Six steps to sustainable commercial buildings for developers

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Summary

Six steps to sustainability is a 'how to' guide for owning, developing, designing, constructing, occupying and managing sustainable commercial buildings. For each industry group, it is a compilation of input and ideas from Australian industry leaders as to what, in their experience, are the most important issues and how they can be addressed. For developers, the six steps to sustainability module provides the key steps to integrating sustainability into their commercial building developments.

The six steps for a developer are:

Step 1 - Get the project off the ground - make sustainability happen

Active leadership

Active leadership is important for increasing the understanding and cultural adoption of sustainability principles, as well as for promoting related initiatives and managing related change (Lantos, 2001; Andersson & Bateman, 2000; Starik & Rands, 1995). Therefore, the success of sustainability initiatives depends upon strong leadership, starting with the CEO. With the CEO on board, it is possible to get the commitment of senior management, to gain access to financial and human resources, and to ensure that sustainability initiatives are recognised as relevant to business, organisational, and personal objectives and values (aspirational, strategic and operational).

Demonstrate the business case

The objective of the business case is to provide a basis for clear understanding of what is to be achieved, at what cost, and why. This is done by answering the following questions:

• How can sustainability add to our profit?
• How can sustainability reduce our risk?
• How can sustainability impact on the continuity of our business?
• How does sustainability fit with our beliefs and values?

For more information about the business case, see The business case for owners of sustainable commercial buildings.

The business case provides the justification for an approach to commercial buildings that can be substantially different from the way developers have done things in the past. It aims to provide decision makers with greater understanding of the benefits to be reaped from sustainability by encouraging them to think through the project in a systematic, step by step manner - this process also assists in developing 'buy-in' from decision makers.

The business case outlines not only the bottom line profit impacts for the project, but also sets out the value of intangible benefits for the developer, particularly brand value, future-proofing and market leadership.

A sound business case will also help senior management to embed triple bottom line accounting and reporting into their decision making, and to establish protocols for life cycle costing, payback evaluation, and trade-off criteria to evaluate alternative solutions. Most importantly, these decisions should decrease the level of (future) risk that the building and the whole portfolio are exposed to.

Assemble the right team

Selecting the right team for the project is important, be they architects, engineers, contractors or other consultants who are knowledgeable about the broad spectrum of green design tools and technologies. Team members should also have an appreciation of the business case for sustainable buildings. The majority of decisions that affect a building's capacity are made in the design stage and these people will bring with them the experiences they have gained in solving the challenges of high-performance buildings and fit-outs. However, it is important to keep in mind that high-design intent does not necessarily correlate with high performance. Commissioning, monitoring and managing the building properly will have a big impact. Planning for this from the beginning is important.

Step 2 - Verify minimum mandatory sustainability requirements and exceed them

Governments at all levels are now more focused on sustainability, and it is crucial to ensure that you are aware of all mandatory sustainability requirements for your commercial building and the development site. In a growing number of regions, design approval requires meeting more and more stringent sustainability requirements and/or addressing sustainability in the design application. Similarly, securing government contracts to develop a property or region, or securing government tenants, increasingly requires a demonstration of sustainability performance on behalf of tenderers and their buildings, as the Commonwealth Government and some state governments now have rating tool requirements for government tenancies and base buildings.

Sustainability also implies an investment beyond that required by compliance - this means not only meeting minimum mandatory requirements, but surpassing them. Developers' buildings need to be able to cope with the growing market demand for sustainable commercial assets in order to attract purchasers and occupiers. Building purchasers will increasingly be seeking to position their assets to keep up with sustainability benchmarking against such things as the Building Code of Australia and the Property Council of Australia's (PCA) building quality matrix, as well as the host of available building rating tools. Prospective tenants are also increasingly expected to specify sustainability performance for commercial buildings to fulfil their corporate social and environmental goals and to align with their business case. Consideration of the types of tenants you will be marketing the building to is therefore critical at this stage - you should consider issues such as tenants' evolving desires for occupant health, safety, comfort, and productivity. Future-proofing a project also increases the value of that project by reducing the exposure to risk.

As no two buildings are alike, it is essential to identify what opportunities exist to raise the bar of sustainability in your building. Reviewing current examples of best practice by visiting other completed sustainable commercial building projects, or by attending presentations and conferences, will help to keep you up to date with the latest technologies and systems, and will help you to identify what has worked for others and how. It can also help identify areas where your development can demonstrate national and international leadership, and may give you strategies to implement new practices – or different applications of old ones – into your building developments.

