The following post was written by Barry F. Hersh. Mr. Hersh is a Clinical Associate Professor at the New York University, Schack Institute of Real Estate where he teaches graduate courses and conducts research related to environmental aspects of real estate. He has over thirty years experience as a real estate executive (with Reynolds Aluminum), developer, and public planning official. NOTE: Mr. Hersh and Larry Simpson (CRE3 Forum Publisher) have formed collaboration to Co-Author a book entitled, “The Convergence in Corporate Real Estate” to be published later this year.
Corporate real estate executives have pretty much figured that most companies want to be, or at least perceived to be, “green”. Adopting environmental mission statements, hiring sustainability directors, corporations have joined the green tsunami. Over a longer period there has been a regulatory drive for more disclosure of environmental liability. What this means for corporate strategy and profitability is becoming clear in several specific arenas directly relevant to corporate real estate.
The first thought may be of the dramatic growth of “green buildings”, with many international corporations adopting policies calling for their own spaces, leaseholds or ownership, to meet LEED (Leadership in Energy and Environmental Design – US Green Building Council) or EnergyStar (US EPA and DOE) or comparable international standards such as Green Globe. Corporations from Google to Hearst have built green headquarters, and some companies have green requirements for all their facilities.
There have a slew of studies asking if going green pays, most focusing on US office buildings and using CoStar data (Eichholtz, Kok and Quigley, 2006 and updated in 2010, Miller and Spivey, 2008, Muldavin, 2009). The results have been varied – but consistently positive, showing stronger lease rates, occupancy and value for certified green buildings – even during the recent downturn. One note is that the most hard-nosed observers, from both the environmental and real estate perspective, focus on energy costs as having the most measurable impact on the bottom line – and on green house gas emissions. The somewhat softer analyses relating to tenant satisfaction, employee attendance, health and performance; as well as aesthetics, image and marketing, have greater potential but are harder to demonstrate.
As dramatic as the shift to green buildings has been, perhaps the more financially significant change for companies with manufacturing or other non-office operations has been the shift in dealing with contamination and reporting requirements. BP showed the world one cannot be “green” and a polluter.
Regulators are strongly pushing corporations to report their environmental performance and liabilities. Sarbanes-Oxley disclosure requirements included revealing potential environmental liabilities from contaminated properties as well as other environmental risks. While some consultants foresaw, and probably wished for, a dramatic change in corporate policy, the results have been more gradual. In particular corporations have not rushed to dispose of contaminated site, but rather focused on identifying the problems, containing the risk, and selling properties into strong markets when secure that the environmental risk is limited.
Recent FASB regulatory proposals for greater potential disclosure of loss contingencies may further impact corporate real estate practice, and litigation. In a recent letter to the Wall Street Journal responding to an editorial FASB’s Lawyer Bonanza” FASB’s Chairman Bob Herz defends FASB’s proposed disclosures for loss contingencies, saying “new disclosures are aimed at providing information earlier to existing and potential investors in order to give them a greater understanding of the risks companies are facing,” and pointing out that, “the proposal allows companies to aggregate claim amounts, so that the plaintiffs attorneys would not be able to identify specific cases.”
GE has been an illuminating example. During the Welch era, GE developed a well-deserved reputation as recalcitrant. One former EPA official said, “Show most companies the edge of the cliff, and they will comply. With GE, you had to push them over the cliff and when they are a foot from hitting with a thud, they’ll start to reluctantly negotiate”. One specific Welch dictum was that GE would not sell contaminated property, even to redevelopers who specialized in remediation – a strategy aimed at minimizing environmental litigation. Well. GE is now the home of “ecoimagination”, realizing that many of its products, from light bulbs to turbines for windmills, sell in the green market. GE is, perhaps still reluctantly, proceeding with a half billion dollar PCB cleanup of the Hudson River. GE Capital has a humongous real estate portfolio of primarily apartment buildings, both mortgages and ownership, and is working to improve energy efficiency, led by a sustainability director – one of several former EPA experts and attorneys now working for GE.
Perhaps the quietest revolution has been in the operational side of corporations. In a new Wal-Mart if you leave the big refrigerated room door open for a few minutes, you get an e-mail from HQ reminding you to close the door. Every aspect of the supply chain: shipping, use of natural resources, transportation costs, energy consumption, packaging, and more are impacted by need to be more efficient. This affects an entire range of corporate real estate decisions related to site selection, design and management of manufacturing, distribution and retail facilities.
The main point for corporate real estate executive is that environmental responsibility is all of the above – and more. Creating a green, high performance company is analogous to designing a green, high performance building. Green wash can’t just be added at the end; sustainability has to be part of every step, especially the initial steps. So the corporate real estate strategy, from site selection to lease negotiation, has to incorporate the company’s goals. Also, just as with building design, measuring performance is vital to going green. Location productivity measurements will include employee satisfaction, health and attendance, as well as energy costs. Real estate decisions now have a new dimension, the impact upon energy use, and the environment.