Selling Green in the Spec Office Market

A growing number of speculative office developers are going to market with sustainable, high-performance buildings. But are tenants willing to pay more green for green space?

August 11, 2010

     
   
  Satterfield & Pontikes Headquarters Houston, Texas
Stats: 65,000 sf; three stories; LEED Gold
Owner/Developer: Satterfield & Pontikes Construction Inc.
Completion: November 2006
Cost: $8 million; $123/sf
Cost premium for green: 5%
Asking lease rate: Up to 15% over Class A market rate
Market rates: $26.5/sf for newer Class A space
Percent of space leased to date: 100%
How green is helping to attract tenants: All tenants that occupy the space signed up, in part, because of the LEED-Gold rating and the potential to save on utility costs, according to the developer.
Challenges: During the pre-leasing phase, the developer had to educate the local broker community on the benefits of green and overcome skepticism among brokers and prospective tenants of the projected utility savings.
 
     










































W hen Kansas City-based Zimmer Real Estate Services put the finishing touches on its LEED-certified EcoWorks at Southlake Park office building in Lenexa, Kan., more than six years ago, the developer slapped a premium-Class A price tag on leases in the 124,000-sf building and waited for prospective tenants to get in line to sign up.
 

Even though the Kansas City office market was soft at the time, Zimmer felt that the state-of-the-art office space, with its then-unique green features and potential to save tenants money through lower energy and operations costs, would fetch higher lease rates and fill up faster than its non-green counterparts. But when much of the space lay vacant for several months, Zimmer had to rethink its strategy.

“We decided that the markets were not strong enough to get a premium for the space,” says David J. Zimmer, president of the 60-year-old development firm. “In talking with our partners, we thought it was better to get market rent. Then, if we could manufacture a reduction in operating costs and keep the tenants in the building past the initial term of their lease—that would basically be our premium for LEED.”

                
   
    Banner Bank Building Boise, Idaho
Stats: 195,000 sf; 11 stories; LEED Platinum
Owner/Developer: The Christensen Corp.
Completion: July 2006
Cost: $25 million; $128/sf
Cost premium for green: Zero (does not include LEED fees)
Asking lease rate: Market rate
Market rates: $19-20.50/sf for Class A space
Percent of space leased to date: 95%
How green is helping to attract tenants: Green was not a critical feature for anchor tenant Banner Bank, but it did help attract several smaller tenants after the building opened. The building leased up in just 18 months—63% faster than the last Class A office building constructed in Boise, the 11-story, 200,000-sf Wells Fargo Center.
Challenges: Developing in a small office market meant that the budget had to stay within market-rate cost. The team accomplished this by applying integrated design: Any additional costs allocated to one system or approach had to be offset by savings in other parts of the building.
                    
   
    EcoWorks at Southlake Technology Park, Phase 1, Lenexa, Kan.
Stats:
124,000 sf; two stories; LEED Certified
Owner/Developer: Zimmer Real Estate Services
Completion: 2001
Cost: $17 million; $130/sf
Cost premium for green: 4%
Asking lease rate: Market rate
Market rates: $21-23/sf for Class A space
Percent of space leased to date: 96%
How green is helping to attract tenants: Green wasn’t a key factor in attracting the first generation of tenants, but it is playing a much larger role in attracting second-generation tenants. Major tenant Samsung plans to lease more space, in part because of the green features. New tenants like TradeWind Energy specifically sought out EcoWorks for its sustainable design and healthy work environment.
Challenges: This was only the second LEED spec office building in the nation, and the developer had a difficult time convincing brokers and tenants of the value of green. Early on, the developer marketed the space at a slight premium over comparable Class A space in the area, but eventually lowered to market rate after experiencing slow leasing velocity.
                     