Step 3 - Think beyond the short-term paybacks - assess costs and value

The market is undergoing a shift in attitude towards sustainable commercial buildings, from seeing them as slightly off-beat yet interesting case studies, to considering them as mainstream assets. This is being driven in part by regulatory policy and in part by the growing understanding of the value achieved by implementing sustainability. However, all projects have a budget, and choices need to be made about how the dollars are allocated. It is important to link the costs to the added value and benefits that may result from the investment and to maintain balance across the whole project. All the building elements should be considered as a whole, rather than as optional extras, so that the budget reflects the sustainable strategies throughout. Each building is unique and must be examined on a case by case basis.

Budgets for sustainable commercial buildings require mechanisms to recognise the value gained from sustainability that extend beyond simple payback equations. Cost advice should be based on whole-of-life-costs, not just capital costs, with net present value and internal rate of return being used as financial measures, rather than simple payback. The value of commercial buildings has traditionally been judged in terms of location, quality, function and aesthetics, which are reflected in the rental return and capitalisation rate (Fullbrook, Jackson & Finaly, 2006; Reed, 2007). Although the direct financial paybacks of reduced operating costs and improved occupant productivity may not flow back directly to developers, other value benefits contributing to the developers' intangible assets may.

Capitalisation rates impact on the value of a project. Developer's capitalisation rates determine the sale price of a project, and anything that improves the capitalisation rate provides a large multiplier in terms of the end-value of a project. For example, longer term tenants will improve the capitalisation rate of a building, compared to a building with a number of short-term leases to small companies. Being able to meet the requirements of such large-scale tenants will therefore improve the capitalisation rate and the end-value of the project. Things like lower outgoings can also be capitalised into a better capitalisation rate.

Furthermore, many end-use purchases, such as those made by super funds, are increasingly being driven by sustainability criteria (as a result of board direction and the carbon disclosure project) and TBL reporting. This means that sustainable developments will bring a price premium; if not now, then certainly in the near future.

Maximise return on investment

Saving money and reducing capital cost expenditure on a project are often the goals of a developer. However, capital cost is not the principal factor that determines the profitability of a given project; rather, it is the return on investment in the form of net income. This requires maximising lettable area and rental value, as well as minimising time to completion and occupancy (Bordass, 2000). Sustainable design strategies can reduce the floor area required for mechanical plant, therefore increasing a building's net lettable area, while integrated design processes have been claimed to reduce project time lines. Reliable data on rental premiums for sustainable buildings is currently lacking, although surveys by Jones Lang LaSalle indicate that tenants 'will very soon come to expect a discount to occupy buildings that do not have these [sustainability] features' (Wallbank, Hilderson & Apted, 2006, p.6).

Step 4 - Minimise capital expenditure - build sustainable with less

There is a misleading perception across the industry that it is not capital cost-effective for a developer to design and build sustainably. However, every project is unique and offers different opportunities for maximising the value presented by the site, the commercial circumstances, or by an existing building.

Passive features, such as building orientation, massing, glazing, shading devices and façade treatments to keep heat loads out the building, can potentially reduce the required capital expenditure on mechanical equipment as a result of improved building envelope performance and control systems.

Sites should be selected to take advantage of existing infrastructure, such as mass transit and cyclist-supported road networks, so that the proposed buildings require fewer car parking facilities. Tried and tested technologies that may have a cost-neutral or negative impact should be implemented, such as light sensors and water and energy-saving fittings. It is also important to avoid over-designing (i.e. designing building services/capacities based on perceived tenant and market requirements that may actually never be used). During building upgrades, options for improving energy and water efficiency should be explored, such as sub-meters that can pay for themselves in five or six years.

Finally, it is important to explore all avenues for funding support and grants programs that may be available from public and private sources. This can help to offset any additional capital expenditures for implementing sustainable building strategies.

Step 5 - Spell out and sell the benefits - market your building

Developers need to market and sell the sustainability choices they make for their buildings to prospective buyers and occupiers. They need to improve knowledge of sustainable commercial buildings by educating stakeholders and providing reliable data to the wider marketplace.

To market their sustainable commercial buildings, developers need to:

• understand and present the business case in the buyer/occupier's terms
• understand the buyer/occupier's motivations and unmet needs, and identify clear links and relationships between the sustainability of the building and any benefits to the owner/occupier
• understand that sustainability can be a potential differentiator to the right owner/occupier
• educate salespeople, including leasing and sales agents, on the sustainable features and benefits of the building
• establish differentiation through branding - brands have the power to tap emotional factors in decision making and involve positioning activities for the target market (Yudelson, 2006).
  
