Fortune 500 companies, governments, REITs, home builders and private institutions are moving into green building—and banks, public pension funds, mortgage companies and private investors are helping them to figure out how. “I've seen a transformation in the marketplace in the last three years,” says Peter Garver, director of development for Corporate Office Properties Trust, Columbia, Md., a REIT that does spec office development, primarily in the Mid-Atlantic region. “Three years ago, our big prospects—Booz Allen, Unisys, General Dynamics, AT&T, Wachovia, Boeing—couldn't care less about what we were doing in green.” Now, he says, “they're aware of it, and they're starting to ask about it.”

Credit the U.S. Green Building Council's Leadership in Energy and Environmental Design (LEED) rating program for playing a major role in changing the minds of hard-nosed investors. “The biggest change is the establishment of standards we can all point to,” says Dan Rashin, senior vice president at Houston-based developer Hines. “In the '80s, we had 'smart buildings,' but no one knew what that meant. LEED allows us to have a standard which the consumer can recognize. It's a stamp of approval.”

Are green buildings more profitable—and therefore more valuable—than conventional buildings? “From a market valuation, you're starting to see things turn a little bit. ... (But) the deal still has to pencil out,” says Steven Lane, an executive vice president with Citigroup.

The main beneficiaries of green building are the occupants and their businesses, who stand to gain “potentially enormous” health and productivity benefits from green building, according to a study by the Canadian branch of the Royal Institute of Chartered Surveyors. “However, contrary to some claims, this does not necessarily translate into higher asset value,” the study warns. “If developers, owners, and valuers can understand how to tap this benefit, the commercial advantage that they would gain would become the most significant aspect of Green Value.”

Do green buildings "lease up" more quickly
or at a higher rate per square foot—than other buildings?

Yes and no. “Are there rental premiums? No, but we're seeing abbreviated absorption periods for these projects,” says Theddi Wright Chappell, LEED Accredited Professional, Fellow of the Royal Institute of Chartered Surveyors and member of the Appraisal Institute, who is managing director of advisory services for Pacific Security Capital, Beaverton, Ore.

“In today's hot market, you're not seeing tenants saying, ‘I will not be in that building if it is not high-performance,' " says Brenna Walraven, executive director of national property management for USAA Real Estate Co., Irvine, Calif., and chair-elect of the Building Owners and Managers Association International. “It's still location, location, location, plus other factors. In a white-hot capital market, am I going to get a premium for LEED? No, because that's the market. But I think that's going to change, and you're going to see that in a down market.”

Are tenants in green buildings willing to pay more? "We're not counting on it,” says Diana Laing, CFO of Thomas Properties Group, Los Angeles. As part of its $500-million project with Cal-STERS, TPG is renovating “undermanaged” older buildings (20-30 years old) in “great locations.”

The strategy: Improve the indoor environmental quality, conserve energy, and make the buildings sustainable. Laing says TPG can devote $20/sf for sustainable improvements and still generate “superior returns” by being able to pocket $2/sf on a typical $12/sf gross lease.

Others see increasing anecdotal evidence of green buildings leasing well. “Why green?” asks Leanne Tobias, founder of Malachite LLC, Bethesda, Md., and an adviser to this white paper. “To lease faster. To lease to the top tier of the Class A market. And to get the most positive tenant retention. If you can do well in Class A, you’ll do better with green [Class A].”

Do green buildings have reduced liability risk?

“Mold is the new asbestos,” says Peter Garver, of Corporate Office Properties Trust. “Twenty percent of our properties are leased to the government, another 30% to defense contractors, and they're all concerned about mold.”

Another potential liability is obsolescence—that a building that is not built to high green standards will be outclassed by other properties at some time in the future. That argument strikes a chord with Kevin Fitzpatrick, who is responsible for 53 million sf of real estate for AIG: “I don't think I would build a new building right now that's not green, because in five years I may be at a competitive disadvantage.”

Should green buildings enjoy lower insurance rates?

That's already starting to happen. Fireman's Fund is the first U.S. insurance company to offer a discount on green buildings—both LEED- and Green Globes- certified.

Do green buildings create marketing
or public relations opportunities for developers and owners?

You bet. Ask the Durst Organization, which has gotten incredible amounts of free ink in The New York Times and other media for its Bank of America tower going up in New York. Exploiting the marketing and public relations aspects of green building is probably the most cost-effective tool developers and building owners have at their disposal.

But don't expect the PR gravy train to last forever. “There will be a point at some time in the future when green buildings will generate less attention because they will be more the norm,” said Chris Wedding, a LEED Accredited Professional and sustainable design associate for Cherokee Investment Partners, Raleigh, N.C.

Are green buildings a factor in employee recruitment
and retention for tenants?

Employees at 30 The Bond, the five-star Green Star (Australia's green rating program) headquarters of Lend Lease in Sydney, rated “physical space” and “health and safety” as their top two concerns in a post-occupancy survey, says Maria Atkinson, global head of sustainability. She adds, however, that “they see green space as an indicator of an employer who cares. That will start to be a drawing card” in the future.

Does going green always make sense?

No. Developers cannot forget the basic facts of real estate. Wachovia's Bill Green says, “If you see two buildings, and one has good views and one has good indoor air quality, the one with the good views will always win.”

As the green building movement enters this more-mature phase of its young existence, its proponents might do well to emphasize the “single bottom line”— the economic component—for a while, at least, to keep the money people from being scared off. “If I go hugging a tree, I'm going to have people walk out of the room,” says USAA Realty's Brenna Walraven. “I'm not in a charity business. If a deal makes sense from a financial perspective, then it's right for me. I'm not going to do it at the expense of the financial aspects.” -- To see the entire white paper, click here.