Institutional Investors Increasingly Demand High Performance Buildings

Dan Winters
With primary U.S. markets flooded with capital, institutional investors place a strong value on high performance assets as they seek to improve investment returns, reduce risk, and protect against asset obsolescence.

Real estate markets across the U.S. are exhibiting strong signs of value recovery with Class A office assets fetching record prices in Chicago, Washington DC, Houston, Baltimore and Boston. High performance buildings are leading the way with LEED Platinum and LEED Gold buildings setting the pace. Here’s the recent rundown:

Chicago, IL: 300 North LaSalle

This 60-story, 1.3 million square foot LEED Platinum office tower sold in 2Q14 for $850 million to The Irvine Company — the   $652/SF transaction price is the highest $/SF price in the history of the Chicago office market.

Washington DC:  800 17th Street

This 11-story, 364,500 square foot LEED Platinum office building sold in 4Q14 for $1,050/SF to a joint venture between TIAA-CREF and Norges Bank Investment Management — this price reflects the highest $/SF price ever in the District of Columbia office market.

“Green buildings are setting $/SF records in many primary and secondary US markets.”

Denver, CO: 1800 Larimer Street

The 495,500 square foot LEED Platinum office building located in the Denver CBD sold in 2011 for a then-record $430/SF to Invesco Real Estate Advisors, who then broke their own price record in 1Q15 by paying $544/SF for 1515 Wynkoop Street, a 295,200 square foot office developed by Hines that has achieved a 95 or higher ENERGY STAR score five years running. Denver is experiencing record prices for multifamily projects evidenced by the LEED Gold Solera, an 11-story, 120 unit high-rise in the Denver CBD recently fetching $308,333/unit.

Houston, TX: 1000 Main Street

This 837,000 square foot LEED Gold office tower rises 36-stories above the Houston CBD and is an iconic downtown anchor. Built in 2003 as Reliant Energy Plaza, the Class A building fetched $537/SF in 4Q14 from LaSalle Investment Management setting a Houston record for office prices.

Baltimore, MD: Thames Street Wharf

KBS Realty Advisors paid $341/SF in 2Q14 for the 8-story LEED Gold office building; KBS indicated that location and LEED Gold status were primary selling points. The previous Baltimore high-water mark was set in 2005 when Wells REIT II bought the T. Rowe Price building at 100 East Pratt Street for $316/SF, which has remained a consistent ENERGY STAR award winner.

Boston, MA: Boston Properties Portfolio

Norges Bank entered into a JV with Boston Properties to acquire several properties including the 1.23 million square foot LEED EB:OM Silver office tower at 100 Federal Street and the 791,000 square foot LEED Platinum Atlantic Wharf both located in Boston.

As institutional investors seek to place capital in well-located buildings leased to market leading companies, LEED certification and ENERGY STAR building performance labels have become a must-have attributes particularly when investing on behalf of foreign capital sources. This dynamic is taking hold across broader property sectors including apartment, retail, flex/industrial, warehouse distribution, and data centers.

Multiple lines of evidence are supporting this market shift, serving to further drive institutional investors toward LEED and ENERGY STAR buildings:

  1. Investment grade assets are increasingly LEED certified and disclose multiple ENERGY STAR scores.
  1. Institutional investor engagement with environmental, social and governance (ESG) measures is rapidly increasing evidenced by the 637 real estate entities that achieved a 2014 GRESB assessment and benchmark.
  1. The Deloitte Center for Financial Services identified factors where high-quality tenants look to their real estate portfolios to implement ESG best industry practices, and seek to include these metrics when reporting progress to their investors and other stakeholders.
  1. Valuation professionals are incorporating high performance building attributes and asset-level certifications into established appraisal and financial underwriting processes through guidance led by the Appraisal Institute.

Leading economists at the Wharton Initiative for Global Environmental Leadership estimated the US market for green buildings may rise from $85 billion in 2012 to $200 billion by 2016 [new and retrofits]. With primary US markets flooded with investment capital, investors are placing strong value on high performance assets as they seek to improve investment returns, reduce risk and protect against asset obsolescence.

Demand is particularly strong for LEED Gold and LEED Platinum buildings demonstrating sustained engagement with best practices via multiple year-over-year ENERGY STAR labels, particularly when combined with LEED CI tenant fit-outs executed through a green leasing program.

A recent Mercer report “Global Insights on ESG in Alternative Investing” highlights how institutional investor engagement with ESG criteria has increased significantly since 2011, and that nearly three-quarters of respondents now utilize ESG criteria when investing in alternative assets classes. This dynamic is abundantly clear within the real estate sector – GRESB coverage has tripled since inception with industry scores increasing year-over-year as REITs and private equity firms benchmark themselves against their peer group.

History will likely show 2014 as a tipping point as GRESB participation exceeded 50% on all major FTSE / EPRA / NAREIT worldwide indexes, and a clear majority of private equity firms globally are engaged in ESG benchmarking. For the laggards, it’s increasingly problematic to ignore ESG factors given the fiduciary responsibilities of loyalty and prudence, potential for reputational harm, increasingly sophisticated regulatory frameworks, and the ultimate drive to deliver consistent investment returns at lower risk.

Investors make capital allocation to management teams who demonstrate strong risk management practices. Given increased ESG engagement within the real estate sector, it’s fair to say investor demand for high performance buildings will continue at a brisk pace for the foreseeable future.

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

Related resources and references

April Issue: Investment—Green Values   Dees Stribling