Green Building Myths Debunked?

A new study shows that green buildings are far more expensive than they are made out to be, and that it may take longer than advertised for energy savings to cancel out costs.

Jeffrey Harris, a vice president at the pro-efficiency group Alliance to Save Energy, said these claims have a sturdy foundation in the laboratorys and in the real world. He pointed to the Energy Department's data on high-performance buildings, as well as other databases containing information on existing buildings. Engineers and green-building leaders, he said, 'are not breaking a huge amount of sweat in getting beyond 30 percent in code.'

He also had major question marks about the NAIOP study. He called the 10-year payback target 'an undershot,' since the savings of a green building continue as long as it's still standing. He also questioned the report's assumptions about electricity prices and the cost of certain 'green' features."

"[John] Bryant, [an] NAIOP lobbyist, disagreed. He said commercial building developers routinely make decisions based on a five-to-10-year payback period, and if green buildings broke even that quickly, builders would have erected more.

'We're looking at it from a developer point of view, when maybe some of the other groups aren't,' he said."

Full Story: Can Green Buildings Pass Payback Tests?



Payback Time And Full Cost

Note that they are talking about the payback time to recover the initial investment through savings in energy costs - without counting the environmental costs of saving that energy.

Clearly, when we have carbon pricing to internalize part of that environmental cost, green buildings will have a shorter payback time.

If we counted the full cost of the energy consumption, including all the environmental costs, the payback time would be even shorter.

Charles Siegel

The developer point of view...

... isn't necessarily the long view or the whole picture. The economics of maximizing developer ROI may end at the point a developer has successfully sold the development - builders aren't always (or perhaps even in most instances) owner-operators or tenants...

It kind of is...

in a strange way. Even a merchant developer wants to maximize value upon occupancy and sale of his/her project. Since buyers are pricing the building based on cap rate/DCF, the long term (5-10 years) operating expenses will greatly affect value. I'm not sure how much energy cost you save by a green building, but if you can reduce operating expenses from $8/psf to $7/psf, that would add $1/psf to NOI. At an 8% cap rate, that's just over $12 psf increase in value for the building. The real question, for me, is how much does it cost to do this? And, to Charles' point below, what is the impact of any fees/taxes on not going "green". That could add capitalized value in the same way I showed above. I think owner/operators (REITs, pension funds, some private equity, foreign capital funds) are convinced of energy cost savings from Green buildings, the question is a cost vs. value proposition. Carbon taxing/cap and trade could make it more compelling if buildings are included in that.

It all depends on how long 'long' is...

A 5-10 year payback period may be the convention but is it the 'long term'? Obviously, green projects that may have penciled for payback within 5-10 years when oil costs were at their peak might not do so today, and might again 3 years from now - but what about the buildings' conservatively estimated operating life expectancy? [And thank you for grounding the discussion with some real numbers].

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