LEED For Retail: Developers seeing BLACK through GREEN

by Kurt Thompson
Market Leader for ecostrategy
Oculus Inc.

Green is a market differentiator.  Even in today’s tumultuous economy, building owners, property managers, and tenants are maintaining their commitments to green building and sustainability as key components of their real estate portfolios.  With investments at an all-time low for new construction and the leasing outlook bleak, building owners and developers are now retrofitting their existing retail and other commercial building stock to increase the value and marketability of their overall portfolios.   A new tool called LEED for Retail is coming online this year, and savvy developers are teaming up with architects and sustainability consultants to bolster their balance sheets with green retail building retrofits in a down market. 

The United States Green Building Council (USGBC) has created LEED for Retail to accommodate the unique nature of the retail environment, while keeping in mind the different types of spaces that retailers need for their distinctive product lines. There are two different tracks to follow with LEED for Retail:  LEED Retail NC, which is aligned with the developers’ role; and LEED Retail CI, which is aligned more with the tenants’ role in retail property design and construction.  Both systems are divided into five categories in which credits (points) can be achieved:
• Sustainable Sites
• Water Efficiency
• Energy & Atmosphere
• Materials & Resources
• Indoor Environmental Quality
• Innovation & Design Process

The total number of prerequisites and credits achieved by a project determines the certification level of that project.  Certification levels include Certified, Silver, Gold, and Platinum.

LEED Retail NC puts greater emphasis on site selection and energy performance, whereas LEED Retail CI emphasizes material selection and indoor environmental quality as the main drivers of its rating system.  The LEED for Retail reference guide will be formatted to LEED 2009 standards, and is expected to become available by the end of the first quarter of 2009 when the pilot versions are finalized.  As part of the LEED 2009 changes, the certification scale under LEED for Retail varies between each track. LEED Retail NC has a higher maximum point threshold, requires one additional prerequisite, and requires projects to receive a greater number of points to achieve minimum certification.

Why Invest in Green Retail Building?

There are several retail industry drivers influencing developers, building owners and property managers to build green.  The most powerful is the potential to lower operating expenses and increase resale values.  A 2007 study conducted by Davis Langdon concluded that on resale values alone, a LEED building sold for a $171 per square foot premium versus comparable ‘non-green’ (brown) buildings designed and built just a few years prior.  The CoStar Group recently presented a study that found that rent rates in LEED buildings were on average $11.33 per square foot greater than comparable non-LEED peers.  LEED certified buildings also have higher occupancy rates, nationally, by approximately 360 basis points or 3.6%, according to the CoStar Group.  All of these traits increase the marketability of a project and create opportunities for developers to maximize their return on investment.

The second most critical factor pushing commercial real estate developers into green retail building is market competition.  Nearly 90% of the respondents to a national survey on Green Building published by National Real Estate Investor said they will own, lease, or manage some form of green building or real estate within the next five years.  If your firm is not engaging in sustainable development practices, the strength of your holdings is likely to decrease as tenant demand and government incentives drive investment away from non-green buildings and into your competitor’s green building down the street or across the road.

Commercial retail developers are acting quickly to take advantage of a green building’s benefits.  Among the top trends developers are utilizing in their projects are energy efficiency, sustainable site development, and water efficiency.  LEED for Retail recognized these trends and stacked the points in each category by working with developers to maximize their benefit.  Smart developers are leveraging these strategies to reduce operating expenses and structuring leases to profit from green building and sustainable design.

Energy efficiency is a fundamental driver of LEED.  There are seventeen possible points to choose from in this category, which represent the greatest potential for cost savings.  Approximately one third of the total savings associated with green building can be attributed to energy efficiency, which is about $0.30 to $0.39 per square foot in a LEED Silver plus building, according to a recent study led by the CoStar Group.  Developers and landlords can realize a part of these savings by structuring lease deals appropriately.  For example, benchmark the energy costs of older, similar properties to quantify the savings of your project and guarantee a lower cap rate on operating expense cap by some percentage.  Pass these savings through to your triple net tenants in expense.

Oculus Inc. and ecostrategy recently helped a retail landlord in Chicago to meet the burdens of new ‘green’ planned development zoning requirements while also saving money and generating positive publicity.  A modular green roof system was utilized to cover nearly 100% of the project’s flat roof space.  This creative solution reduced the landlord’s burden for the remainder of the development significantly, and generated a great deal of positive exposure through local media.  The green roof enhanced their public image and elevated their brand to ‘top of mind’ among the consumers.

The second major trend for developers is sustainable site development.  Sustainable site development encourages developers to analyze local population and infrastructure density as well as the availability of alternative transportation methods in order to maximize the site efficiency of the development.  A smaller footprint in a more densely developed area has the potential to require less capital to construct, reduces the environmental impact of the project, and reduces urban sprawl.  Brownfield redevelopment can also be a critical strategy for sustainable sites, especially when redevelopment credits are available through the local and national government, which reduce the developers’ investment and provide positive marketing exposure for a project.

Water efficiency can lower development costs and help maintain lower operating expenses through innovative, yet straightforward solutions that reduce the amount of potable water used for non-essential items.

In order to be successful at implementing green building practices for retail developments or retrofits, the entire project team must be on board from day one of the project.  Partnering with the right architect, sustainability consultant, and contractor is paramount to minimizing the cost impact of green design.   With the right team in place, developers can achieve these benefits for a cost premium between 2% and 7%, depending on the local market, the intensity of sustainable design elements, and the commitment of the project team, according to CoStar Group. 

Kurt Thompson is the Market Leader for ecostrategy, which provides sustainability and environmental strategy consulting and education services to clients of Oculus Inc.  Oculus Inc. is a WBE-Certified, full-service architecture and consulting services firm with offices in St. Louis and Dallas.

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