   
    Navy League Building Arlington, Va.
Stats:
213,000 sf; seven stories; four below-grade parking levels; LEED Silver
Owner/Developer: Navy League of the United States
Completion: September 2005
Cost: $58 million; $275/sf
Cost premium for green: 2.8%
Asking lease rate: Market rate
Market rates: $38-40/sf for newer Class A space
Percent of space leased to date: 100%
How green is helping to attract tenants: The green features helped attract tenants, but it is regarded more as an amenity and has not translated into a premium lease rate. The project received a density credit of 0.25 FAR (floor-to-area ratio) from Arlington County, which allowed the developer to add 12,318 sf to the project.
Challenges: Achieving LEED Silver while keeping the building lease rate competitive and without having most of the building end-users identified at the time of design (Navy League occupies just one-tenth of the building).
                       
   
    Prime Meridian Center Tampa, Fla.
Stats:
450,000 sf; 1,800-car garage; 20 stories; LEED Gold (registered)
Owner/Developer: Trammell Crow Company
Completion: January 2010
Cost: $135 million; $300/sf (projected)
Cost premium for green: Less than 3%
Asking lease rate: $31-34/sf (projected)
Market rates: $25-30/sf for Class A space
Percent of space leased to date: Zero
How green is helping to attract tenants: The first major green Class A office space in Tampa’s central business district. Attracting companies that are interested in providing a sustainable live-work-play environment for their employees.
Challenges: Educating the broker community on the value of green office space. Competes with Tampa’s popular Westshore office market for tenants.
                       
   
    Signature Centre Denver, Colo.
Stats: 298,000 sf; five stories; three below-grade parking levels; LEED Platinum
Owner/Developer: Aardex LLC
Completion: June 2007
Cost: $46 million; $110/sf (office space)
Cost premium for green: Zero (does not include LEED fees)
Asking lease rate: Market rate
Market rates: $18/sf for Class A space
Percent of space leased to date: 100%
How green is helping to attract tenants: The building was 100% leased prior to its opening, in part because of its LEED Platinum status. The developer offered space at market rate and heavily marketed the building’s lower utility costs ($2/sf less than the competition) and potential to improve worker productivity and reduce absenteeism.
Challenges: Educating the market on the benefits of sustainable design was the toughest hurdle, according to the developer.
                       
   
    Two MarketPointe Bloomington, Minn.
Stats: 230,000 sf; eight stories; LEED Silver (registered)
Owner/Developer: Ryan Companies US
Completion: September 2008
Cost: $55 million (projected)
Cost premium for green: 2-3%
Asking lease rate: $19.50/sf
Market rates: $18-19/sf for new Class A; $16-17/sf for existing Class A
Percent of space leased to date: 30%
How green is helping to attract tenants: Only Class A office space in the area that offers the combination of underfloor air distribution, 10-foot floor-to-ceiling heights, direct/indirect pendant lighting, and floor-to-ceiling glass. UFAD is a “deal closer,” specifically because it allows employees to control their environment.
Challenges: Green has been a hard sell to brokers and prospective tenants, particularly because Ryan is asking for a slight premium in lease rate compared to new Class A office space in the area.
                      
   
    Wilcox 190 Center Plano, Texas
Stats: 185,000 sf; three stories; LEED Silver (pre-certified)
Owner/Developer: GVA Cawley
Completion: December 2007
Cost: N/A
Cost premium for green: Less than 5%
Asking lease rate: 3-4% above market rate for new Class A
Market rates: $24-26/sf for new Class A; $21-23/sf for existing Class A
Percent of space leased to date: Zero
How green is helping to attract tenants: This is the first LEED-certified spec office in Plano, Texas. As such, the project is receiving a lot of support from city officials. After initial pushback from the local broker community, brokers are starting to see the benefits of green for their tenant clients.
Challenges: The developer has had to allocate significant resources toward educating the local broker and prospective tenant community on the value of green. Several competing, non-green office properties in the area offer space at less cost.
                           

Now 96% leased and keeping major tenants like Samsung past their initial lease signing period, EcoWorks is a success, especially considering it was just the second LEED-certified speculative office in the nation.
 

