and keep those employees cheery with some form of social event for the holidays.

Recession All Over Again?

Taunted with signs of recovery and improving economic stability we now stand on the brink of yet another real estate disaster. This time our commercial sector prepares for dark times, but will it prove as colossal as the housing crisis?

Our looming situation comes as no surprise to many and has been inevitably following on the coat tails of our current recession. Speculating arguments have surfaced regarding the severity of our commercial real estate downturn. For a better grasp of how the commercial sector will affect our national economy lets examine some expert opinions.

Turning to professional real estate writer Mark Heschmeyer, of CoStar group, for more evidence of what we can expect out of the commercial market, I find few optimistic views. After analyzing feedback from CoStar surveys Mark concludes that the worst blows might have already hit us- smashing!-, but commercial real estate will drag the recession out longer and could possibly deliver a knockout punch. Although this seems like a contradictory comment, there is truth to it. And yes, a knockout punch sounds unnecessarily ominous, but its shock factor is undeniable.

Lets consider the main reasons why this write up believes there is no end in sight to the commercial crisis. Reason one: federal initiatives are prolonging the hurt by artificially propping up banks' troubled real estate assets. Reason two: maturing debt loads and rising loan defaults will continue to keep property values and deals down for a long time. Reason three: Consumer spending is weak and continues to fall because of deteriorating net worth in home values and rising unemployment, and reason four: all of there factors are continuing to hurt property fundamentals, and will likely continue to do so until real growth returns, which is not in sight.

Government and business continue their finger pointing with accusations of incompetence. I think the sooner that these two bickering siblings realize they need each other the sooner prosperity and progress will be achieved. However I agree with the article, that as long as the government pumps money into financial institutions it is only a façade of actual recovery. Banks need to lend money again in order to booster economic activity, but even with the aid money, loan requirement are too demanding on businesses. We will only be able to accurately gauge our economic stability and progress once the government takes off the training wheels. To paraphrase Tim Knight, when the dot.Gov bubble bursts it's going to make the dot.com and housing bubbles look like a hiccup.

Debt. It’s all about debt. Lenders gave loans on assets that unfortunately are no longer worth today what they were two years ago. Many mortgages are worth more than the actual asset used to secure the debt. This over valuation of the asset crippled lenders because they are now taking losses instead of turning profits. Trillions of dollars just evaporated. Lenders are unwilling to refinance and until they come to grips with inevitable losses we will continue to see a stale market. More than one trillion dollars in commercial real estate loans will mature within the next three years and without a plan on how to refinance it and balance the books, we could be looking at some hard times. A creative way that sellers of property can help potential buyers secure a loan is by offering the seller carry back loan. This would classify as a junior loan, second in line after the primary loan, but it can be extremely helpful to buyers and sellers.

While this article touts weak consumerism, I for one still like to believe we live in America, where consumerism is what we do best. But don’t take it from me, major retailers Apple, Khols, Starbucks, and Target have all opened up new stores this year and continue to purchase new buildings, expand, and cancel previously scheduled store closings. Leasing and Investment activity have increased and the retail market is on the rise. Retail is a different beast than office. The office market usually lags about 12-18 months behind the national economy because of the leasing structure and amount of space needed to accommodate more employees. Retail will always bounce back first. Home values have mostly bottomed out and national unemployment appears to have reached its peak, from 9.7%in June and July to 9.5% in September. While the unemployment rate might still remain high for the next few months, I believe we will not witness any more spikes or major job loss.

To quote Steven D. Sandler, CEO of Crosswind Capital LLC in Rye, NY, “The system is still too much of a cauldron of bad debt, soon-to-be bad debt, nonexistent credit availability and weak employment drivers.” The prognosis for our impeding ill economy does not look bright given all these factors. Ben Bernanke can’t even seem to fully convince himself, and the rest of the country for that matter, that we are climbing out of this dark, credit-void pit (see my last post). But where you find hard times you will also find opportunity.

Many landlords are facing high vacancy rates and are willing to make deals in order to keep their occupancy levels up. This is the best time for tenants to renegotiate with their landlords or use these low offers as leverage when looking for a new space. There are not only opportunities for tenants right now but for developers as well.

Although the construction aspect for the commercial market has looked dim and will continue to look so for a while, local governments pockets are hurting from the halt in development. With no new developments, municipalities have lowered certain building requirements in order to kick start economic growth, and their tax collections. Projects that have been rejected in the past are now passing. Now is the perfect time to entitle property.

Prices for office buildings have dropped, and will continue to do so for the immediate future. What we should look forward to is that the low price of office space will soon be exhausted sparking more construction and more growth throughout the nation.

So to summarize, the evidence suggest that the recession might not get worse. We have reached a plateau where the commercial sector will just delay recovery until new transactions, instead of just restructured or renegotiated deals, can reenter the commercial market.

A Small Light

Here are just a few article titles circulating; in MarketWatch, “Bernanke Declares ‘Recession is Very Likely Over’”, in the California Real Estate Journal, “Analysis California Showing Signs of Economic Recovery” and “U.S. Industrial Production Exceeds Expectations” and in the Los Angeles Times, “Southern California’s Vital Signs are Improving”.

Yes, finally some good news. Articles like these have been popping up like crazy the last two or so weeks, but before you get too excited keep in mind that our economy remains in a fragile, anemic state. Recovery will not be an instantaneous turn around, in fact predictions say it will be quite the opposite. Unemployment will continue to rise into 2010, when job growth is expected to resume again, slowly. Even Bernanke himself admits that economic forecasting is not a precise science and that these promising predictions are based off of only numbers.

Whether or not these optimistic economic results were generated by scientific methods, headlines of hope, recovery, and future prosperity bring a comforting feeling.

Welcome!

Greetings my friends!

This blog is dedicated to talking about the real estate industry and other factors that effect real estate. Through this portal I will discuss development, finance, investment, brokerage, commercial real estate, residential real estate, energy legislation, green building and hopefully many more topics. The current economy will also be examined with analysis of how we got to where we are now and what steps we are taking to correct our situation.

Real Estate comprises a huge percentage of our nations wealth and is something that most of us will deal with in our lives in one way or another, whether its buying or selling a home, renting office space, or investing for the future.

I look forward to writing so I hope you look forward to reading and exploring this industry together.

-G. Finkus