Lisa Michelle Galley & Our Green Journey

In Less Than 30 Days, You Could Be Hangin' Out with Super Heroes

In case you haven't heard: our own USGBC Northern California Chapter is back again with Green Building Super Heroes.

This is a not to miss. Last year, the entire green building community came out in full force to party and honor our friends who are really doing a great job of advancing green building and green justice throughout the Bay Area Community.

Follow the registration link above to see the names of another group of top Bay Area leaders who we'll be honoring for their outstanding job of advancing the green building environmental and social equity mission.

If you ever wanted to meet a super hero, here's your chance.

What's Different About Underwriting Sustainable Buildings?

Do you see the unique value that green brings to your real estate investments reflected within their appraisals? No? Well, join the big crowd and read on: this is a special post for you.

Not everybody in commercial real estate is immersed in gloom and doom. Some folks, like the Appraisal Institute, are using the downtime coming from fewer transactions to get themselves fit for the sustainable real estate future. In case you missed the announcements, the AI is in the midst of a series of classes for their members, to introduce them to sustainability principles and the basic considerations for appraising green buildings.

I've had the chance to talk with the seminar's co-developer,  Theddi Wright Chappell, Cushman Wakefield's new National Practice Leader for Green Buildings & Sustainable Real Estate. The overall course is framed around the question "how is a sustainable building different?" than conventionally built property.

With good questions focused around understanding the differences, appraisers will be more likely to surface up more relevant facts that help them to better distinguish the risk profile of the green vs the non-green building.

As for the potential differences, any of these may be present within the green transaction:

• lower exposure to energy and consumables costs increases
• potential for greater construction and delivery risks, depending on factors such as availability of trained professionals
• different pattern of lease-up and absorption risks
• different pattern of tenant retention and turn-over risks
• different pattern of periodic capital improvements
• lower exposure to obsolescence.
  

The Green Journey Take
This is just a tidbit of the considerable body of knowledge that Theddi and her AI colleagues have packed into this very timely course for those just getting into the green real estate game.

Within our own practice, we typically receive detailed investment cases from clients for green buildings, which completely overlook any type of enhancement that sustainability brings to the assets. Nearly 100% of the time, some portion of our investment client work involves working with the the investor to "connect the dots" between the green building's design and construction budget and the operating pro forma assumptions during the holding period. The clients rightfully want to know how appraisers might handle these same issues, under the logical (but incorrect) assumption of if the appraiser won't count it, why should we do change our underwriting? So, from our point of view, it is good to see that the AI is helping to address this question with their new course.

What can you do? Talk with your appraisal colleagues about how they might evaluate sustainable real estate and urge them to take this new course, if they have lots of questions.

Retailers Increase Customer Loyalty with Green Initiatives – The Landlord’s Angle

With the economy weathering tough times, all eyes in commercial real estate have been on declining retail performance. So it’s no surprise to see recent reports about how retailers are using green initiatives to improve both store performance as well as stay close to customers.  And we think those successes have wider implications for underwriting green real estate.

The Aberdeen Group recently published “Getting from Green to Gold: Retail Success Factors and Outcomes”. Note: you’ll need to register for free to download the report. They surveyed over 100 retailers with sustainability initiatives and identified the key components to a successful green strategy for retailers. 

Here’s a high level download:
 
•    Green Upside: The top 20% of the surveyed retailers are reducing their energy costs by an average of 20%.  Additionally, they are seeing significant reductions in logistics and merchandise costs.  

•    Green Downside: The green “Laggards” – those who were less successful with their green initiatives – reported their energy, logistics, and merchandise costs increased by 39, 16, and 17 percent, respectively.

The Green Journey Take

Aberdeen research also indicates that sustainability strategies help retailers improve their customer relations, which can be instructive for commercial real estate professionals interested in underwriting the value that green initiatives can bring to a property.

Retail profits can be quantitatively traced to attracting and retaining customers.  In the retail world, “customer value” is a euphemism for the dollar value a new or returning customer brings to the bottom line.  And the research indicated that over 80% of the “Best-In-Class” green retailers think that their sustainability strategies have improved their customer service and brand image.

We green real estate professionals love “quantifiable” green initiatives that we can directly tie to asset value creation.  Yet, in our practice here at Galley Eco Capital, we review many green projects where the value-add of tenant retention for a green project is not  underwritten into pro forma assumptions, to avoid overstating the green business case. Plus, frankly, most info about retention rates within green projects out there is self-reported and anecdotal.  Lots of folks want more reliable data on this one.

But lots of investors lease to retailers. And most of those retailers have done the rigorous work of quantifying the value of customer loyalty. That subset of those retailers employing sustainability initiatives will undoubtedly know in the short term the contribution that green initiatives make to retaining customers and their bottom line as well. 

Like my previous post about Google tying the leasing of green space to employee satisfaction, a retailer leasing in a green shopping center will be able to figure out how that helps customer loyalty and, hence, their bottom line.

While it is good for landlords to be prudent underwriters, they probably do not intend to be less sophisticated about understanding how to quantify the value of green than their tenants. The smarter ones will be working on quantifying the relationship between green initiatives and tenant retention in order to be more competitive and maximize their position in the market.



Download and read the entire study from Aberdeen Group (free registration required):
http://www.aberdeen.com/summary/report/benchmark/5213-RA-green-to-gold.asp