But the developer’s rocky start is a lesson that dozens of pioneering speculative office developers like Zimmer are learning as they go to market with green office space. Sustainable, high-performance buildings are not necessarily an easy sell to brokers and prospective tenants in markets where green is not the norm, especially if they cost more than the typical Class A rent.

Even with the green building movement’s rapid growth in the U.S., the fact remains that, outside of a number of Fortune 500 corporations, multinational giants, and environment-related companies and institutions, the lion’s share of companies and organizations that are in the market for Class A office space do not specifically demand green buildings over non-green buildings, let along require that their office space be LEED certified.

“We have yet to see a tenant rule out a building because it wasn’t green or LEED certified,” says Rick Collins, VP of development with Ryan Companies US, Minneapolis, which is developing and constructing the $55 million, LEED-Silver Two MarketPointe project in Bloomington, Minn., due to open in September. Collins says that while a growing number of RFPs that cross his desk inquire about green, sustainable design is simply not a must-have for the vast majority of prospective tenants.

Consequently, many green developers are finding it necessary to devote a considerable amount of their resources and efforts to educating the local broker community and prospective tenants on the value of sustainable design and green building.

“It’s still an issue of how much green is worth dollar-wise to the tenant,” says Jack (Buddy) Tompkins, senior director of Dallas-based GVA Cawley Realty Services. Tompkins has spent the better part of the past year organizing “broker road shows” to educate brokers and clients on the benefits of taking up space in the developer’s 185,000-sf, LEED-Silver Wilcox 190 Center in Plano, Texas, that city’s first LEED-rated spec office project. The property came online in December, and has yet to attract a tenant, although the building is gaining momentum in the marketplace, says Tompkins.

The challenge for GVA Cawley has been getting brokers and prospective tenants to see past the 3-4% premium over market rate for the Class A space and consider the benefits of 20% savings in electrical costs, a 38% reduction in potable water consumption, and possibly greater employee productivity. “The energy reduction alone equates to 40 cents per square foot in savings for the tenants,” says Tompkins.

Tompkins points to another key selling point of green buildings: “Studies show a 16% increase in employee productivity due to improved air quality in a LEED-Silver building. Using only a 10% productivity savings and an average $50,000 per employee salary, the savings to the tenant in employee costs is $20 per square foot per year.”

These are the kinds of arguments that the majority of developers marketing green spec office space are using. But without legacy data to back these claims, the message does not always get through to clients shopping around for space. None of the worker productivity studies have been conducted for LEED-rated buildings, which is one reason why the U.S. Green Building Council will be devoting $2 million to research the “productivity bonus” hypothesis for green buildings.

The Wilcox 190 Center is competing with several new, non-green spec office properties in the area, including a “worthy opponent” of similar size across the street, says Tompkins. “If companies are evaluating another building that is comparable in almost every way, but there’s a difference in cost, sometimes they’ll think strictly with their pocketbook,” he says.

In Houston, contractor/developer Satterfield & Pontikes Construction was able to overcome initial pushback over premium lease rates to lease up 45,000 sf of available space in its 65,000-sf, LEED-Gold headquarters building. Now 100% leased, the building commanded rates of up to 15% over market rate for Class A space in the area.

“At first, the tenant brokers were skeptical of our claims on the benefits of green and projected operational cost savings, but they eventually came around,” says George A. Pontikes, Jr., president and CEO of the 19-year-old firm. He says virtually all tenants are oil- and gas-related companies, many of which are getting pressure from downstream to go green.

“If we built a building four times the size, we could have leased it at a premium,” says Pontikes.

Taking the integrated design approach

Some developers are flat out bypassing the price-point debate with brokers and tenants and are applying the tried-and-true integrated design approach to ensure that their projects come in at or near market rate. The best examples are two LEED-Platinum developments in Denver and Boise, Idaho, both of which came in at market rate, giving them a sizable marketing advantage over competing non-green properties.

