Market News

 August 22, 2007
The True Costs of Green Building

 Vancouver, Canada (GLOBE-Net) -- The benefits of green building are many: greater energy efficiency, reduced water consumption, longer useful life, better health conditions for occupants, and much, much more. All of these factors can improve the value of a building over the long term and reduce operational costs. However, the mistaken perception exists that green building "costs too much" without a commensurate return on investment. Addressing that misconception is key to promoting the spread of sustainable construction.

A recent global survey of 1400 building professionals conducted by the World Business Council for Sustainable Development (WBCSD) found that the costs of "green" building are frequently overestimated -- often by as much as 300%. The report notes that such misjudgment of the costs of "green" construction creates barriers to more energy efficiency in the building sector.

Respondents typically estimated the additional cost of building green at 17 percent above conventional construction costs, which is more than triple the true cost differential of about 5 percent. At the same time, survey respondents estimated the percentage of greenhouse gas emissions from buildings at about 19 percent of the world's total, which is less than half the actual figure of 40 percent.

The study also found that fewer than one in seven industry respondents had participated directly in a green building project. Involvement ranged from a high of 45 percent in Germany to just 5 percent in India. About 20 percent of architects, engineers and developers have been involved in green building projects, compared to just 9 percent of owners and tenants.

This fact alone demonstrates that industry perceptions are wrong and that there is need for more accurate information on the true costs of green building.

The findings are disclosed in a report entitled Energy Efficiency in Buildings: Business Realities and Opportunities (PDF), which is part of an industry-supported three year initiative to assess the environmental impacts of buildings and to develop means of achieving zero net energy use for residential and commercial buildings.

Among the key conclusions of the project is that energy efficiency in buildings can be dramatically improved with existing technologies. Efficiency gains in buildings are likely to provide the greatest energy reductions and in many cases will be the most economical option, notes WBCSD.

For example, one study by McKinsey estimated that demand reduction measures with no net cost could cut in half expected growth in global electricity demand. The Intergovernmental Panel on Climate Change (IPCC) Fourth Assessment Report estimated that by 2020 CO2 emissions from building energy use can be reduced by 29% at no additional cost.

According to United Technologies Corporation Chairman and Chief Executive George David, "Existing technologies combined with common sense design can increase energy efficiency by 35 percent and reduce heating costs by 80 percent for the average building in industrialized markets."

These thoughts echo a study conducted by the American Institute of Architects and the Royal Architecture Institute of Canada (RAIC), which concluded that a shared goal of making all new buildings carbon neutral by 2030 is technically achievable with a few minor policy adjustments.

In late 2003, The Massachusetts Technology Collaborative, a state agency which promotes renewable energy and innovation, published one such study by Greg Kats which surveyed 33 LEED buildings across the U.S. The findings showed an average premium of just 1.84%, from a low of 0.66% for LEED Certified buildings to a high of 6.5% for LEED Platinum.

Another industry study concluded that "many projects achieve sustainable design within their initial budget, or with very small supplemental funding." A report from Building Design and Construction (BD+C), Green Buildings and the Bottom Line, notes that "experienced builders using integrated design and off-the-shelf solutions - such as low-e glazing, "cool" or vegetated roofs, energy-conserving lighting, dual-flush toilets, low-demand landscaping, and grey water irrigation - could readily bring in even the most sophisticated projects at a cost owners and developers could be happy with."

So why are more builders and industry firms not constructing and retrofitting buildings to be energy efficient? The answers are complex, and often can be traced to: a lack of education on the true costs and benefits of green construction; a lack of willingness to pursue potentially risky new projects while traditional practices are still feasible; and overall inertia within the industry that will likely take time to overcome.

Participants in the WBCSD venture concluded that there are first-mover advantages for entrants into the energy efficient construction market but there are also risks, especially with respect to the timing of market entry. Demand is expected to grow as people become more aware of the importance of energy use in buildings and the value proposition will continue to develop, but the key question for many firms is how fast these changes will occur.

Businesses also need the skills to develop attractive, energy efficient propositions at appropriate cost levels. Research on perceptions associated with green building reveals there is a widespread lack of personal and corporate know-how in the marketplace, and a general reluctance to innovate. However, once a company has gained the necessary specialist knowledge, it can become a real competitive advantage.

Ensuring proper valuation of environmental performance is also seen as a key factor. Engaging the accounting and valuation professions helps promote recognition of the increased value and reduced risks that green buildings offer.

This fact was affirmed at the Vancouver Valuation Summit, organized by the GLOBE Foundation of Canada held March 2007 which provided critical insights in how sustainability factors can add tangible value to business and property valuations.

The Summit demonstrated the links between the market value of a real estate asset and its sustainable features and related performance. Based on a 2005 study called "Green Value", Summit Speakers proved that the value generated by enhanced productivity resulting from sustainable design is orders of magnitude greater than the value generated through simple energy savings.

The Summit concluded that without changes to the tools for assessing business cases and without understandable guidelines for the validation for sustainability, the real estate and financial sectors will remain skeptical about how best to 'value' these considerations.

Despite all of these challenges facing the green building sector, it should be noted that sustainable construction is growing in North America, Europe and Worldwide. The U.S. Green Building Council (USGBC) welcomed its 10,000th member company in July 2007, and it estimates the green building industry is now worth upwards of $12 billion. A decade ago its value was negligible. The Canada Green Building Council (CaGBC) is also reporting greater-than-expected interest in new LEED programs, building up to 1400 members since launching in 2002. By 2015, the CaGBC aims to certify 100,000 commercial and 1,000,000 homes.

Buildings represent approximately 40 percent of primary energy use globally and energy consumption in buildings is projected to rise substantially in populous and fast growing countries such as China and India.

Establishing strong energy efficient building practices is key to reducing future costs and risks, and curbing greenhouse gas emissions. Communicating the true costs and benefits of sustainable design and spreading understanding of the business case for green building is one way in which the construction industry can enhance long term value and preserve the global environment.