A victim of the recession?

Examining the economics of sustainable development

BY BRAD ERIKSEN Jordan Schrader Ramis

In the "green" Pacific Northwest, the general consensus has been that our society has encountered a paradigm shift and that sustainable commercial development is here to stay, regardless of changes in the underlying economic environment.

A 2008 survey conducted by commercial real estate information company CoStar supports the economic benefits of sustainable building practices, finding that buildings obtaining a Leadership in Energy and Environmental Design certification have a 3.8 percent higher occupancy rate than conventional structures, generate more than $10 per square foot in additional revenue and sell for more per square foot than similar conventional properties.

However, despite the benefits of LEED-certified properties, reports from builders and developers suggest that sustainable practices may not be as ingrained as previously thought. Since 2007, there has been a sense that some commercial projects are abandoning certification and reducing sustainable elements. Some "green" projects are being shelved altogether.

Looking at the underlying economic indicators, the recent trend away from sustainability is understandable, for the following reasons:

Cost.  Industry estimates indicate that construction costs for sustainable development are 5 to 10 percent higher than for conventional construction. Renovation and repairs are also incrementally higher. Commercial real estate owners and developers are necessarily cautious about incurring these additional costs without a reasonable assurance of a return on their investment. Even the cost of the LEED certification process itself can dissuade owners of smaller commercial projects from obtaining certification.

Credit.  It's the one factor hobbling many development projects: the unavailability of credit and the ratcheting up of financing terms by lenders. Lending standards have changed dramatically since the height of the housing boom only a few years ago. Equity requirements for all projects have increased significantly. Eliminating optional sustainable elements in a project may be the difference between obtaining the funding or going without and having no project at all.

Energy Costs. As the cost of natural gas and oil has dropped, so has the incentive to install fuel-efficient systems. Natural gas prices alone fell more than 20 percent in November. As energy costs come down, the payback period for the additional cost of energy-efficient systems is necessarily increased. A few extra years added to the payback period may be sufficient to dissuade a developer from including such a system in the project, or even prevent the project from penciling out altogether.

Tax Credits. Most governmental incentives designed to encourage sustainable development come in the form of tax credits. Tax credits require taxable income in order to provide the desired incentive. But such incentives have little motivational value during a recession when many owners and developers are experiencing flat net income at best and operating losses at worst.

Only time will tell if sustainable development can survive the downturn in the economy.  Governmental incentives intended to spur sustainable development must be rethought to ensure that they are providing desired outcomes. Perhaps most importantly, the industry must examine the best way to deliver sustainable development in a cost-effective manner.

Thomas B. ("Brad") Eriksen represents business and corporate clients in all aspects of business operations for Jordan Schrader Ramis PC in Vancouver. He can be reached at 360.567.3903 or brad.eriksen@jordanschrader.com. 

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