After a tremulous time during the credit crisis and resulting Great Recession, commercial real estate bounced back and became one of the better performing asset classes, over the last two years. Funds like the SPDR Dow Jones REIT (NYSE:RWR) saw their assets swell, as investors have flocked to hard assets and strong dividend plays. Now, in the face of once again slowing global growth and after so much sector out performance, property owners have the task of differentiating themselves from the pack. Luckily, real estate owners and REITs that choose a sustainable path are seeing green, in more ways than one.
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Sustainability Becoming Key
Property owners who embrace energy efficiency and sustainability options, could be the real winners, versus their peers, in a slowing economy. Amid the rising costs for energy and various raw materials, environmentally sustainable buildings are often more cost-effective for landlords and tenants, even after factoring in the premium to construct or retrofit buildings and the higher rents they demand. A report by SmartMarket estimates that green buildings can reduce operating costs by 8 to 9% and increase property values by over 7%. In addition, green buildings improve overall returns on investment by 6.6%. (For related reading, see How To Calculate ROI For Real Estate Investments.)
These energy cost savings have become a driving force for tenants demanding green spaces. A February survey by CoreNet Global and Jones Lang LaSalle (NYSE:JLL) shows a building's sustainability strategy is extremely important for corporate executives, when considering office location. Overall, more than 92% of leasing and corporate executives consider sustainability criteria, when choosing office locations. Half of them would be willing to pay higher rents for that "green leased space." Landlords are often able to charge 3% more for these spaces and see occupancy rates climb by 3.5%, versus non-green buildings.
Perhaps Doug Gatlin, vice president of market development at the U.S. Green Building Council, said it best in a recent interview with Forbes, "If it's not green, in the near future it won't be considered Class A space. Green is a must-have. It's the best way to attract key tenants and retain them."
Adding the LEEDing REITs
For property owners, the financial motivation to add efficiency measures to their buildings is there. Increasing demand from tenants, coupled with higher rents and building values, makes the choice clear. Currently, around 20% of the new space being acquired or built by U.S. REITs is green rated and about 40% of REITs hold some type of green property. By honing in on these REITs, as opposed to making broad bets in funds like the iShares Cohen & Steers Realty Majors (NYSE:ICF), investors could see better gains.
Office REIT Liberty Property Trust (NYSE:LRY), has currently over 7 million square feet of LEED certified space and 59 Energy Star certified buildings, nationwide. CEO Bill Hankowsky believes that a variety of green initiatives "are a long-term key component of our strategy" and will ultimately boost shareholder value. Shares of Liberty currently yield 6.1%. Similarly, office REITs Boston Properties (NYSE:BXP) and Brookfield Properties Corporation (NYSE:BPO), offer extensive access to green buildings.
Aside from being the largest industrial property REIT with properties spanning 22 countries, ProLogis (NYSE:PLD) is also one of the largest operators of green buildings, in the world. All new construction for the REIT is LEED certified and the company has partnered with GE (NYSE:GE) to add solar installations to its buildings rooftops. Overall, ProLogis has 27 rooftop solar installations, worldwide, and generates 13.5 megawatts of solar energy.
The Bottom Line
Along with rising energy costs, interest in energy efficient office buildings is also increasing. Those REITs that embrace sustainability will ultimately be the leaders in future Class A space. For investors, betting on these firms now could be the key to real estate success. The previous firms, along with Corporate Office Properties Trust (NYSE:OFC), make ideal selections. (For related reading, see Introduction To International REITs.)
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At the time of writing, Aaron Levitt did not own shares in any of the companies mentioned in this article.