Cutting Edge LEED on the Chopping Block?
Green Building Law Update would be remiss if it did not comment on the recent financial struggles and the impact these events will have on the green building industry. Simply put, here at GBLU, we anticipate scaled back green building efforts as developers struggle to obtain financing.
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A recent article in Globe and Mail (Canada’s National Newspaper!) does a great job highlighting the recent financing struggle for project development. The article focuses on a major condominium project in Canada and the developer’s struggle to obtain financing:
Just eight months after frenzied buyers lined up for days to buy units of the $450-million luxury skyscraper to be erected at the corner of Yonge and Bloor Streets, the global credit and U.S. subprime mortgage crises tightened their grip . . . .
Mr. Gold moved a few months ago to seek out new financing partners. Conditions are getting tougher, but the location and quality of the project helped him sign on two European pension funds, Mr. Gold said.
While this developer was able to find new sources of financing, the article points out that “it’s the marginal projects that could get hurt.” Additionally, as financing becomes harder to come by, developers may be forced to “scale back their projects.” While Mr. Gold’s project apparently is not seeking LEED certification, if Mr. Gold had been forced to scale back the project due to a lack of financing, LEED certification may have been on the chopping block. Unfortunately, as developers fail to obtain financing, green building certification may be one of the first components of construction projects to be eliminated.
Do you agree or disagree?
Related links:
- Kazakh company erecting 'bold' tower at Yonge-Bloor (cbcnews.ca)
- Developers struggle to secure financing (Globe and Mail)
- Architects Hit Hard by Financial Crisis (Architectural Record)
- ‘A good time to build unless you have to borrow’ (Char. Business Journal)
My guess: We'll see a drop in percentage of projects pursuing the higher-level goals of LEED Platinum or Gold as well as a drop in percentage of projects pursuing more experimental environmental systems, strategies and technologies, but the percentage of projects persuing LEED Certification (basic) will stay relatively stable.
A few reasons why I am hazarding this guess: With an increasingly tight financing market, lenders are going to be lending to projects with a competitive edge. Green projects are still going to be more attractive to consumers, and thanks to green building legislation both enacted and impending they are still going to be required in some areas.
Also, acheiving the most basic level of LEED certification is not necessarily expensive or risky, as good architectural practice should bring projects within spitting distance of certification anyway. We've had a number of projects come through the pipeline where the owner has decided at the very last second (after construction documents were already completed) to pursue LEED while it was never an original intent, and it ended up requiring minimal changes to the building design and systems (we MIGHT even achieve Silver).
I'm of two minds on this one. On the one hand, I feel that in a tough market, going through the percieved expense and extra time to get LEED CERTIFICATION is definitely on the chopping block. On the other hand, I think that green building in general is still going to be happening since it gives a substantive value to an otherwise saturated condo market. The past trend for luxury condo developement in New York was to just buy it, build it, push it out the door and pocket your millions. Whether or not a building was green made no appreciable difference to developers since it would just take out of their bottom line and not add appreciably to the cost per square foot they could get. A lot of those developers are now sitting on condo vacancies and have become landlords, renting the empty ones out and trying to weather the storm. In New York, landlords traditionally pay for heat and so the developers turned landlords are dealt a double whammy of having rents that won't cover their highly leveraged mortgages and having to pay to heat poorly made luxury condos with floor to ceiling windows and poor insulation.
I think that in the coming economy, residential and commercial buildings will begin to be rated by thier effiecency in much the same way that people now look at the fuel economy stats on new cars. If I had money now to invest in a commercial building, I'd take a much more favorable view of one that has an energy modeling report in the prospectus.
Thanks for the comments Jason! I hope you are right regarding LEED certification. You make a good point that lenders may be looking to finance projects with a competitive edge and LEED certification provides that competitive edge. My fear is that "marginal projects" that previously would have pursued LEED certification will not do so when strapped for cash.
Next week, I am going to write about why projects SHOULD continue to pursue green building strategies and certification. You have hit on some of the primary reasons.
TeddyFrank - I agree that the extra costs associated with LEED certification may put the certification process on the chopping block. I also agree that projects should think long term and incorporate green building strategies, particularly related to energy efficiency.
Also, you make an interesting point regarding rating buildings based on their energy efficiency. Washington, D.C. has implemented a program to create this type of market. You can read about the program here: http://www.greenbuildinglawupdate.com/2008/10/articles/codes-and-regulations/city/anyone-using-energy-star-benchmarking/
Thanks for the great comment!
Two thoughts
1) Many energy efficiency improvements are cost-effective and anyone tightening their belts should be looking into these options. I realize that the up-front costs can be prohibitive, but the current financial crisis teaches us to think logically and think ahead.
2) The regulatory requirements and incentives are unlikely to go away, even in with the new economic situation. The stock market tanking does not make global warming less of a threat. Because of the highly cost-effective nature of many green building improvements, lawmakers will continue to look to green building strategies to address the climate problem. Both presidential candidates claim to be serious about tackling climate change and I predict green building will be a big part of this (maybe not LEED certification, but definitely energy efficient buildings).
As the first two commenters already mentioned, I believe that the really bleeding edge experimental stuff with no proven ROI will be the first to go in the era of tighter credit. I doubt that LEED and green-building practices will go out the window completely though, since (depending on your location) LEED Certified or Silver have minimal hard construction cost premiums and relatively quick payback. These higher-performance buildings could even be in higher demand as owners look for a way to differentiate themselves to potential tenants if the rental/lease market gets flooded.