Thoughts On Green Real Estate (Report from the 2009 YAREA Conference)

Here is the house / Where it all happens - Depeche Mode

Here is the house / Where it all happens - Depeche Mode

So it turns out that in addition to ruling the world from the Skull & Bones tomb, Yalies also get involved in real estate from time to time.  There’s even a group called Yale Alumni Real Estate Association (YAREA, pronounced Y-Area) that just held its annual conference.  I was invited, so… I went.

Since the theme of the conference was on “Green Real Estate”, and this was an area about which I was more or less wholly uneducated, the day turned out to be one of the most enlightening of my career in real estate.  A blogpost is really not the place to describe everything I’ve heard and learned, and the people I’ve met, but I do want to touch on some of the high points.

Green Capital also means yknow... the other Green

Green Capital also means y'know... the other Green

Green Capital

It turns out that in the world of real estate high finance, green is more or less a requirement.  Panelists such as Cherie Santos-Wuest, the Director of Global Social and Community Investments for TIAA-CREF, and Victoria W. Kahn, Managing Director of ING Clarion, made it clear that for them to consider investing in real estate projects, those projects have to meet certain green standards, such as LEED.

Considering that these folks have billions-with-a-B dollars under management, and make eight and nine-figure investment decisions… one would do well to take notice.

Which makes me wonder whether large-scale residential developers, such as Lennar or Hovnanian, ever put together a green subdivision.  And by that, I do not mean — and the folks at the conference do not mean — slapping solar panels on McMansions and calling them “green” houses.

My thought is that while this development is still limited mostly to high-end commercial real estate projects, I see the requirement to be much more environmentally conscious filtering down the ranks first to regional banks then local banks.  It might not be tomorrow, or next year, but I could see a time in the near future when your local S&L will be demanding that the local developer putting up a spec home include rain harvest and greywater recovery systems.

Green Ain’t Mainstream Until It Can Move to the Suburbs

One thing that was very evident — primarily because one of the panelists on the Green Cities panel said it — is that there is a very strong hostility to suburbia.  The green movement is the urbanist movement is the green movement.

The reasoning is extremely solid.  Cities cut down on transportation from one building (your house) to the next (your office, the store, etc.).  Cities enable walking or biking to locations, or public transportation, whereas suburbs are inherently built for the car culture.  Indeed, one might say that the American car culture would be impossible without suburbia, and that suburbia was made possibly only because of Henry Ford and his progeny.

Having said that… unless there is a wholesale change in American culture, most families and people are going to head to suburbia at some point in their lives.  Homeownership is the American Dream, and for whatever reason, owning a co-op ain’t really the same thing psychologically.  Also, people tend not to feel the need for more space and a backyard and such until they are expecting their second child… but once they do….

Plus… let us face facts.  Living in the city — in any city — is far more expensive than living in the ‘burbs on a per-square-feet basis.  I would have loved to have stayed in New York City with my two kids, but the equivalent space I have in my tiny little house in Millburn would have cost not double, not triple, but quadruple in NYC.  To me, it seems a simple matter of supply & demand.  Cities have less land; more people want the convenience of city living; ergo, prices will be high.

My sense right now is that this movement is here to stay, whether you believe in the whole Anthropogenic Global Warming thing or not.  (For the record, I do not, and I think Al Gore is a buffoon.)  Because there are other economic benefits to green buildings — lower energy costs, less water usage, and better health are all great things to have even if you think carbon footprint is something to be maximized if at all possible.

But equally clear at the moment is that the green building movement is still restricted to large commercial developments or large multifamily projects, and remains a fairly small niche.  Until it can cross the gap into the suburbs, impacting single family residences and suburban buildings, and leave behind the elitist disdain for suburbia, I don’t think green buildings can be a mainstream phenomenon.

Costs of Green Technology Must Come Down

A big part of the equation is the cost of green technology and green building techniques.  I got to listen to what was one of the most fascinating discussions about Green Buildings by some of the premier practitioners of the craft.  Architects such as Mark Simon of Centerbrook, Stephen Kieran of KieranTimberlake, and Rafael Pelli of Pelli Clarke Pelli gave presentations on some of the techniques they used on their green building projects and… let me just say that my respect for the architect profession increased by orders of magnitude.