Aardex LLC offered up space at its 298,000-sf Signature Centre in Denver at a base rate of just $18/sf, about what tenants would pay for Class A space in the city’s nearby Union Boulevard corridor. The developer’s ultra-competitive price point and strong marketing message—which pushed the benefits of “user-effective buildings” and ongoing utility savings of $2/sf—helped achieve 100% leasing even before the $46 million building opened last June.

“LEED Platinum was definitely a bonus,” says Randy Swearingen, VP of office development with Aardex, Golden, Colo. Swearingen says by going green, the development was able to attract environmentally focused companies like Blue Sun BioDiesel. “They’re paying nearly double what they could have paid in a Class B building in town just to walk the talk.”

By applying a holistic design approach, the Building Team for Signature Centre was able to incorporate relatively exotic technologies like chilled beams in the glass curtain wall mullions, underfloor air distribution, and water-free urinals without adding to the overall construction cost, according to Swearingen. For instance, to help cover the additional first costs for the building’s underfloor air distribution system, the team reduced the height of the building by approximately one foot per floor, which “dramatically lowered our building skin cost,” says Swearingen. “Integrated design was a major time and money saver.”

Leasing velocity wasn’t quite as extreme for the 11-story, 195,000-sf Banner Bank Building in Boise, but developer Gary Christensen says the building’s $19-20.50/sf asking lease rate and LEED-Platinum rating were key to reaching 95% occupancy within 18 months—63% faster than the last Class A office building constructed in Boise, the 11-story, 200,000-sf Wells Fargo Center.

“In talking with the brokerage community, we got a lot higher percentage of leasers to lookers than virtually any other project in town,” says Christensen. He adds that while green wasn’t a prime factor in attracting the building’s anchor tenant, it did help in recruiting several smaller tenants, including an engineering firm, a CAD software distributor, and a nature conservancy.

“During the pre-leasing and middle-leasing phases, there was uncertainty about how a green building [would] be different and what they would have to give up,” says Christensen. “But once the building opened and they could tour the space and see that they were not, in fact, giving up anything and that they would be getting a high level of finish, quality materials, cleaner air, and better light, it helped us lease up much faster than we expected.”

Christensen says his Building Team was able to hold to a tight $128/sf construction budget by offsetting the additional cost of sustainable technologies with savings in other areas of the building.

For example, the additional cost for underfloor air distribution was offset by requiring less mechanical equipment for air distribution and modular electrical distribution, says Christensen. A $150,000 investment in lighting controls for the building was offset, in part, by the elimination of light switches (“A $2 light switch costs $120 installed!” he notes) in favor of occupancy sensors throughout the building. Using castellated structural steel beams in lieu of standard steel I-beams eliminated the need for about 400 smoke detectors that otherwise would had to have been installed in the beam pockets.

“There’s this underlying assumption in the industry that green has to cost more,” says Christensen. “I don’t believe that has to be true. With integrated design, it will simply cost different.”

So, which types of features and amenities are drawing tenants to green spec offices?

Underfloor air distribution is a big selling point, says Collins of Ryan Companies, which will offer UFAD throughout its Two MarketPointe building. “What we are selling [with UFAD] is the ability to provide employees control over the volume of air flow in their personal space. That is not something that’s been available in this market before,” says Collins, who adds that improved indoor air quality and the ability for tenants to reconfigure their space faster and more efficiently also make UFAD a great draw.

The core decision to invest in UFAD at Two MarketPointe also put the building “a long way” toward achieving LEED Silver, says Collins. Installing floor-to-ceiling glass, for instance, would have been an unrealistic option with a conventional HVAC system.

He explains that the traditional Minnesota building has a sill of at least 30 inches in height because it is very difficult to push air down the wall to warm the window any lower than that with a conventional HVAC system. “By providing air at the floor, we’re able to warm the expansive windows and thereby live with floor-to-ceiling glass,” says Collins.

