2012-05-07

Co.Exist

Calculating The True Economic Benefit Of Green Buildings

Standard real estate practices have a hard time modelling for the system-wide and long-term benefits that building more sustainably provides. A new system, called Economics of Change, finds the real cost.

Humans are shortsighted by nature, and humans in the U.S. may be more shortsighted than most, at least when it comes to environmental issues. We have an economic system that is often more driven by quick return on investment than any other developed nation, and as a result, longer-term investments like green buildings don’t get the attention they deserve.

A group of green building professionals are aiming to change that with a project called The Economics of Change (PDF). When complete, it will provide a new investment model for green building that actually makes sense to the ROI-driven business world.

The big problem right now lies in a lack of data. There’s a dearth of information on green building transactions and operational costs, LEED has only been around for about a decade, and the lack of data is only exacerbated by confidentiality issues. The market isn’t asking for this information, and there are no requirements to do it. The Economics of Change model goes beyond just energy and water reporting, though; it proposes taking into account all social and ecological costs and benefits of a building. These include non-tangible benefits like flood-risk prevention, recreational value (for a plaza or park), worker productivity, and aesthetic value—all things that are ignored by traditional economic models.

As David Batker, the founder of Earth Economics and one of the contributors to the Economics of Change model explains: "When the city of Seattle more than 100 years ago decided to purchase the watershed, if they had used return on investment or benefit cost ratio or maximizing net returns, they would never have purchased it because it was so expensive. But the goal was to provide clean drinking water for the population of Seattle at any population level in perpetuity, and now we are huge beneficiaries and we have avoided building four filtration plants during that time period. So I think the U.S. faces economic decline if we think that shorter-term profits and investments are the way forward."

Many of the non-tangible attributes of living, green buildings can be measured and inputted into traditional real estate valuations—it just takes a little ingenuity. Think about it: better ventilation and non-toxic building materials can contribute to worker productivity, which adds up to money saved; attractions like vegetated walls and gardens can attract tourists, who come ready to spend money; overall tenant value (measured by the likelihood that they renew a lease) can increase market value of a building, and so on. And some attributes, including water storage, materials life-cycle, flood protection, and carbon sequestration can be easily measured.

As convincing as the numbers may be, it will still be nearly impossible to gain traction without policy change on the local, state, and federal level. "If investment is going to move, policy is always a key," says Batker. "We are looking for some jurisdictions that want to take a package of policies to transform their cities. A city or county that starts moving in a dramatic way towards shifting incentives will see economic progress quickly."

The timeline to finish the Economics of Change is short—Batker anticipates the project will be ready to go in a year to 18 months. It will include an Integrated Real Estate Modeling Tool that acts as an extension to a traditional real estate pro forma analysis (a set of calculations used to project the financial return of a real estate development); monetization models for social and environmental benefits of building features; an analysis of policy interventions; and more.

The project will, in other words, combine a convincing business case with doable policy change ideas. It will hopefully do this well enough to change our short-term style of thinking in the near future, before a warming planet completely takes hold. Batker has hope. "If you look at college students, there are green buildings on almost every campus," he says. "There’s a big transition taking place."

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