The amount of thought these talented architects put into things like designing a wall — a topic to which I have never given a moment’s thought — is simply amazing.  And the impact of that design is similarly amazing.  I wish I had slides of Stephen Kieran’s presentation where he showed that a properly designed wall has three times the impact of solar panels on energy efficiency.

Kroon Hall, Yale University

Kroon Hall, Yale University

This intellectual work has to make its way into the mainstream of American homebuilding industry before the crossover can truly happen.  We’re starting to see it with EnergyStar appliances, and with double-pane windows and such.

But technology like geothermal heat pumps, dual-flush toilets, greywater recovery, rainwater harvesting, and of course the photovoltaic cells have to all come down in price and become far more widely available.  I was privileged to take a tour of Kroon Hall, the new home for Yale’s Forestry and Environmental Studies Department, and the building is simply a marvel.  I wanted almost all of the features in that building in my house — and keep in mind that once again, I do not believe in AGW — but the cost is still exorbitant for single family homes.

Last, But Most Important… Consumer Demand

Today, the consumer demand for green buildings is simply… meh.  In other words, all things being equal, people would prefer to be in a green building.  But all things can’t really be equal when you’re investing in green technology.  Yes, for large multifamily or for big commercial buildings, the savings in energy alone could probably pay for the investment.

But as yet — and based on like, no evidence, but plenty of anecdotes — consumers aren’t willing to pay a significant premium for green homes.  There has to be a relatively short horizon for payback on any investment for consumers to take green buildings really seriously.

Having said that… the Green Building trend is here to stay.  And it will accelerate and continue to do so.  Even after the whole global warming fraud is exposed as pseudo-science, the green building trend will stick because so much of what it proposes is common sense: use less energy, use less water, be smarter about designing buildings, and don’t stuff your home with dangerous chemicals if you don’t have to.  As prices of technology come down, and smart architectural and materials design continue to filter downwards from the big commercial projects, I think consumer demand will be there.

I think I got a glimpse of the future last Friday.  And the future is green.

-rsh

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  • Erin

    Interesting points Rob – we’re starting to see green homes pop up in downtown Chicago, but of course, the premium to build is a hurdle. I think you may have missed another driver, aside from a reduction in cost, which is the impending scarcity of resources for select communities. With the impending water issues facing Las Vegas, and increasingly frequent droughts across the southeast, I believe many families will start to turn to, at least, water conservation technologies just to be able to continue living in those cities.

  • Erin

    Interesting points Rob – we’re starting to see green homes pop up in downtown Chicago, but of course, the premium to build is a hurdle. I think you may have missed another driver, aside from a reduction in cost, which is the impending scarcity of resources for select communities. With the impending water issues facing Las Vegas, and increasingly frequent droughts across the southeast, I believe many families will start to turn to, at least, water conservation technologies just to be able to continue living in those cities.

  • http://robhahn.wordpress.com/ -Rob

    Thanks for the comments, Erin.

    FWIW, I think you’re correct about resource constraints. But I don’t have any information on how those constraints translate into economics.

    In other words, shouldn’t running water in Las Vegas or Phoenix be more expensive? The minute that a Las Vegas resident is paying $2/gal for running water is the same minute he’d be investing in greywater recovery systems.

    I think regulation is a particularly poor way to handle things, even for green issues which mostly deal with externalities, when market-based incentives will work just as well most of the time.

    For example, I believe that deregulating utilities (including water) or privatizing them so that those utilities have to turn a profit to stay in business would immediately create massive demand for green buildings and green technology in numerous areas of the country.

    -rsh

  • http://www.choosinggreen.com/ Roy Taylor

    Rob,
    It makes no sense that the green movement has not made it down to the local S&L financing the next spec or even custom home. I am a green architect. I can show any builder how to take any house design and make it more green and only spend 7-10% more in the process. The Green that I am talking about is not the slapping on of a solar panel (which is the last thing you should do if you want to build a green house, no I mean it, the last thing) Energy efficiency is the green that I am talking about: infiltration, insulation, conservation, efficiency, in that order. Net result is energy bills that are less than half.
    So here’s the financial magic for all mortgage lenders. The cost of the 10% increase over thirty years is less than the cost of half the the utility cost and so on a monthly basis the payback is immediate.
    So it actually costs less to build green than to not, even in suburbia. Why would a banker allow their money to be used without requiring it to be built green in this manner,it makes the loan safer by resulting in a lower impact on the monthly nut and is a better house for a resale value. On top of the financial reasons are that the house is less drafty, more comfoartable, and has a healthier indoor air quality. win-win.
    Roy

