Greenbuild 2014: Strategic Leadership

Dan Winters
In a crowded, noisy marketplace it is strategically important to demonstrate ongoing engagement with best practices, and transparency of outcomes.

When Greenbuild 2014 arrived in New Orleans, the city known as “The Big Easy” opened its arms to an estimated 20,000 industry leaders eager to showcase the latest in innovative building technologies, products and services.

There’s never been a better time to be in the green building industry. As of 3Q14, over 25,000 projects secured a compelling business proposition and achieved a LEED rating. Cities are pushing forward on energy benchmarking and disclosure efforts. Institutional investors require greater disclosures on ESG metrics through GRESB, the Global Real Estate Sustainability Benchmark.

PWC — a leading business consultancy — observes continued momentum in the number of quarterly management presentations to Wall Street analysts that include substantial discussion of corporate sustainability efforts. Market leadership opportunities beckon, and companies are answering the call.

Greenbuild Gets Down to Business

Several Greenbuild 2014 education sessions focused on the business issues of sustainability. During the Wednesday morning Greenbuild educational kick-off session, I had the opportunity to elaborate on a range of successful business strategies that characterize investment in high-performance green commercial real estate.

The presentation [see PDF] outlined four high-level business strategies:

  1. Marginal investment
  2. Competitive differentiation
  3. Market signaling
  4. Capital accessibility

Below is a brief description with accompanying context to frame each strategy:

 1. Marginal Investment

Achieving greater asset value requires additional investment of time and/or capital — the basic economic principle of “no free lunch” remains true. Deploying marginal investment into high performance asset attributes and management best practices enables owners to pursue opportunities to achieve increased revenue while reducing operating costs. Marginal investment is a calculated business decision designed to drive investment returns and achieve greater asset value.

 2. Competitive Differentiation

Market participants use asset ratings such as LEED or ENERGY STAR to communicate management’s engagement with best business practices, or to highlight a building’s relative energy efficiency. As example, ENERGY STAR provides a 1-100 score that communicates the asset’s energy efficiency to the broader market. This relative score provides important information to a wide array of stakeholders.

LEED’s position as a multi-category, tiered building rating system supports two distinct competitive differentiation techniques: 1) relative achievement level – Certified / Silver / Gold / Platinum; and 2) specific LEED credit achievement patterns. Unpacking the LEED plaque allows investors, owners and occupants to better understand asset attributes that support economic value, human experience, operational efficiencies, and other areas of focus.

 3. Market Signaling

Signals can convey significant information that support economic market value. Signaling is important to real estate, a market characterized by a high degree of information asymmetry whereby owners know their building far better than a prospective tenant or buyer.

Information transparency and reliability are critical elements of a well-functioning marketplace. Transparency of asset attributes, ongoing engagement with credible rating systems, and disclosing metrics and other outcomes allows market participants to discern high quality assets from ‘lemons’. Owners who differentiate their assets are significantly better positioned to achieve superior economic outcomes.

 4. Capital Accessibility

Portfolio owners who establish an engagement pattern and track record with green building are well-positioned to capitalize on new and emerging capital market opportunities. In Spring 2014, two major U.S.-based REITs with a history of market leadership raised $700 million in green bonds. These and other green-oriented debt and equity products are sure to emerge from the ever-evolving capital markets.

It’s clear the business community’s engagement with the strategic underpinnings of sustainability is at an all-time high, driven by both the pursuit of strategic advantage and investor interest in positively influencing its portfolio risk profile.

Where real estate is concerned, it’s notable that early sustainability leaders are harvesting significant financial gains. Gerding Edlen, a real estate development and investment firm based in Portland, Oregon recently began marketing for sale the Green Cities Fund I portfolio consisting of seven urban core apartment communities totaling 788 units. This private equity fund holds assets Gerding Edlen began developing in 2004, is seeing strong acquisition interest from a wide range of institutional investors. The fund’s major assets are certified at the LEED Gold or LEED Platinum tiers, and all are located in a prime 24/7 gateway city — Seattle, San Francisco, Los Angeles or Boston.

Earlier this year, KBS Realty Advisors achieved the highest $ / SF sale price in Chicago’s history with the 2Q14 sale of the 1.2 million square foot LEED Platinum office building at 300 North LaSalle which sold for $850 million [$634/SF] to The Irvine Company.

Financial outcomes like this are no accident. In a crowded, noisy marketplace characterized by 1) inconsistent recognition of meaningful asset attributes, 2) limited comparative context on performance measures, and 3) general opaqueness on asset history it is strategically important to demonstrate ongoing engagement with best practices and transparency of outcomes.

Leading companies including Gerding Edlen, KBS, Hines, and Bentall Kennedy among select others have acquired an extensive track record of sustainability engagement. The value they’ve created for investors, employees and the communities in which they operate significantly outpaces the average real estate company.

Capital gravitates to investment firms with talented individuals who can deliver superior risk-adjusted returns — more often than not, superior returns are delivered by professionals who are up to date with current trends, technologies, and management techniques.

Savvy professionals from great firms who attend Greenbuild are able to experience the sheer breadth and depth of high performance building information while interacting with leading peers. The annual conference provides opportunities to engage with the products and people that drive progress in the real estate industry. With nearly 1,000 exhibitors on hand, investors can inspect new technologies from View Dynamic Glass, cutting edge materials by established leaders including Saint Gobain and Kawneer, and the latest in design technologies from Autodesk’s Green Building Studio. Analytics firms such as Lux Research attend Greenbuild to gain insight into emerging building technologies while taking the pulse of market trends.

Greenbuild attendees also have access to a wide range of educational opportunities to acquire new leadership skills, gain insight into best industry practices, and learn from leading practitioners. With over 150 educational sessions to choose from along with the various summits, workshops, and building tours, Greenbuild can be an intense week. It was great to see the growing number of finance and investment banking firms in attendance.

Next year, Greenbuild will be held in our nation’s capital, Washington DC, where the theme is “Monumental Green”, a fitting tribute to a city that recently passed 100 million square feet in LEED certifications. Actions, outcomes and consistent engagement over time are the hallmarks of leadership. Between now and Greenbuild 2015 there will be many opportunities to express your market leadership and drive investor results. Looking forward to seeing you next year at the DC convention center and hearing about your industry leadership efforts.

Dan Winters
Dan Winters is GRESB's Head of North America

Related resources and references

Frontiers in Research: Business Strategy & FInance (Presentation)  Dan Winters, CRE