Collins is confident that by packaging UFAD and floor-to-ceiling glass with two other distinctive green features—10-foot floor-to-ceiling heights and direct/indirect pendant lighting—Two MarketPointe will beat out comparable Class A properties in the highly competitive Southwest Minneapolis market, the second-largest office market in the Twin Cities region with 16 million sf of space.

In fact, the builder-developer feels so strongly about the unique set of features at the development that it is betting that the building will command a 2-3% premium in lease rate. Ryan’s asking net rent is $19.50/sf, $0.50/sf more than new Class A space in the area and as much as $3/sf more than existing Class A offices. “The reception among the market place has been very favorable,” says Collins. “This building has allowed us to be considered by tenants who previously might not have considered us, because it is such a unique grouping of features and benefits.” In fact, even before breaking ground last July, Ryan Companies signed CB Richard Ellis for 70,000 sf.

Access to public transit, bike storage and showers, daylighting, and outdoor views are other popular green amenities that are a draw for prospective tenants, says Elaine Melonides, managing director with Jones Lang LaSalle, Chicago, which represents major corporate giants like Ernst & Young, HSBC, and BP.

“Many of our clients are about doing more with less space, so offering plenty of daylight and access to views is important,” says Melonides. She says many of her clients have a more heightened awareness of sustainability today and are starting to realize the benefits of green buildings in attracting and retaining the new generation of workers.

“A company like Ernst & Young hires thousands of employees each year of out college, and many of those young workers want to align with companies that are looking to improve the environment,” she says.

A positive sign of green’s coming of age in the financially driven commercial office world is the growing number of short-term developers that are investing in LEED-rated buildings. It was assumed that only long-term property holders could justify the perceived long-term payback periods associated with sustainable design.

But with the growing demand for green space, the potential to earn premium lease rates, the higher perceived value of green buildings, and more-integrated design making added first costs almost negligible, developers that plan to sell their investment in as little as five years are starting to get into the mix.

Mega-developers like Hines know firsthand about the investment payback of green buildings. Less than two years ago, the Houston-based company sold LEED-rated spec office towers in Atlanta and Chicago at record-breaking prices. In September 2006, the company fetched $400/sf for its 41-story, 669,700-sf, LEED-Gold 1180 Peachtree tower in Atlanta. A month later, its 40-story, 820,000-sf, LEED-Silver One South Dearborn tower in the Windy City sold for $422/sf.

“Is it because they are LEED certified or because they have Class A tenants paying Class A rents? Well, I think those two go hand in hand today,” says Jerrold P. Lea, SVP of conceptual construction with Hines. He adds that going green increasingly helps secure financing on the front end of projects as well. “Our financing sources believe that a sustainable project is one that has greater long-term value.”

Lea, who served as chair of the U.S. Green Building Council’s LEED for Core & Shell committee, argues that the very definition of Class A now includes sustainable design—“and probably LEED certification”—in a number of competitive markets and cities.

GVA Cawley’s Tompkins concurs. “Frankly, I think green is going to be on most investors’ checklists soon,” he says. “Before they buy a building, they’ll check if it’s ADA-compliant, LEED certified, and so on. Green is going to be that critical to them.”

                  
Study provides a glimpse at the real dollar value of green offices
A November 2007 study by commercial real estate information services company CoStar Group, Bethesda, Md., and the University of San Diego’s Burnham-Moores Center for Real Estate sheds much-needed light on the real dollar value of sustainable, high-performance design in the speculative office market.
     The study compared 435 Energy Star and LEED-rated Class A office buildings with 238,808 traditional Class A office buildings in CoStar’s database. With all other factors being equal (i.e., building size, number of floors, location, class, age), green buildings were found to be netting $2.65/sf/year more than non-green buildings, as of the third quarter of 2007. Moreover, a comparison of all sales transactions tracked by CoStar in 2007 shows that green office buildings commanded on average $338/sf versus $295/sf for non-green buildings—a 14.6% premium.
     The study also showed that owners of green office buildings are enjoying nearly 91.7% occupancy rates, more than 3% higher than non-green buildings.