  

Step 6 - Monitor, evaluate, review, report and integrate into the next project

Monitoring buildings post-completion and during occupation provides an understanding of whether the building has generated the expected returns (both tangible and intangible), as outlined in the business case. It is crucial for developers to ensure stakeholder satisfaction post-sale and during occupancy. Establishing long-term relationships with building owners and occupiers is a smart way of getting feedback about the building and its performance, and for gaining insights about future value-added propositions for your next sustainable commercial building.

Moreover, if the building stakeholders, including owners, occupiers and managers, do not understand the sustainable features of the new building and how they work, it is possible that the benefits of the developer's investment in sustainable features will be unrealised or under-appreciated; in some cases, developers may even be blamed for poor building performance. Ensuring performance is delivered as promised is therefore a new business opportunity.

Share lessons learned and integrate learning into future projects

As many developers and other industry groups remain unconvinced of the business case for sustainable buildings, more transparency and sharing of financial data is required in case studies of sustainable commercial building projects. A general lack of reliable 'real' data on historic costs can often be elusive because:

• they are not often published
• published tender prices may bear little relation to the final outcome of a project
• quoted figures may or may not include things like landscaping, design fees and taxes
• nearly every project has its special features, site constraints and time pressures
• local conditions (place and time) are highly influential
• clients may bury costs for commercial or PR reasons (Bordass, 2000, p.341).

However, the development of financial information on sustainable buildings is crucial for developers, as it strengthens the business case by providing a robust set of data to undertake cost-benefit analysis (RICS, 2005). Over time, it is anticipated that the amount of financial information about sustainable buildings will increase dramatically.

Establish a sustainability dialogue

Developers are likely to have significantly more experience in building development than their occupiers do. Assisting tenants with fit-out and design services ensures that the sustainability features of the building are continued into the fixtures and fittings of fit-outs.

An ongoing sustainability dialogue also enables an understanding of the performance of the building and helps to identify opportunities for improvements for future developments. Performance testing, purchaser and tenant satisfaction surveys, and a 'lessons learned' database will all assist in keeping track of and maintaining a steady flow of valuable information for evaluation and analysis (see Performance setting and measurement for sustainable commercial buildings for more information). This can then be used to distinguish the benefits of developing sustainable buildings, and to reinforce and market the value proposition and the overall business case for developing high-performance buildings.

References

Andersson, L.M. & Bateman, T.S. (2000), 'Individual environmental initiative: championing natural environmental issues in US business organizations', Academy of Management Journal, 43(4), 548-570.

Bordass, B. (2000), 'Cost and value: fact and fiction', Building Research & Information, 28(5/6), 338-352.

Fullbrook, D, Jackson, Q & Finaly, G 2006, Value Case for Sustainble Building in New Zealand, accessed from ME705.

Lantos, G.P. (2001), 'The boundaries of corporate social responsibility', Journal of Consumer Marketing, 18(7), 595-630.

Power, T (2004), Lease arrangements for green commercial buildings, Accessed 15 May, 2007, from http://www.freehills.com.au/publications/publications_2243.asp.

Property Council of Australia (2006), Guide to office building quality, Sydney: PCA.

Reed, R (ed.) (2007), The valuation of real estate, Canberra: Australian Property Institute.

RICS 2005, Green Value: Green Buildings, Growing Assets, Royal Institution of Chartered Surveyors, accessed from http://www.rics.org/greenvalue.

Starik, M. & Rands, G.P. (1995), 'Weaving an integrated web: multilevel and multisystem perspectives of ecologically sustainable organizations', The Academy of Management Review, 20(4), 908-935.

The Commission for Architecture & the Built Environment and British Council for Offices (2005), The impact of office design on business performance, Accessed 1 March, 2007, from http://www.cabe.org.uk/AssetLibrary/2191.pdf.

Wallbank, C, Hilderson, P & Apted, J 2006, Assessing the Value of Sustainability, Jones Lang LaSalle.

Wilson, S (2005), Business and finance: green as a marketing tool, Paper presented to Developing green: the case for high-performance buildings and sustainable development - Urban Land Institute conference, Washington D.C., Accessed 18 May, 2007, from Urban Land Institute website.

Yudelson, J. (2006), Marketing green buildings: guide for engineering construction and architecture, Lilburn, GA: The Fairmont Press Inc.