Annual State of the Market Update


ANNUAL STATE OF THE MARKET UPDATE

Speakers: Aida Barrigan, Heather Rosenberg, Hilary Firestone, Luke Patruno, Seth Strongin, Sharla Shimono, Will Lowery

Attendees: Bach Tsan, Carlo Gavina, Clayton Moses, Daniel Zepeda, Daniela Garcia, David Hodgins, David Nevarez, Deena Weiner, Drew Shula, Felicia Williams, Holly Hill, Jaime Villarino, Jeff Roi, Jose Jargas, Khalila Haynes, Lance Colling, Liam Dow, Peter Tray, Robert Willette, Simon Turner, William Lowery, Zach Khan

The U.S. Green Building Council’s Los Angeles chapter gave its annual State of the Market Update on December 10, 2015 to an audience of sustainability and existing building industry professionals. This presentation covered a variety of topics including updates on the industry as a whole, City of Los Angeles, resiliency, Energy Star, LEED Dynamic Plaque and the Green Janitor Program. This article summarizes the key highlights discussed during the USGBC-LA’s presentation on the state of the state of the market.

INDUSTRY UPDATE

Rick Fedrizzi, President, CEO, and founding chair of the USGBC says that, “There are more than 120 million energy hogs out there that need to be retrofitted for high performance. It could save more than $160 billion in energy costs, and it could put our industry and a lot of other people back to work.”

In addition, President Obama stated, “Greater building efficiency can meet 85% of future U.S. demand for energy, and a national commitment to green building has the potential to generate 2.5 million American jobs.”

Beyond the high-level advantages of job creation, green buildings contribute to soft value creation factors such as: market differentiation, reputation, growing public awareness, tenant demand, reduced obsolescence, lower energy cost risk and increase in local and federal government regulations. With the potential for so many benefits, it is important for industry experts to understand the latest trends and the state of the green building market.

Furthermore, buildings in the U.S. use more energy than the total energy consumption of any other country in the world besides China and the U.S. as a whole (Figure 1). The need for green buildings is evident from this shocking fact.

Figure 1

Fortunately, green building strategies are becoming more prevalent in the existing building industry. Benchmarking and transparency policies are becoming increasingly more popular in the United States while building regulations are increasing globally with the government being the most important driver of regulations in many markets. In fact, all but one S&P 500 firm reported to either GRI (3,500 firms) or CDP (6,000 firms). Similarly, EPA Energy Star and LEED continue to grow and dominate the market for benchmarking and certification.

Market leaders in many industries are recognizing opportunities for competitive differentiation and risk management through Environmental Social Governance (ESG) Principles.

  • Environment: Reducing costs, impacts, and liabilities

  • Social: Improving engagement, increasing well-being and satisfaction, reducing social issues and risk

  • Governance: Ensuring high quality, informed, and accountable management

  • Bottom line: ESG considerations in the property industry reflect global trends

Companies are turning to PRI, CDP GRI, GreenRating, ULI Greenprint, breaeam, LEED and many more methods to report ESG information.

ESG and green building principles are driven by four major groups: regulators, investors, tenants/occupiers and Real Estate associations. Figure 2 denotes the different ways in which these groups influence the market.

In addition, tenants are demanding ESG performance and improved indoor environmental quality. Energy efficiency, sustainability and ESG initiatives have led to higher rental rates, lower vacancy levels, lower operating costs, higher capital values, increased asset liquidity, premiums in office rents, improved well-being for occupants, and regulator and climate risk mitigation.

On top of these benefits, 90% of studies on the cost of capital show that sound sustainability standards lower the cost of capital of companies while 88% of the research shows that solid ESG practices result in better operational performance of firms. Moreover, 80% of studies show that stock price performance of companies is positively influenced by good sustainability practices.

As building managers, owners, architects, etc. begin to plan for sustainability and energy efficiency updates, they should keep in mind four major trends that are impacting the office market.

  1. Non-Dedicated Office Space (sharing), along with more on-site amenities. Collaborative Work Spaces and functional project teams

  2. Telework (Growing acceptance, even encouragement of telecommuting)Standardized

  3. Work Spaces 250 sf/person in 2004 185 sf/person in 2014 Companies are beginning to downsize the amount of leased space that they need.

Instead, tenants are looking for flexible spaces that offer the ability to collaborate and share space. With the need for new space shrinking, retrofits of existing buildings will become more popular. According to Vince Adamus, Vice President, Real Estate and Business Development for the Greater Cleveland Partnership, “To be competitive in the future, office space needs to offer natural light, better temperature controls, better ventilation and options for more flexible reconfiguration”.

SASB UPDATE

By 2016, Sustainable Accounting Standards Board (SASB) will have issued standards for about 80 industries in 10 sectors including:

SASB focuses on identifying industry-specific metrics that are comparable for investors. To do this, they use a research process that incorporates balanced stakeholder participation from corporate investors, analysts, and public bodies to identify those metrics that are most likely to be material for companies. These standards are designed to fit seamlessly within existing regulatory framework and aim to help companies identify and disclose decision-useful information in their 10-K filings. The Public Comment Period for these new standards ended on January 5, 2016.

City of Los Angeles Update

The City of Los Angeles plans to have 60 million square feet of energy efficient buildings by 2017 and a 30% reduction in energy use by 2035. To achieve these goals, city officials have identified the following 2017 near-term outcomes:

  • Create benchmarking policy to monitor and disclose energy building use Develop policy package (e.g., audits and retro-commissioning) to address energy consumption in the city’s largest buildings (public and private)

  • Expand LA Better Buildings Challenge (LABBC) to 60 million square feet12,500 homes retrofitted with residential PACE financing.

  • Avoid cumulative 1250 GWh of energy use between 2014 and 2017 due to efficiency programs

Resiliency

Resilience is the capacity to adapt and thrive in the face of stressors and shocks. It encompasses sustainability, business continuity, public health,