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.

Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

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.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Aaron Levitt did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Investing

    How to Ballast a Portfolio with Bonds

    If January and early February performance is any guide, there’s a new normal in financial markets today: Heightened volatility.
  2. Stock Analysis

    Performance Review: Emerging Markets Equities in 2015

    Find out why emerging markets struggled in 2015 and why a half-decade long trend of poor returns is proving optimistic growth investors wrong.
  3. Investing News

    Today's Sell-off: Are We in a Margin Liquidation?

    If we're in market liquidation, is it good news or bad news? That party depends on your timeframe.
  4. Investing News

    Bank Stocks: Time to Buy or Avoid? (WFC, JPM, C)

    Bank stocks have been pounded. Is this the right time to buy or should they be avoided?
  5. Stock Analysis

    Why the Bullish Are Turning Bearish

    Banks are reducing their targets for the S&P 500 for 2016. Here's why.
  6. Stock Analysis

    How to Find Quality Stocks Amid the Wreckage

    Finding companies with good earnings and hitting on all cylinders in this environment, although possible, is not easy.
  7. Chart Advisor

    How Are You Trading The Breakdown In Growth Stocks? (VOOG, IWF)

    Based on the charts of these two ETFs, bearish traders will start turning their attention to growth stocks.
  8. Mutual Funds & ETFs

    Pimco’s Top Funds for Retirement Income

    Once you're living off the money you've saved for retirement, is it invested in the right assets? Here are some from PIMCO that may be good options.
  9. Chart Advisor

    Watch This ETF For Signs Of A Reversal (BCX)

    Trying to determine if the commodity markets are ready for a bounce? Take a look at the analysis of this ETF to find out if now is the time to buy.
  10. Investing News

    What You Can Learn from Carl Icahn's Mistakes

    Carl Icahn has been a stellar performer in the investment world for decades, but following his lead these days could be dangerous.
RELATED FAQS
  1. Should mutual funds be subject to more regulation?

    Mutual funds, when compared to other types of pooled investments such as hedge funds, have very strict regulations. In fact, ... Read Full Answer >>
  2. Do ETFs pay capital gains?

    Exchange-traded funds (ETFs) can generate capital gains that are transferred to shareholders, typically once a year, triggering ... Read Full Answer >>
  3. How do real estate hedge funds work?

    A hedge fund is a type of investment vehicle and business structure that aggregates capital from multiple investors and invests ... Read Full Answer >>
  4. Are Vanguard ETFs commission-free?

    While some Vanguard exchange-traded funds (ETFs) are available commission-free from third-party brokers, a large portion ... Read Full Answer >>
  5. Do Vanguard ETFs require a minimum investment?

    Vanguard completely waives any U.S. dollar minimum amounts to buy its exchange-traded funds (ETFs), and the minimum ETF investment ... Read Full Answer >>
  6. Can mutual fund expense ratios be negative?

    Mutual fund expense ratios cannot be negative. An expense ratio is the sum total of all fees charged by an asset management ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center