Green Building Opportunities Heat Up in Top Phase I ESA Markets

Through the continued unrest in the overall economy and the commercial real estate market, one area gaining traction is that of green buildings. For evidence of this growing interest, consider the fact that ULI is now developing technology that would allow a user point an iPhone at a building to get its energy rating. And as interest in green buildings intensifies, it isn’t hard to envision due diligence as a three-legged stool consisting of: environmental site assessments (is the land contaminated?), property condition assessments (is the building structurally sound?), and green building assessments (can the building be certified on the basis of its sustainability and energy efficiency?). The trend is perhaps most pronounced in the office sector where fundamentals are gradually improving, and the prime Class A properties are attracting the most attention by investors. Without much new construction, potential buyers are paying attention to ways of improving existing properties, including energy retrofits. Thanks to a mix of regulatory and economic forces, growing attention on sustainability and green building is manifesting itself in opportunity for environmental due diligence professionals in the area of energy audits. However, opportunities are not identical across all markets.

Many cities and states are adopting measures to require energy performance disclosures for buildings. Austin, Texas, for example, adopted an ordinance that requires mandatory energy audits for residential, commercial and multifamily buildings that receive service from an Austin-based utility. New York City is enacting a series of energy efficiency initiatives under the Greener, Greater Buildings Plan—the first phase of which requires all large commercial and multifamily building owners to benchmark their energy and water usage against 2010 results.

In total, according to Cliff Majersik, Executive Director of the Institute for Market Transformation, “An estimated 60,600 buildings need to be benchmarked and reported annually in the two states and five metros with existing programs. That number is even higher, given that some jurisdictions like California have triggers that require buildings be benchmarked when they are sold, leased or financed.” Considering that another 10 states have disclosure requirements for commercial buildings in development, this number could soon rise above 100,000 commercial buildings.

Cushman & Wakefield conducted an interesting analysis that ranked metros’ “green building opportunity” based on a mix of each metro’s market and investment conditions, state energy initiatives, mandates and incentives, investment outlook and “green culture.” Through this lens, metros with strong investor interest in office properties, coupled with strong drivers like local energy disclosure and land-use oriented incentives, received a higher score—indicative of a more fertile environment for green building opportunities.

Based on the study’s findings, environmental due diligence firms targeting energy assessment opportunities may want to consider focusing on metros like San Francisco, Manhattan and our nation’s capital. Interestingly, many of the highest-volume markets for Phase I environmental site assessments in the United States are associated with the strongest potential for green building opportunities. In fact, seven of the metros with the highest green building opportunity index are also among the ten largest Phase I ESA markets. New York City, the 2nd ranked metro on the Green Building Opportunity Index with a score of 88, is currently the largest Phase I ESA market in the country. And the second largest market, Los Angeles, ranks fifth in terms of green building opportunities. Other top Phase I ESA markets in the ranking are Chicago, Dallas, and Houston. In the aggregate, Phase I ESA activity in the 20 metros with the highest green building index score accounted for nearly 30% of all Phase I ESAs conducted nationwide in 2011.

Today’s market is dynamic, challenging environmental due diligence firms to behave in kind. As the landscape changes, the challenge is to understand and adapt to new drivers as they emerge. Just as we compare MPG ratings on new cars or nutritional labels on food, energy performance ratings could become commonplace for allowing buyers to compare the energy performance of an office building for purchase. As new green building drivers take shape, opportunities for consulting firms set up to provide energy-related services as part of their due diligence suite open up. If sustainability in commercial real estate is the direction the wind is blowing, what role is there for you to play in it? Getting up to speed on the disclosure requirements already on the books or under development could be a valuable first step in bringing lenders, property purchasers, sellers or building owners up to speed on what their requirements are—or may soon be—and play a role in helping them to stay in compliance.