‘Guest Blog’ with Scott Yahraus: The Green Fever! But What About the Cost?

It is everywhere and all around us! Being “Green”! It is hard to go through the day without seeing some advertisement for a product promoting itself as green. I see this for banks, retailers, and of course car companies. At the footnotes of emails that I receive there is often a message reminding me to “Think of the environment before you print this email.”

If you are anything like me, you subscribe to several trade publications on the apartments industry, as well as the commercial real estate sector in general. This month, a leading apartment magazine ran a cover story questioning the divide between building or retrofitting a property to be “Green” and the cost associated with it.

The most popular certification body that exists is LEED (Leadership in Energy and Environmental Design) certified by the National Green Building Council (NGBC). But they have largely focused on office buildings and within that on new construction. What about multifamily? USGBC has a new residential unit LEED certification, but it is still a work in progress and is very expensive; roughly $1,500 per unit.

If you are an investor or a developer, do you go after this certification? It would depend upon your exit strategy and if in fact an additional charge of $1,500 per unit pencils out. The question really is this: Does the $1,500 per unit drive enough NOI increase and give me a payback of 2.5 years or less? If the answer is “no” then in my humble opinion this certification is not warranted. The argument is made that a LEED certified building will sell for a higher premium. “…CoStar Group reports that LEED-certified office buildings sell at a 36 percent premium-over non-certified buildings.” (Apartment Finance Today. May/June 2009, pg. 21.) Of course they sell at a premium because they attract a higher occupancy than the mean. Tenants are drawn to these types of buildings! Let’s not also forget that many LEED buildings tend to house long-term government tenants! Initial construction or retrofit construction for a LEED certified building can be as much as 15 percent or more of the total cost of development (TCD). 

We know that our multifamily tenants are also drawn to green certified buildings. They are not much different than you or I. From a purely emotional viewpoint wouldn’t you want to live in an efficient “green” building if you were a renter? You need not look any further than the green demand from student housing whose tenants are demanding more green services and amenities. This demand crosses over all age ranges too. From the late economist Jean Baptiste Say (1767-1832) we get Say’s Law stating “Supply creates Demand.” You the developer/investor only need to supply the green certified property, demand will follow. But as a developer/investor would you pay $1,500 a unit or 15 percent of your total cost of development?

A multifamily certification should offer two primary functions:
1) Raise NOI through efficiency retrofits with good payback timeframes.
2) Allow you to emotionally market to tenants so as to fill your vacancies and keep occupancy high. This will also help you in resigning your current tenants to new leases.

That’s it. Cost should be low as well.

The president of UDR, Doug Walker, was quoted in the May/June issue of Apartment Finance Today, page 23 as saying “LEED is the flavor of the day in large part because there was no other flavor to pick from. But I’m not sure LEED is going to be the front runner forever.”

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(Scott Yahraus is the president of Apartment Energy Consultants. Apartment Energy Consultants is the governing body that certifies multifamily properties as being “National Green Apartment Certified.” He can be reached at 818-854-6850 or [email protected].)