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Investing in Green Design - Good for Earth and Wallet

Sep 6, 2008
There are many terms that are often used to describe real estate with environmentally friendly architecture. "Green," "eco-friendly," and "sustainable" buildings reduce energy and water use and may improve the quality of life for those who live or work inside it. Architects design green buildings using various design techniques, including natural ventilation, geothermal cooling systems, low-flow toilets, solar chimneys, and reclaimed wood.

The green building industry (a field that most hadn't heard of only a decade ago) was worth about $12 billion in 2007, according to the U.S. Green Building Council. Although sustainable construction is one of the fastest-growing areas of commercial building, a small number of new buildings are green. Buildings that do meet these standards can save money on energy costs, which is a benefit that may become more attractive as energy costs continue to rise.

What Is a Green Building?

Leadership in Energy and Environmental Design (LEED) is the designation given by the U.S. Green Building Council based on how well architects and designers can reduce a building's environmental impact and energy use. LEED projects may receive one of four levels of certification. The certifications include Certified, Silver, Gold, and Platinum, depending on how many credits the buildings receive.

There are many ways that architects and organizations can make buildings green without having to involve costly projects. Using recycled materials, for example, is a way to generate several points. Changing the way a building faces, so that windows and open spaces can better use natural light, doesn't have to cost any extra money. It also can reduce energy bills and increase the number of points the building receives. Having natural ventilation shafts for circulation and roof overhangs to shade windows also are simple design methods to reduce the need for air conditioning.

Using Green to Put Green in Your Wallet

There are many benefits from using green designs. Benefits range from lower energy costs to improved indoor environmental quality, which can lead to greater employee comfort and productivity. These benefits make going green more attractive, despite any initial costs for the projects.

Green properties can also have a boon for real estate investors, as the green buildings can bring higher rents and building values. According to McGraw-Hill's SmartMarket Report in 2006, buildings renovated to meet green standards often increase value by 7.5 percent and occupancy rates by 3 percent. Green buildings may cost between 2 and 3 percent more to build, but they use between 25 and 30 percent less energy than "conventional" buildings.

An example can be found in Exelon Corporation, one of the largest electric utility companies in the United States. This company in downtown Chicago was recently certified at the Platinum level. Exelon has reduced its electricity consumption by more than 43 percent and its water consumption by 30 percent.

Green Investment Opportunities

There are three main ways to have green investment opportunities. Two ways are indirect, and are through pooled investment vehicles, mutual funds, and REITs. The third method is through direct investment through buying a company's stock. There are currently few pooled funds that focus only on green real estate. Most funds only have a portion of assets invested in green properties. Individual stocks may have more opportunities for investors, but then investors also have commensurate risk and have the challenge of having to weed good stocks from the bad.

One significant challenge for individual and institutional investors as that LEED and the Energy Star program only certify individual properties and not the companies investing in those properties. That action begs the question of whether social and environmental issues should be evaluated at the property level.

Additionally, the methods for assessing social and environmental characteristics of real estate investments are not widely defined or accepted. This mean that a store like Wal-Mart or Home Depot may be attacked for eliminating local merchants, but can also be defending as being a benefit for low-income consumers who want quality products at a price they can afford.

The REIT Way

Real estate investment trusts (REITs) are investment funds that own a portfolio of property investments just how mutual funds aggregate securities. REITs with offerings of new or renovated green buildings may be the easiest way for individual investors to invest in green real estate. With one REIT purchase, the investor can access the portfolio of properties in the EIT. This spreads risk across many properties, and much more efficiently than if an investor with a small amount of assets were to do the same thing.

Mutual Funds

There are some mutual funds that are composed of green real estate stocks. They may also have stocks for companies that manufacture products used to construct green building. These mutual funds, like REITs, spread the risk of investment across a broad portfolio of securities. Mutual funds and REITs have professional managers for their holdings, which means individual investors don't have to take that responsibility.

Individual Stocks

Those who are looking for green investments, and are willing to buy individual stocks, may have a broader range to choose from. Investors can choose from various companies that have various involvements in green real estate. Individual stocks have more risk and volatility than pooled investments like mutual funds or REITs.

The Bottom Line

Green properties, although they may initially be more expensive, will likely become more popular as the trend of energy conservation grows and energy itself becomes more expensive. This growing market for "going green" like flexible reward cards and the acceptance of green buildings means that this area will be rich for profitable investment opportunities.
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