GW's Milken School of Public Health is LEED-certified. (Photo courtesy of Milken Institute School of Public Health at the George Washington University)
Sustainability in commercial real estate: Transparency matters
Through my internship in real estate consulting and lease auditing, a process saving large organizations millions of dollars per year, I have grown to understand that when it comes to a companies real estate portfolio transparency matters. It is of the utmost importance that real estate portfolio managers who may be managing thousands of leases are on top of what’s happening behind the scenes in their office buildings. With sustainability driving commercial real estate development and operation, the urge for transparency becomes more pressing.
Of the main drivers of sustainability in real estate, the LEED certification seems to be the one that has been given the most weight. LEED stands for Leadership in Energy and Environmental Design and a building can be given a certification of Certified, Silver, Gold, or Platinum in ascending order of positive sustainable impact, which is based on an allocated points system out of 100 possible. The points are given based upon a variety of factors including design innovation, water and energy efficiency, and environmental impact among others.
So why should portfolio managers care what the building owners are doing in regards to sustainability?
As with many things in business, it all comes down to cost. The materiality of these projects undertaken to upgrade to a LEED certification level is not small. Projects associated with a LEED certification can vary from installing more efficient toilets to replacing large HVAC units to more efficient models. There is a common misconception that the building owners will bear the weight of these costs, but that’s not typically the case. Many times, owners will attempt and pass the projects through to the tenants in their operating costs and this could go unnoticed. Now, depending on a company’s lease at that particular location this may or may not be acceptable and can often depend on if the project reduces operating expenses for the tenants of the building. However, if managers don’t realize they’re paying for these projects they can’t determine whether the costs are acceptable or not. Hence, why transparency is critical for a corporate real estate portfolio.
With that being said, there is something special about being a tenant in LEED-certified building and as a company expands, they should look to locate in LEED-certified buildings. In the long run, it is typically less expensive to operate in one of these buildings although the base rent may be a bit more per square foot because they are often nicer. And not too mention that if managers are actively seeking these building, it gives owners more incentive to upgrade to become LEED-certified and therefore the push for sustainability in commercial real estate continues!