  • http://www.choosinggreen.com Roy Taylor

    Rob,
    It makes no sense that the green movement has not made it down to the local S&L financing the next spec or even custom home. I am a green architect. I can show any builder how to take any house design and make it more green and only spend 7-10% more in the process. The Green that I am talking about is not the slapping on of a solar panel (which is the last thing you should do if you want to build a green house, no I mean it, the last thing) Energy efficiency is the green that I am talking about: infiltration, insulation, conservation, efficiency, in that order. Net result is energy bills that are less than half.
    So here’s the financial magic for all mortgage lenders. The cost of the 10% increase over thirty years is less than the cost of half the the utility cost and so on a monthly basis the payback is immediate.
    So it actually costs less to build green than to not, even in suburbia. Why would a banker allow their money to be used without requiring it to be built green in this manner,it makes the loan safer by resulting in a lower impact on the monthly nut and is a better house for a resale value. On top of the financial reasons are that the house is less drafty, more comfoartable, and has a healthier indoor air quality. win-win.
    Roy

  • http://robhahn.wordpress.com/ -Rob

    FWIW, I think you’re on to something. If I were building a new house, I would probably insist on a fair amount of green features built-in. Because I like saving money, and I like preserving water.

    The issue, frankly, is whether consumers are willing to pay the 7-10% extra. On a 300K house, 10% premium for green is $30K. According to mortgage calculators, assuming a 5% APR, a 30-year $300K mortgage is $1610.46 a month. $330K is $1771.51 a month.

    Would consumers want to pay $160 extra per month?

    The answer depends in part on what sort of savings the buyer can see immediately on a monthly basis. If the cost savings is at or above $160 a month, then it’s a no-brainer. If it’s close, where the extra cost is only $20 a month or so, perhaps it’s still a no-brainer. If it’s not close, then I don’t see consumers going that way.

    And the realtors I’ve spoken to confirm that they simply can’t identify a market premium that buyers are willing to pay for green buildings.

    What has to happen, I think, is greater education all around. If lenders only want to lend for green buildings for new projects, that is certainly within their prerogative. The market will bear out their decision one way or the other. If more builders would educate their clients about the benefit of building green, I think it’ll make a difference over time.

    -rsh

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  • http://robhahn.wordpress.com -Rob

    Thanks for the comments, Erin.

    FWIW, I think you’re correct about resource constraints. But I don’t have any information on how those constraints translate into economics.

    In other words, shouldn’t running water in Las Vegas or Phoenix be more expensive? The minute that a Las Vegas resident is paying $2/gal for running water is the same minute he’d be investing in greywater recovery systems.

    I think regulation is a particularly poor way to handle things, even for green issues which mostly deal with externalities, when market-based incentives will work just as well most of the time.

    For example, I believe that deregulating utilities (including water) or privatizing them so that those utilities have to turn a profit to stay in business would immediately create massive demand for green buildings and green technology in numerous areas of the country.

    -rsh

  • http://robhahn.wordpress.com -Rob

    FWIW, I think you’re on to something. If I were building a new house, I would probably insist on a fair amount of green features built-in. Because I like saving money, and I like preserving water.

    The issue, frankly, is whether consumers are willing to pay the 7-10% extra. On a 300K house, 10% premium for green is $30K. According to mortgage calculators, assuming a 5% APR, a 30-year $300K mortgage is $1610.46 a month. $330K is $1771.51 a month.

    Would consumers want to pay $160 extra per month?

    The answer depends in part on what sort of savings the buyer can see immediately on a monthly basis. If the cost savings is at or above $160 a month, then it’s a no-brainer. If it’s close, where the extra cost is only $20 a month or so, perhaps it’s still a no-brainer. If it’s not close, then I don’t see consumers going that way.

    And the realtors I’ve spoken to confirm that they simply can’t identify a market premium that buyers are willing to pay for green buildings.

    What has to happen, I think, is greater education all around. If lenders only want to lend for green buildings for new projects, that is certainly within their prerogative. The market will bear out their decision one way or the other. If more builders would educate their clients about the benefit of building green, I think it’ll make a difference over time.

    -rsh